Broker-Dealer Litigation - Greenberg Traurig LLP

Broker-Dealer Litigation
2012 Annual Survey
Editor
Terry R. Weiss
GREENBERG TRAURIG LLP
Atlanta, Georgia
© March 2013

This Survey identifies significant court decisions and administrative proceedings before
the SEC and FINRA, which involve issues relevant to broker-dealers and investment banking
firms during the year 2012. Although the Survey does not purport to necessarily be
comprehensive, it is intended to include all notable decisions and proceedings during 2012.
This Survey is an annual project of the ABA’s Broker-Dealer Subcommittee, conducted
with the assistance and support of the full Securities Litigation Committee. Again this year, the
Survey has been prepared in conjunction with the annual Compliance and Legal Seminar of the
Securities Industry and Financial Markets Association. In addition to the Subcommittee
members participating in the project listed below, we gratefully acknowledge the special
assistance of Marisa Crawford, Jonathan Lippert, and Brenda McDonald of Greenberg Traurig in
Atlanta, Georgia, for their efforts in editing, revising, and organizing the Survey.
Dated: March 1, 2013
Terry R. Weiss
Atlanta, Georgia
Co-Chair, Broker-Dealer Subcommittee,
Litigation Section, American Bar Association
Subcommittee Members Participating in the Project:
Timothy P. Burke
Bingham McCutchen
Boston, MA
Jeff G. Hammel
Latham & Watkins
New York, NY
Christine M. Debevec
Stradley Ronon Stevens & Young LLP
Philadelphia, PA
Jeffrey W. Willis
Rogers & Hardin
Atlanta, GA
Joseph D. Edmondson, Jr.
Foley & Lardner, LLP
Washington, DC
Michele R. Fron
Keesal, Young & Logan
Long Beach, CA
H. Nicholas Berberian
Neal Gerber & Eisenberg LLP
Chicato, IL
Thomas C. Sand
Miller Nash LLP
Portland, OR
Bennett Falk
Bressler, Amery & Ross
Miramar, FL
Peter S. Fruin
Maynard Cooper & Gale PC
Birmingham, AL
Alyson M. Weiss
Loeb & Loeb LLP
New York, NY
Matthew R. Stammel
Vinson & Elkins LLP
Dallas, TX

Rocky Pozza
Miller, Canfield, Paddock and Stone PLC
Detroit, MI
Additional Contributors:
The Subcommittee would also like to acknowledge the efforts of the following
individuals on this year’s Annual Survey:
Bingham McCutchen
Matthew C. Applebaum
Timothy P. Burke
Michael R. Weissman
Bressler, Amery & Ross
Bennett Falk
Foley & Lardner, LLP
Joseph D. Edmondson, Jr.
Greenberg Traurig LLP
Evelyn Bukchin
Travis R. Chapin
Andy Clark
Jonathan Cyprys
Marisa L. Crawford
Brett M. Doran
Leslie P. Fisher
Sandra D. Gonzalez
Joseph P. Griffith
Vera Ranieri
Matt Simmons
Jennifer Tomsen
Lauren R. Whetstone
Keesal, Young & Logan
Sean B. Cooney
Christopher R. Farnsworth
Michele R. Fron
Jessica Luhrs
Ian Ross
Erin Weesner-McKinley
Latham & Watkins
Jeff G. Hammel
Adrienne Wheatley

Loeb & Loeb LLP
Alyson M. Weiss
Daniel Murphy
Maynard Cooper & Gale PC
Peter S. Fruin
Miller Canfield, Paddock and Stone PLC
Todd A. Holleman
Rocky Pozza
Miller Nash LLP
Thomas C. Sand
Christine L. Taylor
Neal Gerber & Eisenberg LLP
H. Nicholas Berberian
Tina L. Winer
Rogers & Hardin
Thomas J. Mew
Jeffrey W. Willis
Stradley Ronon Stevens & Young LLP
Christine M. Debevec
David E. Somers
Vinson & Elkins LLP
Ari Berman
Adrian J. Rodriguez
Matthew R. Stammel

TABLE OF CONTENTS
Page
A. Definition of a Security............................................................................................................ 1
B. Liabilities under the Securities Act of 1933 ........................................................................... 6
1. Section 11 ..................................................................................................................... 6
2. Section 12 ................................................................................................................... 26
3. Section 17 ................................................................................................................... 52
C. Liabilities under the Securities Exchange Act of 1934 ........................................................ 59
1. Section 10(b) and Rule 10b-5 ................................................................................... 59
a. Churning ........................................................................................................ 59
b. Suitability ....................................................................................................... 60
c. Insider Trading .............................................................................................. 63
d. Misrepresentations/Omissions.................................................................... 101
e. Standing ....................................................................................................... 107
f. Affirmative Defenses .................................................................................. 110
2. Section 14 ................................................................................................................. 115
3. Section 15(c) ............................................................................................................ 131
4. Section 16(b) ............................................................................................................ 138
5. Section 17 ................................................................................................................. 143
6. Section 18 ................................................................................................................. 144
7. Section 19(b) ............................................................................................................ 144
8. Margin Violations .................................................................................................... 145
D. Liabilities under the Securities Litigation Reform Act of 1995 ........................................ 148
1. Pleading .................................................................................................................... 148
2. Appointment of Lead Plaintiff/Class Counsel ....................................................... 172
3. Safe Harbor/Bespeaks Caution Defense................................................................. 189
i

E. Liabilities under the Securities Litigation Uniform Standards Act of 1999 ..................... 203
F. Liabilities under State Statutory and Common Law .......................................................... 214
1. Blue Sky Laws ......................................................................................................... 214
2. Consumer Protection and Other Statutes ............................................................... 219
3. Common Law Fraud ................................................................................................ 219
4. Breach of Fiduciary Duty and Other Common Law Claims ................................ 222
G. Liabilities Involving Clearing Brokers ............................................................................... 227
H. Secondary Liability .............................................................................................................. 230
1. Respondeat Superior ................................................................................................ 230
2. Control Person ......................................................................................................... 238
3. Aiding & Abetting ................................................................................................... 311
4. Conspiracy................................................................................................................ 347
5. Failure to Supervise ................................................................................................. 357
I. Private Rights of Action for Violations of SRO Rules ...................................................... 362
J. RICO ..................................................................................................................................... 364
K. Damages and Other Relief in Private Actions .................................................................... 377
1. Damages as Element of Claim ................................................................................ 377
2. Measure of Damages ............................................................................................... 381
3. Punitive Damages .................................................................................................... 387
4. Attorneys’ Fees and Costs ....................................................................................... 388
L. Contribution, Indemnification ............................................................................................. 398
M. Statute of Limitations ........................................................................................................... 400
1. Federal Securities Claims ........................................................................................ 400
2. State Securities Claims ............................................................................................ 408
3. RICO......................................................................................................................... 412
4. SRO Rules ................................................................................................................ 412
ii

N. Arbitration............................................................................................................................. 413
1. Scope ........................................................................................................................ 413
2. Eligibility/Limitations ............................................................................................. 430
3. Jurisdiction/Estoppel ............................................................................................... 431
4. Motions to Vacate or to Enjoin ............................................................................... 436
a. Punitive Damages ........................................................................................ 436
b. Attorneys’ Fees............................................................................................ 436
c. Other............................................................................................................. 438
O. Practice and Procedure ......................................................................................................... 458
1. Rule 9(b) of the Fed. R. Civ. P. .............................................................................. 458
2. Rule 11 of the Fed. R. Civ. P. ................................................................................. 467
3. Rule 23 of the Fed. R. Civ. P. ................................................................................. 468
4. Venue, Pendent Jurisdiction Removal and Other Issues ....................................... 471
5. Discovery ................................................................................................................. 475
P. Failure to Supervise.............................................................................................................. 479
1. SEC Enforcement Actions ...................................................................................... 479
2. FINRA Enforcement Actions.................................................................................. 485
3. NYSE Enforcement Actions ................................................................................... 495
Q. SEC Litigation Affecting Broker-Dealers .......................................................................... 499
1. Direct SEC Proceedings .......................................................................................... 499
a. Sales Practice Violations ............................................................................ 499
b. Unfair/Fraudulent Markups or Commissions ............................................ 500
c. Other Fraudulent Practices ......................................................................... 501
(i) Misappropriation ............................................................................. 501
(ii) Misrepresentation ........................................................................... 504
(iii) Falsification of Documents ............................................................ 510
iii

(iv) Failure to Maintain Accurate Books and Records ........................ 512
d. Mutual Fund Trading and Disclosure Violations ...................................... 513
e. Trading Practice Violations ........................................................................ 514
(i) Insider Trading ................................................................................ 514
(ii) Market Manipulation ...................................................................... 517
(iii) Securities Offering Violations ....................................................... 520
(iv) Trading Rules Violations ............................................................... 521
f. Failure to Supervise..................................................................................... 521
g. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed .................................... 523
h. Procedural Issues ......................................................................................... 524
(i) Jurisdiction and Time Bars............................................................. 524
(ii) Standard of Review ........................................................................ 524
(iii) Due Process ..................................................................................... 524
(iv) Prior Disciplinary Histories............................................................ 524
(v) Selective Prosecution...................................................................... 524
(vi) Sanctions ......................................................................................... 524
i. Broker/Dealer Registration Violations ...................................................... 525
j. Miscellaneous .............................................................................................. 527
2. SEC Review of SRO Proceedings .......................................................................... 528
a. Sales Practice Violations ............................................................................ 528
b. Unfair/Fraudulent Markups or Commissions ............................................ 529
c. Other Fraudulent Practices ......................................................................... 529
(i) Misrepresentation ........................................................................... 529
(ii) Falsification of Documents ............................................................ 530
(iii) Failure to Maintain Accurate Books and Records ........................ 530
iv

(iv) Selling Away ................................................................................... 530
d. Financial Responsibility Violations ........................................................... 530
(i) Segregation of Customer Funds ..................................................... 530
(ii) Regulation T Violations ................................................................. 530
e. Trading Practice Violations/Market Manipulation ................................... 530
f. Failure to Supervise..................................................................................... 531
g. Registration Violations ............................................................................... 532
h. Failure to Cooperate with FINRA Investigation/Failure to
Comply with FINRA Requests for Financial Information ....................... 532
i. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed .................................... 532
j. Procedural Issues ......................................................................................... 532
(i) Evidence .......................................................................................... 532
(ii) Due Process ..................................................................................... 532
(iii) Jurisdiction and Time Bars............................................................. 532
(iv) Discovery ........................................................................................ 533
(v) Sanctions ......................................................................................... 533
(vi) Right to Counsel ............................................................................. 533
k. Statutory Disqualification ........................................................................... 533
l. Reporting Violations ................................................................................... 534
m. Net Capital Violations................................................................................. 534
n. Miscellaneous .............................................................................................. 528
R. Broker-Dealer Employment Litigation and Arbitration .................................................... 535
TABLE OF AUTHORITIES ........................................................................................................... 551
RESEARCH CONTRIBUTIONS BY FIRM ................................................................................. 601
v

SECURITIES LITIGATION
A. Definition of a Security
A.
S.E.C. v. Merklinger, 489 Fed. Appx. 937, 2012 WL 3064777 (6 th Cir. July 30, 2012).
The SEC had sufficiently alleged that the investments were “securities” under federal
securities law when the investors provided “an investment of money,” collectively investing over
$7.2 million, defendant commingled investors’ funds, and they were marketed as a “passive
investment” from which “after five years the investors could expect returns on their investments
ranging from 57% to 372%.”
S.E.C. v. Schooler, No. 12–CV–2164, --- F. Supp. 2d ---, 2012 WL 4761917 (S.D. Cal. Oct. 5,
2012).
SEC made out a prima facie case that the general partnership interests at issue were
securities based on the defendants’ likely involvement in selling the parcel of land in which the
general partnerships were invested, its pivotal operational role with respect to the general
partnerships, the fractional nature of the general partnerships’ interest in the land, and the
apparent use of investors’ IRA funds.
S.E.C. v. Shields, No. 11–CV–02121, 2012 WL 3886883 (D. Colo. Sept. 6, 2012).
Interests in four joint ventures were not investment contracts and, therefore, not securities
as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934.
Goldberg v. 401 North Wabash Venture, LLC, No. 09 C 6455, --- F.Supp.2d ----, 2012 WL
4932653 (N.D. Ill. Oct. 16, 2012)
Hotel condominium units (HCUs) are not “securities” for purposes of the Illinois
Securities Law, as there is no horizontal commonality, as required to satisfy the “common
enterprise” element of the test for an “investment contract”; any net revenue from the rental of
each HCU was paid directly to the owner of that particular HCU, there had never been any
pooling of revenues, and to the extent any common revenue was “pooled,” there was no showing
that the revenue was anything more than an offset of operational expenses, much less the fruits
of an investment undertaking.
A.
A.
A.
1

S.E.C. v. Sentinel Mgmt. Group, Inc., No. 07 C 4684, 2012 WL 1079961 (N. D. Ill. Mar. 30,
2012).
Defendant offered investment contracts to potential investors who invested their money
in a pooled fund with other investors, i.e., a common enterprise, and they expected a return on
their investment solely from defendant’s efforts. Therefore, the court held that the investment
agreements entered into by defendant and its investors were, as a matter of law, securities.
Ferguson v. Purvis, No. 11–cv–573, 2012 WL 1029388 (S.D. Ind. Mar. 26, 2012).
Note secured by a mortgage on a home was not a security and claim related to same did
not invoke federal court jurisdiction under securities laws.
Valley Forge Renaissance, L.P. v. Greystone Servicing Corp., Inc., No. 09-CV-00131, 2012 WL
1340802 (S.D. Ind. Apr. 18, 2012).
Commercial loan agreement with a rate lock mechanism was not an investment, which is
necessarily accompanied by at least some degree of risk. Instead, the plaintiff merely purchased
certainty in the form of a locked interest rate. There was simply no risk inherent in the financial
instrument itself and the rate lock mechanism was not a security.
Delgado v. Center on Children, Inc., No. 10–2753, 2012 WL 2878622 (E.D. La. July 13, 2012).
Promissory notes were “securities” because three of the four Reeves v. Ernst & Young,
494 U.S. 56 (1990), factors clearly weighed in favor of characterizing the notes as securities,
and, under a balancing approach, these three factors outweighed the one factor that weighed in
favor of classifying the notes as non-securities.
S.E.C. v. Gagnon, No. 10–CV–11891, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012).
Defendant offered and sold securities within the meaning of the Securities and Exchange
Acts when all the investors made or were solicited to make investments of money in a common
enterprise where the funds went into a common pool from which all might benefit; the investors
were motivated to earn profits, evidenced by their desire to earn returns rather than by a desire to
use or consume the item purchased; and the expectation of profits was to be derived from the
entrepreneurial efforts of the defendants.
A.
A.
A.
A.
A.
2

A.
S.E.C. v. Morriss, No. 12-CV-80, 2012 WL 6822346 (E.D. Mo. Sept. 21, 2012).
When defendants characterized their offerings as securities under circumstances where
investors had reason to believe this characterization, the investments at issue satisfied the
definition of “security.”
Baroi v. Platinum Condo. Dev., LLC, No. 09-CV-00671, --- F.Supp.2d ----, 2012 WL 2847819
(D. Nev. July 11, 2012).
Interest in condominium units was a security under Nevada securities laws when sale of
condominium units and rental agreements constituted a single transaction, sale of condominium
units constituted a “common enterprise,” and purchasers lacked the practical ability to control
their investment. The unregistered sale of the securities violated Nevada securities laws.
Levin v. Barry Kaye & Assocs., Inc., 858 F.Supp.2d 914 (S.D. Ohio 2012).
The court held that fact issues precluded summary judgment on the issue of whether life
insurance policy was a security under Ohio’s Blue Sky Law.
Wolfe v. Bellos, No. 11–CV–02015, 2012 WL 652090 (N.D. Tex. Feb. 28, 2012).
The court held that loans to partnership were not securities but rather ordinary
commercial transactions outside the purview of the federal securities laws because the only
money plaintiff expected to receive was repayment of principal, she did not anticipate any
appreciation in the value of the amounts loaned, repayment of the loans was not conditioned on
success of the investment, and the loans were not extended so partnership could obtain
investment assets but to pay partnership’s business debt to solve its financial problems.
Boulware v. Baldwin, No. 11–CV–762, 2012 WL 1412698 (D. Utah Apr. 23, 2012).
Where plaintiff was motivated to purchase shares solely by the prospect of a return on the
investment and not by any desire to “use or consume” the shares, and plaintiff relied on the
management efforts of defendants to generate that return, the court found that the shares
purchased by the plaintiff were securities.
A.
A.
A.
A.
3

A.
S.E.C. v. Mowen, No. 09–CV–00786, 2012 WL 2120249 (D. Utah June 11, 2012).
Promissory notes at issue were securities subject to federal securities laws because (1)
seller’s purpose was to raise money for a business enterprise and buyer’s purpose was to make a
profit; (2) the note was offered and sold to a broad segment of the public; and (3) the investing
public reasonably viewed the promissory notes as investment securities based upon the terms of
the notes and the fact that the seller’s offering materials clearly and repeatedly identified the
notes as “securities” and the purchasers as “investors.”
Carlucci v. Han, No. 12-CV-451, --- F. Supp. 2d ---, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).
Under the “family resemblance” test, investor’s convertible promissory notes were
“securities” within meaning of the Securities Exchange Act of 1934, even though seller’s
purpose in selling notes was for corporation’s legitimate business purposes and notes did not
appear to have been offered to broad segment of public, where investor’s motivation in
purchasing notes was to make profit, corporation’s owner approached investor to solicit
“investments” so notes would have been construed accordingly by reasonable investor, notes
were convertible into corporation’s common stock, and no other regulatory scheme would
significantly reduce risk of notes and render application of securities laws unnecessary.
In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012).
Trustee’s allegations described a passive investment scheme that could meet the
definition of an investment contract and thus a security when Trustee alleged that investors
purchased interests in commercial properties for a combination of cash and the assumption of
pre-existing debt, were guaranteed a 20–year return on investment of upwards of 7 percent, and
the properties were managed by a master lessee, who sublet the property, collected rents, and
handled the expenses related to capital expenses and improvements.
In re Gables Mgmt., LLC, 473 B.R. 352 (Bankr. D. Idaho 2012).
Transactions at issue were held to be loans and not investments or the sale of securities
based on evidence submitted, including debtor’s characterization of transaction as a loan in its
Schedule F, and testimony that purchaser never believed the monies given to debtor were to be
anything other than loans.
A.
A.
A.
4

A.
In re Mona Lisa at Celebration, LLC, 472 B.R. 582 (Bankr. M.D. Fla. 2012).
Condominium sales contracts which gave each purchaser of condominium unit in
proposed hotel and condominium complex the right to occupy unit for 179 days of year, but
which did not obligate purchasers to rent units out when they were not occupying them and gave
purchasers complete freedom, if they elected to rent units out, to use company affiliated with
developer or any other company of their choice to effect rentals, were not “securities,” such as
should have been registered under federal or Florida law, especially where developer’s
promotional materials generally did not highlight investment opportunities, but unit features and
amenities.
Passatempo v. McMenimen, 461 Mass. 279, 960 N.E.2d 275 (2012).
Uniform Securities Act as enacted by Massachusetts excludes insurance policies from the
definition of a “security.”
Redding v. Montana First Judicial Dist. Court, 365 Mont. 316, 281 P.3d 189 (2012).
Investor, who purchased tenants-in-common investments (TICs) from promoter who was
also property manager, filed suit against promoter and others, alleging unlawful sale of securities
and other claims, after investment scheme collapsed. The court held that the TIC investment
scheme was a common venture and was derived through the entrepreneurial or managerial
efforts of others. Thus, the TICs were “securities” under Montana securities law at time the
investor purchased them.
Digges v. State of Texas, No. 05–10–00239–CR, 2012 WL 2444543 (Tex. Ct. App. June 28,
2012).
Testimony by Director of the Enforcement Division of the Texas State Securities Board
that he reviewed the agreements between appellant’s company and its investors and that the
agreements were contracts containing a promise to pay in the future for consideration presently
received was sufficient to establish that the agreements were securities within the meaning of the
Texas Securities Act.
A.
A.
A.
5

McDowell v. Lopez, No. 2 CA–CV 2011–0073, 2012 WL 376690 (Ariz. Ct. App. Feb. 7, 2012).
Evidence at trial was sufficient to support jury verdict that investment did not involve the
purchase of a security when the plaintiff described the relationship as a partnership that involved
her participation in planning and marketing.
Hicks v. State of Georgia, 315 Ga. App. 779, 728 S.E.2d 294 (Ga. Ct. App. 2012).
Evidence was sufficient, in prosecution under Georgia Securities Act (GSA) of 1973, to
show existence of an “investment contract,” as included within GSA’s definition of “security.”
Victims parted with their money in anticipation of investment gains from bank debenture and a
foreign currency trading program, there was a common enterprise because victims’ funds were
pooled to reach minimum amounts for participation set by defendant; expectation of profits
rested solely on the efforts of others, i.e., the “program manager” or “bank trader”; and defendant
acted as a dealer or salesperson who would receive 50 percent of the profits as commission for
his help and expertise.
Desteph v. Commissioner, Connecticut Dept. of Banking, No. CV105015042S, 2012 WL 953741
(Conn. Super. Ct. Feb. 29, 2012).
When note was issued to accomplish an investment purpose and was not a receipt for a
loan, it qualified as a security under Connecticut securities laws.
A.
A.
A.
B. Liabilities under the Securities Act of 1933
1. Section 11
B.1
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).
The Court of Appeals for the Second Circuit affirmed in part, vacated in part, and
remanded dismissal of plaintiff-appellant’s putative class action complaint alleging violation of
Section of 11 of the Securities Act of 1933, arising from allegedly false and misleading
statements concerning mortgage-backed securities. The district court’s dismissal of the Section
11 claims was vacated, and the claims reinstated. The central issue on appeal was whether
plaintiff had “class standing” (as distinguished from Article III and statutory standing), or
standing to assert claims on behalf of purchasers of securities issued under the same allegedly
false and misleading registration statement (and backed by mortgages originating with the same
lenders), but sold in separate offerings, pursuant to separate registration statements, and
consisting of separate tranches. The court distilled Supreme Court precedent to stand
6

collectively for the proposition that plaintiffs in a putative class action have class standing if they
have personally suffered actual injury as a result of defendant’s allegedly illegal conduct and
such conduct implicates the same set of concerns as the conduct allegedly causing injury to other
putative class members. The court held that plaintiff-appellant did not have sufficient class
standing to represent all investors who purchased certificates in 17 different offerings, each
backed by a distinct set of loans issued by different originators. Because the Section 11 claims
alleged misstatements about origination guidelines, the fact of different originators was material
to determining whether plaintiff-appellant’s claims raised the same concerns as those of absent
class members. Thus, plaintiff-appellant had class standing for offerings backed by a common
originator, but not for offerings backed by different originators. With regard to tranche-level
standing, the court held that certificates’ varying levels of payment priority did not raise such a
fundamentally different set of concerns as to defeat class standing. And though damages may
vary depending on the level of subordination, such individualized inquiries were also insufficient
to defeat class certification, let alone class standing.
The court also held that plaintiff-appellant sufficiently pleaded a cognizable injury under
Section 11 by pleading a decline in the securities’ value based upon rating agency watch labels,
downgrades, and exposure to a higher level of cash flow risk than represented in the offering
documents. The court rejected defendants-appellees’ arguments that timely interest payments on
the securities precluded a finding of loss on the ground that such an argument was inconsistent
with basic securities valuation principles. The court also rejected defendants-appellees’
arguments, and the district court’s conclusions, that the existence or liquidity of a secondary
market precluded a showing of loss given that such conclusion improperly conflated liquidity
and credit risk as well as price and value, and further given that plaintiff-appellant pleaded the
existence of a secondary market. The court noted that Section 11 presumes diminution in value
attributable to the alleged misrepresentations, and places the burden on defendants to disprove
causation.
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (2d Cir. 2012).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a
class action complaint alleging violation of Section 11 of the Securities Act of 1933 based upon
alleged misstatements concerning a pharmaceutical company’s clinical drug trial and business
prospects. The court affirmed the lower court’s application of the heightened pleading standard
of Federal Rule of Civil Procedure 9(b) because the Section 11 claim sounded in fraud. The
court rejected the argument that nominal disclaimer of fraud is sufficient to avoid the heightened
pleading standards of Rule 9(b) where the gravamen of the complaint sounds in fraud and no
other basis for the claims is given. By relying on the same alleged misrepresentations central to
the claim under Section 10(b) of the Securities Exchange Act of 1934, plaintiffs subjected
themselves to, but did not meet, the heightened pleading standard of Rule 9(b).
B.1
7

B.1
Panther Partners Inc., v. Ikanos Commc’ns Inc., 681 F.3d 114 (2d Cir. 2012).
The Court of Appeals for the Second Circuit vacated the district court’s judgment
denying a motion for leave to amend the complaint, with remand instructions to permit such
amendment, for a dispute in which plaintiff-appellant alleged violation of Section 11 of the
Securities Act of 1933 arising from issuer’s alleged failure adequately to disclose allegedly
known defects in its semiconductor chips. The de novo standard of review applied because the
district court denied leave to amend on the ground of futility, the review of which required an
interpretation of law. The court determined that granting leave to amend would not be futile
given that Item 303 of Regulation S-K imposes a disclosure duty where, as here, a trend is
alleged to be presently known to management and reasonably likely to have a material effect on
the registrant’s financial condition or results of operations. The alleged failure to disclose
fundamentally defective semiconductor chips was allegedly known to management (as a matter
of fact, if not of degree), and to be of substantial import given that defective chips were allegedly
sold to clients representing 72% of revenues. The court held that this was more than “potentially
problematic” – it was “very bad,” particularly given that Item 303’s disclosure obligations do not
turn on restrictive mechanical or quantitative inquiries.
New Jersey Carpenters Health Fund v. RALI Series 2006—Q01 Trust, 477 Fed.Appx. 809 (2d
Cir. 2012).
The Court of Appeals for the Second Circuit affirmed the district court’s denial of class
certification in two class actions alleging violation of Section 11 of the Securities Act of 1933
arising from allegedly false and misleading misstatements concerning mortgage-backed
securities that substantially decreased in value following issuance. At issue was whether the
purported class members were subject to certain statutory affirmative defenses on the ground that
they had knowledge of any alleged untruths or omissions. Applying an abuse of discretion
standard, the Second Circuit affirmed denial of class certification because the question of actual
knowledge required individualized inquiries that outweighed common questions. Plaintiffs’
broad and “cumbersome class definitions,” which included any purchaser from the initial
offering to the present day without use of subclasses, further demonstrated that common issues
did not predominate because purchasers over such a broad range of time could have had more or
less public information (and thus stronger or weaker evidence of knowledge) depending on the
timing of purchase.
Lenartz v. Am. Superconductor Corp., Civ. No. 11-10582, 2012 WL 3039735 (D. Mass. July 26,
2012).
The district court granted in part and denied in part motions to dismiss a purported class
action complaint alleging violation of Section 11 of the Securities Act of 1933 arising from
allegedly false and misleading statements upon issuance of common stock. The court declined to
8
B.1
B.1

apply the heightened pleading standard of Federal Rule of Civil Procedure 9(b) because
plaintiffs’ Section 11 claims did not sound in fraud (notwithstanding the use of phrases such as
“knew or should have known” and “materially false and misleading”) given plaintiffs’ disclaimer
of fraud and a separate section pleading factual allegations supporting the Securities Act claims
on a non-fraudulent basis. The court also held that plaintiffs had sufficiently complied with a
prior instruction to amend the complaint to exclude underwriters from generalized allegations
regarding a “fraudulent scheme”. Motions to dismiss by the issuer and individual defendants
were dismissed because they did not dispute that the complaint satisfies the pleading standards of
Rule 8. The court also dismissed the underwriters’ motion to dismiss the Securities Act claims
because the complaint sufficiently pleaded that certain overstated (and restated), materially false
and misleading financial statements were incorporated by reference in the registration statement.
In re Vivendi Universal, S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).
The district court granted defendants’ motion for partial judgment on the pleadings where
plaintiffs alleged violation of Section 11 of the Securities Act of 1933 arising from allegedly
false and misleading statements concerning a foreign issuer’s financial health, thus allegedly
inflating the price of American Depositary Receipts acquired by plaintiffs. At issue were claims
brought under the Securities Act and the Securities Exchange Act of 1934 by individual plaintiffs
who purchased ordinary shares of Vivendi on the Parisian stock exchange. With respect to the
Section 11 claim, the court accepted defendants’ uncontested argument that Morrison v. Nat’l
Australia Bank Ltd., -- U.S. --, 130 S.Ct. 2869 (2010), which held that Section 10(b) of the
Exchange Act does not apply extraterritorially, applies with equal force to Securities Act claims.
This continues the emerging trend in the Southern District of New York that Morrison permits
Securities Act claims only in connection with the purchase or sale of a security listed on an
American stock exchange and the purchase or sale of any other security in the United States.
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.
2012).
The district court granted in part and denied in part defendants’ motion to dismiss a
putative class action complaint alleging violation of Section 11 of the Securities Act of 1933 in
connection with the sale of mortgage-backed security pass-through certificates. Named plaintiffs
had constitutional standing because they purchased from each offering at issue and because
tranches within each offering were constituted from a single pool of mortgages, issued pursuant
to the same set of offering documents, and were part of the same case or controversy. The court
rejected the argument that named plaintiffs lacked statutory standing because of dissimilarities
between the tranches; the requirement in Section 11(a) that plaintiff acquire “such security”
meant only that the security was issued pursuant to an offering document with actionable
misrepresentations or omissions, even if the securities were in different tranches. Extending the
holding of Merck & Co. v. Reynolds, -- U.S. --, 130 S. Ct. 1784 (2010), which invalidated
inquiry notice for claims arising under the Securities Exchange Act of 1934, the court held that
Securities Act claims were not time-barred because, absent a decline in the certificates’ specific
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atings, disclosure of “general, industry-wide practices” more than one year before the operative
complaint was insufficient information on which to plead a claim capable of surviving a motion
to dismiss. Applying the tolling rule in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974),
the court also held that plaintiffs’ claims were not time-barred by the statute of repose;
commencement of the original class action tolled the statute of repose for all putative class
members, even where the original named plaintiff lacked standing. Plaintiffs were deemed to
have adequately pleaded claims where the complaint: linked alleged disregard for underwriting
standards to decline in the certificates’ value using public reports and confidential witness
statements; alleged failure to follow appraisal industry standards identified in the offering
documents; and alleged that defendants did not believe the accuracy of their subjective appraisal
numbers. The court dismissed without prejudice claims concerning investment ratings because
the complaint did not allege those subjective opinions were believed to be false at the time made.
Declines in the certificates’ value and their resale at a loss were deemed legally cognizable
injuries that generic disclosures about market fluctuations could not cure. Where systemic
misrepresentations were alleged, the court declined to permit a “sole remedy” provision,
contractually limiting remedies to repurchase or substitution, to overrule plaintiffs’ statutory
remedies. The court rejected application of the “bespeaks caution” doctrine on the ground that it
cannot apply to alleged misrepresentations and omissions of historical fact regarding compliance
with underwriting standards.
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012).
The district court granted in part and denied in part defendants’ motion for judgment on
the pleadings and for partial reconsideration of a motion to dismiss a complaint arising under
Section 11 of the Securities Act of 1933 and regarding the issuer’s 2008 stock offering. The
court granted the motion in its entirety for the Securities Act claims because the prior opinion
impermissibly sustained claims based upon: non-actionable statements of opinion, not objective
fact, without supporting allegations that the speaker disbelieved the opinion at the time
expressed; statements that were not incorporated or superseded in the offering documents; and
statements that lacked specificity as to the materiality of the issuer’s alleged violation of GAAP,
and any allegedly artificial inflation of the issuer’s valuation resulting from such violation.
In re Gen. Elec. Co. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).
The district court granted in part and denied in part defendants’ motion to dismiss a
putative class action complaint alleging violation of Section 11 of the Securities Act of 1933
arising from issuer’s alleged failure to disclose information regarding its financial health and that
of a wholly owned subsidiary. The court sustained Securities Act claims based upon allegedly
untrue and misleading statements about demand for and performance of GE’s commercial paper
given that GE’s disclosures, taken as a whole, seemed to assure investors that there were no
serious difficulties in GE’s access to short term financing, whereas plaintiffs’ allegations, taken
as true on a motion to dismiss, undermined the accuracy of those representations. The court also
sustained as actionable statements regarding GE’s reclassification of loans as held-to-maturity
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instead of available-for-sale to avoid having to write down the loans to their market value, where
GE had insufficiently cautioned investors about the possibility of write-downs. The court
rejected arguments that the second amended complaint established the absence of loss causation
given that disclosures by GE did not fully reveal the severity of the short-term liquidity problems
that plaintiffs alleged. The absence of a price decline after incomplete corrective disclosures was
held not to establish negative causation on the face of the complaint. The court rejected as
inactionable statements regarding: the quality of GE’s loan portfolio (which either expressed
aspirations or were not false); GE’s 2009 dividend (where disclosures did not guarantee a
dividend and where plaintiff failed to plead scienter as a basis of the Securities Act claims and
that statements about the dividend were not truly held at the time made); GE’s loan loss reserves
(where plaintiff failed to allege facts plausibly to claim with particularity that such reserves were
misstated and where such reserves were not apparently inconsistent with GAAP); and statements
touting GE’s AAA rating despite allegedly knowing that it was imperiled (given that the
statements were roughly equivalent to saying merely that GE wanted to maintain its AAA rating
and further given that reasonable investors would be informed about the relationship between
credit ratings and borrowing costs).
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).
The district court conditionally granted a motion to certify for interlocutory appeal, and
granted in part and denied in part defendants’ motion to dismiss a series of complaints by the
Federal Housing Finance Agency (FHFA) as conservator of the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), socalled
“GSEs” or government-sponsored entities. The complaints alleged violation of Section 11
of the Securities Act of 1933 arising from alleged misrepresentations made in connection with
the marketing and sale of residential mortgage-backed securities. The court ruled that plaintiff’s
claims were timely under the limitations period in the Housing and Economic Recovery Act of
2008 (HERA), which runs for three years from the date of conservatorship, irrespective of any
other provision of law (a decision that was certified for interlocutory review, which defendants
agreed to seek on an expedited basis, along with resolution of whether HERA’s timeliness
provision applies equally to federal and state causes of action). After extending the holding in
Merck & Co. v. Reynolds, -- U.S. --, 130 S. Ct. 1784 (2010), which invalidated inquiry notice
standards for claims arising under the Securities Exchange Act of 1934, to Securities Act claims,
the court further held that Securities Act claims did not accrue and expire prior to FHFA’s
conservatorship. Thus, the Securities Act claims did not accrue until a reasonably diligent
plaintiff in the GSEs’ position would have had sufficient information about a given misstatement
or omission adequately to plead it in a complaint. Under that standard, the court ruled that the
Securities Act claims were still open when the GSEs were placed into conservatorship. The
court held that FHFA adequately pleaded violations of the Securities Act, including Section 11,
based upon: alleged understatement of the loan-to-value ratio of the underlying mortgage pool
(which the court approved as the basis for Securities Act claims, notwithstanding that it
depended on third party appraiser estimates, given plaintiff’s allegations that the appraisers did
not believe their assigned valuations); alleged overstatement of the percentage of properties in
the loan groups that were owner-occupied; and misrepresentations of the extent to which
underlying mortgage loans conformed to risk guidelines for underwriting. The court rejected
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defendants’ argument that Item 1111 of SEC Regulation AB, 17 C.F.R. § 229.1111(a)(3), limited
liability to instances in which defendants failed to disclose deviations from underwriting
guidelines that were known to them on the ground that such argument attempted to “alter the
plaintiff’s pleading burden by grafting a scienter requirement onto Securities Act claims.”
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 322 (S.D.N.Y.
2012).
The district court granted former lead plaintiff’s motion to withdraw as lead plaintiff in a
class action alleging violation of Section 11 of the Securities Act of 1933 in connection with
plaintiffs’ purchase of mortgage-backed securities. The court held that the proposed new lead
plaintiff had constitutional standing because it purchased securities from the same offering as the
withdrawing lead plaintiff; purchasing from the same tranche was not necessary to satisfy
constitutional standing requirements because the alleged misstatements were not tranchespecific,
and were based, instead, “on the entire pool of loans backing the certificates in the
offering.” Because purchasers from different tranches can trace their injuries to the same offering
documents (and, therefore, to the same alleged misconduct), each has a “personal stake” in the
other’s claims. The court also found that because plaintiffs had pleaded that a drop in value in
one tranche affected the value of all the tranches, all purchasers were allegedly affected equally.
The court held that the proposed new lead plaintiff also had statutory standing because, in a class
action arising from the same actionable conduct, Section 11’s “plain language” requiring
plaintiff to have purchased “such security” did not necessarily preclude one purchaser from
representing purchasers of a security from a different tranche. Acknowledging emergent case
law in this area, the court sided with cases conferring statutory standing where plaintiffs are
affected by the same actionable conduct, regardless of the tranche from which the security was
issued.
Pa. Pub. Sch. Emp. Ret. Sys. v. Bank of Am. Corp., 874 F.Supp. 2d 341 (S.D.N.Y. 2012).
The district court granted in part and denied in part defendants’ motion to dismiss
plaintiff’s consolidated class action complaint alleging violation of Section 11 of the Securities
Act of 1933 in connection with the sale of mortgage backed securities, including the allegedly
attendant exposure to billions in loan repurchase claims and including alleged concealment of
reliance on the Mortgage Electronic Registration Systems, Inc. (“MERS”) database. Although
the court acknowledged conflicting law regarding whether the inquiry notice standard still
applies to Section 11 claims following Merck & Co. v. Reynolds, -- U.S. –, 130 S. Ct. 1784
(2010), the majority of courts in the district at the time of this opinion had declined to apply
Merck to Section 11 claims, and plaintiff offered no argument to the contrary. The court
therefore proceeded to dismiss the Section 11 claim as time-barred because publicly available
information, including various news articles, SEC filings, and lawsuits, triggered inquiry notice
of the facts underlying the Section 11 claim. The court rejected plaintiff’s argument that
defendants’ “reliable words of comfort” excused plaintiff’s failure to inquire because investors of
ordinary intelligence would not have reasonably relied on those statements to allay their
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concerns. Although there were fewer disclosures regarding reliance on MERS, the court still
deemed the Section 11 claim time-barred on the ground that notice of all misconduct is not
necessary when inquiry notice has been triggered.
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012).
The district court denied intervenor’s motion, and granted in part and denied in part
defendants’ motion to dismiss a putative class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933 in connection with the sale of shares in certain tripleleveraged
exchanged traded funds (ETFs). The court dismissed for lack of standing any claim
based upon funds in which named plaintiffs had not purchased shares. One plaintiff’s claims
were deemed timely based on the filing date of his complaint; certain other plaintiffs’ claims
were deemed timely based on the tolling rule in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538
(1974). The remaining plaintiffs’ claims were dismissed as untimely, but with leave to amend
the statute of limitations allegations. The court held that the alleged misstatements and
omissions were actionable because defendants’ disclosures insufficiently revealed the magnitude
of risk associated with this investment, particularly because the disclosures were equivocal about
the scope and extent of risk, which undercut the cautionary disclosures that were made. The
court rejected defendants’ remaining arguments for dismissal, including that there can be no loss
causation, which, given trading on the secondary market, was deemed too fact-intensive for
resolution on a motion to dismiss. Resolution of whether and to what extent plaintiff
experienced economic harm as a result of the alleged misstatements was also deemed
inappropriate on a motion to dismiss. Plaintiffs’ untimely filing of certifications required under
the PSLRA was deemed non-prejudicial and cured upon plaintiffs’ counsel’s representation at
oral argument that their clients had read the second amended complaint before filing, as required
by the PSLRA.
Pub. Emps.’ Ret. Sys. of Miss. v. Goldman Sachs Grp., Inc., 280 F.R.D. 130 (S.D.N.Y. 2012).
The district court granted a motion to certify a class alleging violation of Section 11 of
the Securities Act of 1933 arising from a 2006 offering of certificates derived from a pool of
securitized, fixed-rate, second-lien home mortgages. The court held that the proposed class met
the certification requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(3).
Numerosity and typicality were established because plaintiffs were allegedly affected by the
same actionable conduct, regardless of the tranche from which the securities issued.
Commonality was established because plaintiffs were allegedly affected by the same
misstatements and omissions, to which defendants were likely to provide common answers.
Adequacy was established given the alignment of interests between plaintiff and absent class
members, because lead plaintiff had incentive to obtain the largest settlement possible, and
because potential conflicts or perverse incentives given the waterfall structure of the tranches
were speculative. The impact of statute of limitations defenses were deemed not sufficiently
different as between plaintiff and any other institutional investor, thus preserving the court’s
finding of adequacy, though such finding was made subject to a memorandum class counsel was
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instructed to submit addressing class and trial team diversity. The predominance requirement
was satisfied, with individual questions of investor knowledge failing to overcome
predominance, because: (1) individually negotiated transactions relied on the same due diligence
described in the offering documents, and did not give those investors access to information
beyond that generally provided therein; (2) there was insufficient evidence to show that any
knowledge certain class members had regarding the loan originator’s appraisal and underwriting
practices actually implicated the alleged misstatements at issue; (3) materiality and loss causation
turned on objective standards and generalized proof, which was not undermined by differences in
risk and performance among various certificates; and (4) statute of limitations concerns were
capable of being resolved under objective criteria and with generalized proof, particularly given
the court’s holding that the knowledge of lead plaintiff’s advisor would not be imputed to
plaintiff where it was acquired prior to plaintiff’s retention of that agent.
In re Bank of Am. Corp. Sec., Derivative, and Emp. Ret. Income Sec. Act (ERISA) Litig., 281
F.R.D. 134 (S.D.N.Y. 2012).
The district court granted a motion for class certification and appointment of class
representatives and counsel in a putative class action alleging violation of Section 11 of the
Securities Act of 1933 arising from material misstatements and omissions in connection with
defendant Bank of America Corporation’s (“BofA”) acquisition of Merrill, Lynch & Co.
(“Merrill”). The court certified the class on the ground that it met the certification requirements
of Federal Rule of Civil Procedure 23(a) and 23(b)(3). At issue with respect to Section 11 claims
was a 2008 common stock offering that allegedly misstated material information regarding
Merrill bonuses. The court rejected defendants’ argument that numerosity could not be
established absent specificity about the number of purchasers overall and those who held their
shares until disclosure of the Merrill bonuses because the number likely would be in the
thousands in any event, which was sufficient to establish numerosity. Commonality and
typicality were established because the Section 11 claims were all based on the same alleged
misstatements concerning bonus payments. Adequacy was established because the proposed
class representatives were not antagonistic to the interests of proposed class members, and the
proposed class was ascertainable through objective criteria regarding whether shares had been
purchased and held until the corrective disclosure. The court rejected arguments that the Section
11 claim raised individualized tracing problems to the extent BofA shares at issue traded
alongside BofA shares not at issue (thus allegedly defeating the predominance requirement of
Rule 23(b)), holding, instead, that plaintiffs had avoided such tracing complications by limiting
the class to those shareholders who directly purchased shares, and excluding those who acquired
shares in the secondary market. The court held that plaintiffs had sufficiently alleged the
materiality of alleged misstatements concerning Merrill bonuses given that BofA share values
fell 12 percent on the trading day following the announcement of accelerated bonus payments to
Merrill personnel.
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Tsereteli v. Residential Asset Securitization Trust, 283 F.R.D. 199 (S.D.N.Y. 2012).
The district court granted plaintiffs’ motion for certification of a class alleging violation
of Section 11 of the Securities Act of 1933 arising from alleged misstatements and omissions
concerning the issuance, distribution, and sale of certain mortgage-backed securities. The court
held that the proposed class established the requirements of Federal Rule of Civil Procedure
23(a), rejecting arguments that numerosity must be shown on a tranche-by-tranche basis (versus
an offering-by-offering basis), and holding that commonality, typicality, and adequacy were all
satisfied because alleged misrepresentations in the prospectus relate to all investors at issue, thus
presenting common questions, common interests, and a common course of allegedly unlawful
conduct. Damages were also found to present common questions given that they are calculated
by statutory methods set forth in Section 11(e). Although the court acknowledged the potential
for conflicts to arise during the course of the lawsuit (e.g., regarding settlement, materiality, and
knowledge), such conflicts were deemed conjectural at this stage and insufficient to defeat
certification. The proposed class satisfied the predominance requirement of Rule 23(b)(3) for
reasons similar to those supporting certification under Rule 23(a). The court rejected as
unpersuasive arguments that predominance could not be shown given that variation among
individual class members in the level of knowledge of the misstatements and/or inquiry notice
was insufficient to outweigh predominance. The court also held that receipt of monthly trustee
reports supplemental to the alleged misstatements was insufficient to defeat the presumption of
reliance (given that trustee reports are not statutorily defined as “earning statements”), and that
offering documents set the standard for the existence of misrepresentations and omissions, which
need not be proved on an individualized basis, especially where, as here, underwriting guidelines
for the certificates at issue were the same. The objective nature of materiality, which need not be
determined on an individual basis, further supported class certification. The court noted the
insufficiency of loss causation and individualized damage calculations as bases for defeating
certification.
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin. Holdings Ltd.,
No. 11 Civ. 5097, 2012 WL 3283481 (S.D.N.Y. Aug. 13, 2012).
The district court granted defendants’ motion to dismiss a proposed class action
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from defendants’
allegedly false and misleading statements made in connection with the issuance of common
stock. Given the parties’ concession that the proposed class action lies outside the statute of
repose, plaintiffs cited Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) to argue that the
limitations period should be tolled from the time another putative lead plaintiff filed substantially
the same complaint. The court rejected application of American Pipe tolling given that it
addressed statute of limitations, not the statute of repose at issue here. Plaintiffs also lacked
standing to assert Section 11 claims based on shares purchased before the challenged offerings
(and, therefore, not traceable thereto). Pursuit of claims on behalf of the entire class, some of
whom might have standing, did not change this result given Second Circuit requirements that
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named plaintiffs must personally show standing, and given that class certification is not a
dispositive issue that must be resolved before the question of named plaintiffs’ standing.
In re IndyMac Mortgage-Backed Sec. Litig., No. 09 Civ. 4583, 2012 WL 3553083 (S.D.N.Y.
Aug. 17, 2012).
The district court granted in part and denied in part a motion for class certification in
action alleging violation of Section 11 of the Securities Act of 1933 arising from defendants’
allegedly false and misleading statements upon issuance of mortgage pass-through certificates.
Noting that suits alleging violations of Section 11 are “especially amenable to class
certification,” the court nonetheless dismissed Securities Act claims for one offering due to lack
of standing, given the court’s prior finding that Section 11 claims for that particular offering
were time-barred. For the remaining Securities Act claims, the court held that defendants could
not defeat requirements of Federal Rule of Civil Procedure 23(a) regarding commonality,
typicality, or adequacy by arguing that plaintiffs’ varying levels of knowledge about their
investments raised unique defenses since the fundamental nature of plaintiffs’ claims (i.e., that
the offering documents were materially misleading) had remained the same. Allegedly unique
issues in demonstrating materiality and damages were deemed inconsequential given that
materiality is subject to generalized proof and Section 11 damages are calculated with a statutory
formula. The court held class-wide issues predominate, thus satisfying Rule 23(b), because the
record did not contain enough evidence that prospective class members – including sophisticated
ones – likely knew or had any notice of the alleged misstatements or omission in the offering
documents, let alone varying levels of notice or knowledge. The fact that deviations from
underwriting standards may have occurred in some loan groups but not others, and that class
members may have purchased offerings at different times did not defeat predominance given the
substantial similarity of allegedly misleading statements in the offering documents. The
presumption of reliance applied to all investors, even those who purchased certificates after the
initial offerings, because trustee reports accompanying the offerings did not qualify as “earning
statements” that could otherwise eliminate that presumption. As an objective standard,
materiality also presented a common rather than individual issue. Whether each underwriter
adequately performed due diligence did raise individualized underwriter defenses, but was
deemed insufficient to defeat class certification because such findings related only to defenses
and not to matters of proof by individual class members. Individualized damages and the
defense of loss causation were also deemed insufficient to defeat predominance for class
certification purposes. Finally, the court held that the superiority requirement could not be
defeated by the presence of sophisticated investors or foreign plaintiffs absent proof that their
home countries would give preclusive effect to this action.
Ho v. Duoyuan Global Water Inc., No. 10 Civ. 7233, 2012 WL 3647043 (S.D.N.Y. Aug. 24,
2012).
The district court granted in part and denied in part a motion to dismiss a putative class
action complaint alleging violation of Section 11 of the Securities Act of 1933 arising from
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defendants’ allegedly false and misleading statements regarding financial performance, company
operations, and compliance with GAAP by a Chinese issuer of American Depositary Shares
offered through an initial public offering (IPO) and a secondary public offering (SPO). Although
plaintiffs did not and could not sufficiently plead traceability based on the SPO, given that they
did not purchase on the date of the SPO and therefore did not purchase pursuant to the SPO, the
court nonetheless denied defendants’ motion to dismiss the Section 11 claim for lack of standing
because the claim was also based on the IPO, for which traceability was sufficiently pleaded.
The court denied the underwriter defendants’ motion to dismiss the Section 11 claim as timebarred
because red flags in the IPO documents did not indisputably lead to a reasonable investor
to investigate and gave plaintiffs no reason to believe the financial figures were incorrect or
grossly misstated. General disclaimers in the IPO documents that did not “clearly warn”
plaintiffs were also deemed insufficient notice that the financials were misstated. The court
applied the heightened pleading requirements of Rule 9(b) because plaintiffs’ Section 11 claims
sounded in fraud, and failed to specify allegations that would support a negligence cause of
action. The court sustained plaintiffs’ Section 11 claim to the extent based upon extreme
discrepancies between financial statements filed with Chinese versus SEC regulators, with the
more positive disclosures being made to the SEC. That the discrepancies may be explainable
was insufficient grounds to dismiss the complaint given the reasonable conclusion that there was
fraudulent motive to overstate the numbers to the SEC and no fraudulent motive to understate
them to Chinese regulators. The court rejected Section 11 claims to the extent based on alleged
misstatements concerning the issuer’s operations because the pleadings were insufficient to show
how the statements were false. The court granted defendant-auditor Grant Thornton
International’s motion to dismiss the Section 11 claim based upon statements made by Grant
Thornton – Hong Kong, which was not shown to be an agent of Grant Thornton International.
The court also dismissed a Section 11 claim against a defendant “outside investor” that acquired
a 20 percent stake in the issuer because the investor was not a statutorily enumerated party
subject to liability under Section 11 and was not otherwise liable on a theory of respondeat
superior.
In re Proshares Trust Sec. Litig., No. 09 Civ. 6935, 2012 WL 3878141 (S.D.N.Y. Sept. 7, 2012).
The district court dismissed plaintiffs’ putative class action complaint alleging violation
of Section 11 of the Securities Act of 1933 arising from the marketing and sale of exchange
traded funds (ETFs). The court rejected plaintiff’s argument that the registration statements
failed adequately to disclose that ETFs can lose substantial value in a relatively brief period of
time, especially in periods of high volatility, holding, instead, that the disclosures were adequate.
The registration statements clearly and directly addressed the relevant risk, emphasizing their
daily investment objectives, and a reasonably prudent investor would have understood that ETFs
could produce adverse results if held for longer than one day. Contrary to potentially analogous
cases, the registration statements did not contain penalties or enticements that would have
encouraged investors to hold the ETFs for longer than one day, nor did the ETFs impose
penalties for short term trades, which could potentially be construed to encourage long-term
holding and trading of these securities.
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Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, No. 11 Civ. 398, 2012 WL 4616958
(S.D.N.Y. Sept. 28, 2012).
The district court granted motions to dismiss a putative class action complaint against a
foreign bank and certain of its directors alleging violation of Section 11 of the Securities Act of
1933 arising from alleged misrepresentations made in connection with the sale and marketing of
American Depositary Receipts (ADRs). Holding that plaintiffs’ Section 11 claims sounded in
fraud – due to allegations concerning “untrue statements of material facts” and reliance on the
same allegations to plead claims arising under the Securities Act and the Securities Exchange
Act of 1934, which necessarily involves fraud – the court applied the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b). The Section 11 claims were dismissed
because plaintiffs failed to include any discussion as to why statements forming the basis of the
claim were fraudulent. Plaintiffs’ claims also failed under the lower pleading standard of Rule
8(a) given that the statements complained of either were not false or were not actionable.
Plaintiffs failed plausibly to allege that due diligence meetings held in connection with an
acquisition did not happen, that the corporate credit environment was unstable, that statements
about the value of defendants’ securitized holdings were objectively false or that defendants
believed them to be false at the time they were made. The court also dismissed the Section 11
claims as untimely, holding that plaintiffs were put on notice before write-downs of credit
market assets given their involvement as a party to a prior lawsuit containing many of the same
fraud claims; the dramatic price decline of defendant bank’s ADRs in 15 months – a drop that
could not pass without reasonable shareholders being put on notice of potential problems; and
plaintiffs’ failure to identify new information putting them on notice that was not previously
available through other sources. Because plaintiffs failed to establish basic timeliness, the court
declined to consider arguments regarding tolling of the statute of limitations.
In re Lehman Brothers and ERISA Litig., No. 09 Civ. 6040, 2012 WL 4866504 (S.D.N.Y. Oct.
15, 2012).
The district court granted in part and denied in part motions to dismiss a consolidated
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from alleged
misrepresentations concerning Lehman’s accounting practices, real estate asset values,
disclosures regarding liquidity and risk management, and use of Repo 105 to reduce reported net
leverage. The court dismissed certain Section 11 claims as time-barred under the three year
statute of repose, holding that pricing supplements to the registration statement were insufficient
to establish timeliness unless the amendments were pursuant to 17 C.F.R. § 229.512(1)(1)(ii)
(and they were not). Plaintiffs failed to state other Section 11 claims because they failed
sufficiently to plead that the Repo 105 transactions were inconsistent with accounting rule SFAS
140; failed adequately to allege that real estate asset valuations did not comply with accounting
rules or were believed by Lehman to be unreasonable; failed to support allegations that Lehman
regularly exceeded its purported risk limits; and, for securities purchases made before February
13, 2007, failed sufficiently to allege that Lehman excluded its most risky investments from
stress testing. With the exception of five purchases that were deemed sufficient to state a claim,
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plaintiffs otherwise failed to plead purchase of securities in a time period when Lehman had
insufficiently disclosed concentrations of credit risk in violation of SFAS 107. The court limited
Section 11 claims based upon Value-at-Risk, dismissing any such claim for plaintiffs who
purchased their securities before the allegedly misleading statements were made. To the extent
Section 11 claims were based on Repo 105 transactions, the court rejected defendants’ argument
that transactions pre-dating Lehman’s 2007 Form 10-K were immaterial, regardless of whether
Lehman’s bankruptcy examiner held such an opinion. The court sustained Section 11 claims for
one Form 8-K signed by Lehman’s CFO, which allegedly contained misstatements, but
dismissed the remainder of such claims as lacking supporting allegations. The court also
sustained Section 11 claims against Ernst & Young because core allegations against them had
not changed, with the court rejecting the argument that supplemental allegations created a new
“action” for purposes of calculating the statute of repose.
Federal Hous. Fin. Agency v. J.P. Morgan Chase & Co., No. 11 Civ. 6188, 2012 WL 5395646
(S.D.N.Y. Nov. 5, 2012).
The district court granted in part and denied in part defendants’ motion to dismiss a
complaint by the Federal Housing Finance Agency (FHFA) as conservator of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), so-called “GSEs” or government-sponsored entities. The complaint alleged
violation of Section 11 of the Securities Act of 1933 arising from alleged misrepresentations
made in connection with the marketing and sale of residential mortgage-backed securities. The
court declined to dismiss plaintiff’s claims as time-barred given that downgraded credit ratings
of certificates subordinate to those purchased by the GSEs was insufficient to trigger notice of a
potential claim concerning the GSE’s more highly-rated securities, especially given that the
purpose of a subordinated structure is for junior tranches to absorb losses in the event of a
downturn. The court also held that administrative exhaustion requirements under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) did not bar plaintiff’s
claims given that those administrative procedures do not provide remedies for the class of
defendants involved here. Applying the heightened pleading standard of Federal Rule of Civil
Procedure 9(b), the court sustained claims based upon alleged misrepresentation of compliance
with underwriting standards given allegations regarding private and government investigations
concluding that certain originators whose loans supported the GSE certificates systematically
disregarded their own underwriting guidelines; the certificates alleged “total collapse” in credit
ratings; an alleged 60 percent rate of default, foreclosure, or delinquency among the “safest”
loans backing the certificates; and plaintiff’s forensic review of over 1,000 loan files, which
allegedly found 98 percent that were not underwritten in accordance with established guidelines
or otherwise breached representations in the transaction documents.
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).
The district court granted defendants’ motion to dismiss a class action complaint alleging
violation of Section 11 of the Securities Act of 1933 arising from defendants’ public statements
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allegedly exaggerating the value of the issuer’s commercial mortgage portfolio. The court
dismissed the Section 11 claim without prejudice because the complaint failed specifically to
identify the false and misleading statements on which plaintiffs purported to base their claim.
Short quotes allegedly constituting misstatements, without full context and without citation to the
registration statement or prospectus, were deemed insufficient to sustain a Section 11 claim. The
information pleaded suggested that several of the alleged misstatements would be inactionable,
even after construing all inferences in plaintiffs’ favor.
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., --- F. Supp. 2d ---, 2012 WL
2450161 (D. Md. June 26, 2012).
The district court granted in part and denied in part investor-plaintiffs’ putative class
action complaint alleging violation of Section 11 of the Securities Act of 1933 through material
misrepresentations and omissions in financial statements that were restated three years after
filing, when the issuer changed its interpretation of accounting rules regarding low income
housing tax credits that were in effect at the time of filing. The court applied the heightened
pleading standard of Federal Rule of Civil Procedure 9(b) because the fact pattern supporting
Section 11 claims also supported claims arising under the Securities Exchange Act of 1934.
Although scienter was not required for Section 11 claims, plaintiffs were required to, and did,
plead those claims with particularity. The court declined to dismiss a Section 11 claim against
the CFO because arguments related thereto (i.e., that the allegedly false filing was issued before
her tenure and withdrawn before she signed and certified the issuer’s 10-K) were raised for the
first time in a reply memorandum. The court declined to dismiss the complaint on statute of
limitations grounds because inquiry notice was not triggered before the scope of the restatement
was announced in clear terms. The court did dismiss certain Section 11 claims as barred by the
statute of repose, rejecting the argument that it runs from the date shares are first made available
for sale, and adopting the argument that the repose period for registered securities issued prior to
the Securities Offering Reform rules runs either from the effective date of the registration
statement or the date of a post-effective amendment. Acknowledging disputes on whether Bell
Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009),
foreclose general and conclusory allegations of standing, the court held that they do not, and held
that standing to pursue a Section 11 claim can be supported by general allegations that securities
were purchased pursuant and traceable to offering materials that contained misstatements and
omissions.
In re Groupon Derivative Litig., No. 12-CV-5300, 2012 WL 3133684 (N.D. Ill. July 31, 2012).
The district court granted in part and denied in part a motion to stay proceedings in a
shareholder derivative action pending resolution of a motion to dismiss in a related securities
class action alleging violation of Section 11 of the Securities Act of 1933 arising from alleged
false and misleading statements made in connection with an IPO. The court held that staying the
derivative action would simplify the issues in question and streamline the trial because resolution
of the class claims – grounded in allegations that statements regarding the issuer’s business
20
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practices and financial results were false and misleading – would simplify the central issue in the
derivative case, i.e., the scope of the individual defendants’ liability. The court was also
persuaded to stay the derivative proceedings to reduce the burden of litigation on the parties and
to preserve judicial resources in light of the duplicative nature of the parties, allegations,
questions of fact, and sources of proof given that both actions rely on the same or closely related
events, documents, and witnesses. Proceeding with the derivative case could prejudice defense
to the securities claims and would divert resources away from the presently pending action.
Acknowledging that a stay would allow defendants to operate with allegedly deficient internal
controls, the court reasoned that such prejudice to plaintiffs could be minimized by periodically
evaluating whether a stay continues to be warranted.
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal 2012).
The district court granted in part and denied in part defendants’ motion to dismiss the
portion of plaintiffs’ complaint alleging violation of Section 11 of the Securities Act of 1933 in
connection with plaintiffs’ purchase of residential mortgage-backed securities originated and/or
issued by Countrywide. Plaintiffs’ Section 11 claims were dismissed with prejudice as timebarred
because the complaint post-dated the three-year statute of repose applicable to Section 11
claims, which begins to run when the security is bona fide offered to the public. The court
declined to toll plaintiffs’ claims for the reasons set forth in Allstate In. Co. v. Countrywide Fin.
Corp., 824 F. Supp. 2d 1164, 1178-79 (C.D. Cal. 2011).
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal 2012).
The district court granted defendants’ motion to dismiss complaints alleging violations of
Section 11 of the Securities Act of 1933 arising from the structuring and sale of residential
mortgage-backed securities. Plaintiffs’ Section 11 claims were dismissed with prejudice as timebarred
because the complaint post-dated the three-year statute of repose. The court declined to
apply Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), to toll the Section 11 claim because
none of the plaintiffs in the previously-filed actions had statutory standing to sue on the claims at
issue in this case, having purchased their securities from different tranches. The court rejected
the argument that lack of standing in the previously-filed cases was unforeseeable.
Acknowledging emergent caselaw in this area, the court nonetheless concluded that “no
reasonable plaintiff” could conclude that named plaintiffs in the other action had statutory
standing given that they purported to assert claims on behalf of purchasers from any tranche
within 427 offerings. Reliance on the “bare assertion” that the named plaintiffs had acquired
certificates traceable to the registration statements and prospectus supplements was deemed
insufficient to toll the statute of repose or to support a reasonable belief that standing existed.
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Brown v. China Integrated Energy, Inc., 875 F.Supp. 2d 1096 (C.D. Cal. 2012).
The district court denied defendants’ motion to dismiss a putative class action complaint
alleging violation of Section 11 of the Securities Act of 1933 arising from alleged
misrepresentations made when issuer reported certain financial results. The court applied the
heightened pleading requirements of Federal Rule of Civil Procedure 9(b) because the gravamen
of the complaint was fraud and because plaintiffs failed to identify any factual allegations
pleading negligent or innocent conduct. Plaintiffs met the heightened pleading standard through
particularized allegations of inflated financial reports, as evidenced by significant discrepancies
between the issuer’s filings with Chinese versus United States regulators, and concealed related
party transactions and gains therefrom involving the issuer’s CEO and his son.
Scott v. ZST Digital Networks, Inc., No. CV 11-03531, 2012 WL 4459572 (C.D. Cal. Aug. 7,
2012).
The district court granted in part and denied in part a motion to dismiss a class action
complaint alleging violation of Section 11 of the Securities Act of 1933 arising from allegedly
false and misleading statements made in connection with a stock offering. The court dismissed
plaintiffs’ Section 11 claims in their entirety and without leave to amend for failure to satisfy
standing requirements by sufficiently pleading traceability. Plaintiffs had purchased the stock at
issue after defendant filed a second registration statement, and failed to plead with specificity
that their purchases could be traced to the initial offering. The court rejected plaintiffs’ argument
that the second, sequential registration statement rendered a showing of traceability impossible.
It also rejected arguments that the more functional rules employed to show standing for private
placements could supplant the strict traceability requirements of Section 11, from which the
court repeatedly and strenuously declined to deviate.
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).
The district court granted defendants’ motion to dismiss a putative class action complaint
alleging violation of Section 11 of the Securities Act of 1933 through an alleged scheme to
inflate stock price by acquiring a competitor under the pretext of immediate synergies and
increased revenues. The court found the complaint to sound in fraud, given allegations that
defendants were involved in a fraudulent scheme, despite plaintiffs’ disclaimer to the contrary.
The court declined to dismiss the complaint on the basis that the challenged statements were
protected by the Private Securities Litigation Reform Act’s safe harbor for forward-looking
statements (because the statements at issue were unprotected omissions or representations of past
or present facts). The court also declined to dismiss on the basis that the complaint demonstrated
the absence of loss causation, or “negative causation,” noting that courts generally evaluate this
affirmative defense during summary judgment. The court nonetheless dismissed the complaint
on the ground that plaintiffs failed to meet the heightened pleading standard of Federal Rule of
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Civil Procedure 9(b) in that they failed to allege facts sufficient to show that defendants omitted
certain trends and uncertainties (regarding pricing pressures, effects on productivity and sales,
and reduced sales) that were required to be disclosed pursuant to Regulation S-K. The court also
dismissed the Section 11 claim because plaintiffs failed to show that defendants omitted facts
necessary to make statements about the acquisition, revenues, products, and distribution channels
not misleading.
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).
The district court denied one defendant’s motion to dismiss and granted in part and
denied in part defendants’ joint motion to dismiss consolidated class action complaints alleging
violation of Section 11 of the Securities Act of 1933 in connection with funds that were allegedly
marketed as stable, income-seeking investments that would preserve capital when, in fact, they
allegedly used risky investment strategies fundamentally incompatible with stated objectives.
The court held that defendants’ disclosure duties were not satisfied given their failure to disclose
sufficient information to render not misleading statements on investment objectives, highlyleveraged
derivative instruments, and the volatility, liquidity, risk, and valuation of the securities
at issue. As such, those omissions were sufficient to state a claim under Section 11. The court
held that plaintiffs’ losses were adequately linked to the allegedly misleading statements and
omissions, thus rejecting defendants’ loss causation arguments. The court also rejected
defendants’ argument that plaintiffs’ claims were time-barred, holding that news articles and
other press reports were insufficient to trigger inquiry notice. This opinion supersedes the
opinion previously rendered in In re Oppenheimer Rochester Funds Grp. Sec. Litig., 2011 WL
5042066 (D.Colo. Oct. 24, 2011).
United Food and Commercial Workers Union, 281 F.R.D. 641 (W.D. Okla. 2012).
The district court granted lead plaintiffs’ motion to certify a class alleging violation of,
inter alia, Section 11 of the Securities Act of 1933 in connection with a 2008 public offering of
defendant Chesapeake’s common stock. The court rejected defendants’ argument that individual
issues predominated over common claims, thus precluding certification, because all plaintiffs
could not trace their shares to the allegedly deficient registration statement. The court noted that
the parties had previously stipulated to satisfaction of the tracing requirement, and that any
alleged difficulties with tracing required assessment of plaintiffs’ claims on the merits, which
was premature at the certification stage. The court permitted the certified class to include
plaintiffs who purchased Chesapeake stock both directly and indirectly in the public offering,
reasoning that no precise rule existed for defining a class, aftermarket purchasers are
appropriately included to the extent they can satisfy Section 11’s tracing requirement, and the
parties had stipulated to the inclusion of such aftermarket purchasers. Specific reference to the
price at which class members must have purchased the shares was rejected on the grounds that it
was without authority in the caselaw.
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Nat’l Credit Union Admin. Bd. v. RBS Sec. Inc., Nos. 11-2340, 11-2649, 2012 WL 3028803 (D.
Kan. July 25, 2012).
The district court granted and part and denied in part a motion to dismiss alleging
violation of Section 11 of the Securities Act of 1933 arising from alleged misrepresentations in
connection with the sale of residential mortgage-backed securities certificates (RMBS). The
court held that Section 11 claims were not time-barred under the statute of repose because 12
U.S.C. §1787(b)(14)(A) (“the extender statute”) applied to extend actions brought in plaintiff’s
capacity as liquidating agent of a federally-chartered credit union. Section 11 claims were
deemed time-barred on statute of limitations grounds for two certificates where a credit
downgrade watch and an FDIC cease-and-desist order provided constructive notice that a
plausible claim could be pleaded. The court rejected other arguments that the remaining Section
11 claims should be dismissed on statute of limitations grounds because general, industry-wide
problems and RMBS underperformance were insufficient to trigger inquiry notice; early spikes
in default and delinquency rates for loans supplying income for the majority of RMBS
certificates was also insufficient to trigger inquiry notice given that most of the certificates
backed by those loans retained a double or triple-A rating until much later; risk disclosures in the
offering documents did not warn investors that underwriting standards had been abandoned or
virtually abandoned; and lawsuits filed against other defendants regarding RMBS did not clearly
provide constructive notice in this case given the timing of those lawsuits and their varying
allegations, though the court called it a close question. The court sustained the Section 11 claim
as sufficiently pleaded to the extent based upon allegations that defendants systematically
abandoned or recklessly deviated from underwriting standards (including failing to follow
criteria for reduced documentation programs, failing to consider or intentionally exceeding loanto-value
ratio limits, and intentionally inflating an appraisal), except for certificates where the
complaint either did not identify the originators or did not make any allegations specifically
addressing those originators’ underwriting practices. The court rejected defendant’s argument
that plaintiff insufficiently pleaded materiality – publicly available information regarding
deterioration in the housing market and warnings in the offering documents did not adequately
warn reasonable investors that underwriting standards were systematically abandoned. The
claim based upon alleged credit enhancement misrepresentations was dismissed because plaintiff
failed to allege how the descriptions of credit enhancement features were material and untrue
representations at the time they were made. This opinion included an opinion disposing of Nat’l
Credit Union Admin. Bd. v. Wachovia Capital Mkts., No. 11-2649, 2012 WL 3028803 (D. Kan.
July 25, 2012), in which the court denied the Wachovia defendants’ motion to dismiss for the
same reasons it denied similar claims raised by RBS.
Belmont Holdings Corp. v. Suntrust Banks, Inc., No. 1:09-cv-1185, 2012 WL 4096146 (N.D. Ga.
Aug. 28, 2012).
The district court granted a motion for reconsideration of an order denying defendants’
motion to dismiss, and dismissed plaintiffs’ claims, but denied a motion against plaintiff and its
counsel for sanctions in a putative class action alleging violation of Section 11 of the Securities
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Act of 1933 arising from defendants’ allegedly false and misleading statements upon issuance of
preferred securities. The court granted defendants’ motion to reconsider in light of new evidence
(in the form of declarations from the former Group Vice President of Risk Management) casting
doubt on plaintiff’s allegations that the former officer had personal knowledge that certain
statements were false and known to be false at the time made. The declarations clarified that,
contrary to the allegations in the complaint, the former officer did not have personal knowledge
of the subjective falsity of the statements at issue. The court then granted defendants’ motion to
dismiss the Section 11 claim with prejudice because correction of this manifest factual error
(caused, according to the court, at least by plaintiff’s counsel’s carelessness) resulted in only
conclusory allegations of wrongdoing that were insufficient to state a plausible claim. The court
also dismissed Section 11 claims against the auditor on the ground that the amended complaint
failed to state a claim that the audit opinions were subjectively false when issued, and failed to
satisfy the specificity requirements of Federal Rule of Civil Procedure 9(b) regarding any alleged
falsity of such audit opinions.
Mordecai v. Morgan Keenan & Co., Inc., No. 11-04320, 2012 WL 2504038 (FINRA June 18,
2012) (Neal, Arb.)
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted
violation of Section 11 of the Securities Act of 1933 arising from claimants’ investments in
certain bond funds. The arbitrator denied all requests for relief in their entirety, including
claimants’ claims, requests for attorneys’ fees, and requests for punitive damages.
Warwick v. Morgan Keenan & Co., Inc., No. 10-02682, 2012 WL 689087 (FINRA Feb. 23,
2012) (Winter, Boufford, Hubbell, Arbs.).
In an arbitration before the Financial Industry Regulatory Authority, claimants asserted
violation of Section 11 of the Securities Act of 1933 arising from claimants’ purchase of certain
bond funds. After two pre-hearing sessions before the panel and ten hearing sessions, the panel
denied the claimants’ statement of claim, thus rejecting claimants’ arguments that respondent’s
alleged consent to findings of fact that respondent and its employees committed fraud necessarily
rendered respondent’s financial statements materially misleading. All other relief not
specifically addressed was denied, including claimants’ and respondent’s respective requests for
attorneys’ fees. The panel assessed various fees for filing, adjournment, discovery and contested
motions, and hearings. Member fees were assessed to respondent.
Fischer Lime and Cement Co. v. Morgan Keegan & Co., Inc., No. 08-04856, 2012 WL 6759349
(FINRA Dec. 28, 2012) (Pastor, Levine, Linden, Arbs.)
In an arbitration before the Financial Industry Regulatory Authority, three claimants –
two individuals and one corporate claimant – asserted violation of Section 11 of the Securities
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Act of 1933 arising from alleged mismanagement of income funds and alleged
misrepresentations made in connection with same. The arbitration panel denied respondent’s
motion to dismiss as untimely. The arbitration panel rejected a motion in limine in which
respondent asserted that fund mismanagement claims were in the nature of shareholder
derivative claims and not subject to arbitration. Respondent moved to dismiss at the evidentiary
hearing for claimants’ alleged failure to state a claim, which was denied on the ground that
claimants had made a prima facie case. After one pre-hearing before a single arbitrator, eight
pre-hearing sessions before the full panel, and nineteen hearing sessions, the panel held that
respondent was liable for $61,726 in compensatory damages to the individual claimants. The
panel denied claims of the corporate claimant in their entirety and with prejudice. The panel
assessed $16,425 in hearing session fees jointly and severally to claimants and to respondent in
the same amount. The panel also assessed FINRA member fees, as well as fees related to
adjournments and contested motions. All other relief not specifically addressed was denied,
including respondent’s request for attorneys’ fees.
2. Section 12
B.2
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).
The Second Circuit Court of Appeals affirmed the district court’s order granting the
defendants’ motion to dismiss in part and vacated the order in part, holding that the plaintiff-fund
had class standing to assert violations of Section 12(a)(2) of the Securities Act of 1933. The
district court held that the plaintiff could not represent a putative class of all persons who
acquired certain mortgage-backed certificates because the certificates were sold in 17 separate
offerings through 17 separate trusts, using 17 separate registration statements. The plaintiff-fund
argued that class certification was proper because the prospectus statements contained false and
misleading statements that were essentially repeated in each statement, and therefore it could
represent all purchasers, including purchasers of certificates from other offerings or from
different tranches of the same offerings. The Second Circuit held that the plaintiff-fund had
standing to assert the Section 12 claims on behalf of purchasers of certificates that were backed
by mortgages from the same lenders that originated mortgages to back plaintiff’s certificates,
reasoning that those claims raised a sufficiently similar set of concerns. However, the plaintifffund
lacked standing to assert Section 12 claims on behalf of purchasers of certificates that were
backed by mortgages from different lenders than those that originated mortgages backing
plaintiff’s certificates.
B.2
Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (2d Cir. 2012).
The Second Circuit Court of Appeals reversed the district court’s denial of plaintiff’s
motion for leave to amend its complaint on the grounds of futility, finding that the proposed
amendments to the complaint cured prior deficiencies and stated a claim under Rule 12(b)(6).
Plaintiff brought its initial claim for a violation of Section 12(a)(2) of the Securities Act of 1933,
among other securities claims, alleging that the defendant-manufacturer had failed to disclose
known defects in the company’s semiconductor products in violation of Item 103 of SEC
26

Regulation S–K. The district court dismissed plaintiff’s first complaint and first amended
complaint for failure to state a claim, and the Second Circuit affirmed. On remand, plaintiff
sought leave to amend its complaint for a second time, adding new allegations regarding a defect
rate in the semiconductors and its customer demographics. The district court denied leave to
amend. Reversing the district court, the Second Circuit held that the new complaint, which
should be construed broadly, met Item 303’s disclosure obligations.
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).
The Sixth Circuit Court of Appeals affirmed the district court’s dismissal of plaintiffs’
claims under Section 12(a)(1) of the Securities Act of 1933 as barred by the statute of
limitations. Plaintiffs brought several claims against defendants in a separate state court lawsuit
for undue influence, common law fraud, breach of contract, and breach of fiduciary duty.
During discovery in the state court lawsuit, facts and circumstances giving rise to the federal and
state securities claims in this lawsuit came to light. The district court dismissed plaintiff’s
Section 12(a)(1) claims as barred by the one-year statute of limitations. On cross-appeal,
plaintiffs argued that equitable tolling should extend their limitations period because the facts
pertaining to the securities’ exemption status were concealed from them until discovery began in
the state court litigation. The Sixth Circuit affirmed the district court’s dismissal, finding that
because the statute permits claims under Section 12(a)(2) to proceed if brought within one year
of discovery, and Section 12(a)(1) lacked a similar discovery rule, Congress’s intent is clear and
the express language of the statute should be applied. Therefore, the court reasoned, there is no
equitable tolling period for a Section 12(a)(1) claim.
B.2
Fencorp Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).
B.2
The Sixth Circuit Court of Appeals affirmed the district court’s decision to dismiss all
claims under Section 12(a)(1) of the Securities Act of 1933. The district court had declined to
apply equitable tolling and dismissed most of the plaintiff-investment corporation’s Section 12
claims during pre-trial motions as beyond the three-year statute of repose. The remaining
Section 12 claims were dismissed at the summary-judgment stage as barred by the one-year
statute of limitations. On cross-appeal, plaintiff argued that the district court erred in applying
the statute of repose because it is contrary to the Ohio state constitution’s “right to remedy”
provision. The Sixth Circuit affirmed the district court, finding that there was not proof “beyond
a reasonable doubt” that the statutorily-created rights took away other existing claims or
remedies.
Plumber’s Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-10446-
RGS, 2012 WL 4480735 (D. Mass. Oct. 1, 2012).
The court denied defendants’ motion to dismiss plaintiffs’ claims under Section 12 of the
Securities Act of 1933. The plaintiffs’ claims related to alleged misstatements and omissions
27
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made in the issuance and underwriting of mortgage-backed securities. The defendants first
argued that the plaintiffs lacked standing, in part, because the purchasing plaintiff had sold its
certificate before the applicable “corrective disclosure” issued by the relevant defendant. The
court ruled that loss causation is an affirmative defense to a Section 12 claim, and is not part of a
prima facie case. Thus, it was not facially apparent that the plaintiffs could not establish loss
causation. The court found it relevant that the defendant had issued other corrective disclosures
before plaintiff sold the certificate. Although those disclosures did not relate specifically to the
certificate that the plaintiff had purchased, they involved the same issuer, underwriter, and
subject matter.
The defendants also argued that the plaintiffs’ Section 12 claims were brought outside the
statute of limitations period because prior claims that had been dismissed for lack of standing
could not toll the statute of limitations. The court disagreed, finding that applying the tolling rule
to claims that had been dismissed for lack of standing advanced efficiency and economy. To
hold otherwise would force proposed class members to file duplicative proceedings to preserve
their claims in the event the class representative was later found to lack standing.
Lenartz v. Am. Superconductor Corp., No. CIV. 11-10582-WGY, 2012 WL 3039735 (D. Mass.
July 26, 2012).
The court denied defendants’ motion to dismiss plaintiffs’ claims that arose under Section
12(a) of the Securities Act of 1933. The plaintiffs alleged that materials distributed in connection
with the issuer defendant’s offering contained misrepresentations. The plaintiff asserted Section
12 claims against various defendants, including the issuer, individual officers of the issuer, and
the underwriters. The defendants moved to dismiss, arguing that the Section 12 claims
“sound[ed] in fraud” and were subject to the heighted pleading requirements of Federal Rule of
Civil Procedure 9(b). The court denied the motion and held that the claims were not subject to
the heightened pleading standard. Specifically, it held that (1) the claims against the issuer
defendant were based on a theory of strict liability; (2) the claims against the individual
defendants were based on the breach of a duty “to make a reasonable and diligent investigation
of the truthfulness and accuracy” of the offering materials; and (3) the claims against the
underwriter defendants were based on the breach of a duty “to investigate with due diligence the
representations contained” in the offering materials.
B.2
Washtenaw Cnty. Employees’ Ret. Sys. v. Princeton Review, Inc., No. Civ. 11-11359-RGS, 2012
WL 727125 (D. Mass. Mar. 6, 2012).
The court granted defendants’ motion to dismiss plaintiff’s claims under Section 12(a)(2)
of the Securities Act of 1933. The court held defendants had no duty to disclose internallytracked
sales-forecast data for the third quarter of 2010 at the time of the April 15, 2010-offering.
The court found that the sales forecasts, projecting sales over four months after the date of the
offering, constituted omission of forward-looking information not actionable under securities
laws. The court also held defendants adequately disclosed risks of shifting consumer purchasing
B.2
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trends and intense competition at the time of the offering. The court dismissed plaintiff’s
complaints that defendants failed to disclose that they were distracted by “side projects” since
defendants adequately disclosed their diversification strategy. Lastly, the court dismissed
plaintiff’s claims that defendants failed to disclose management’s poor execution of its turnaround
plan since plaintiff failed to identify any false or misleading statement in offering
materials.
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance
Corp. I, No. 08 VC 1713(ERK)(WDW), 2012 WL 4053716 (E.D.N.Y. Sept. 14, 2012).
The district court denied the lead plaintiff’s motion to amend the court’s prior opinion
granting in part and denying in part the defendants’ motion to dismiss. In its prior ruling, the
district court held that the lead plaintiff lacked standing to assert claims under mortgage passthrough
certificates it did not purchase or hold. The lead plaintiff’s motion to amend that
decision sought a certification for interlocutory appeal on the issue of standing that had been
stayed pending the outcome of a factually identical Second Circuit case. The Second Circuit
held that a lead plaintiff had standing as long as the certificates not held by the plaintiff shared an
originator with the certificates the plaintiff held. In light of this authority, the Second Circuit
denied the lead plaintiff’s motion to amend until the parties could advise the court of whether the
lead plaintiff would have standing under the Second Circuit’s rule.
Orlan v. Spongetech Delivery Sys., Inc., Sec. Litig., Nos. 10–CV–4093 (DLI)(JMA), 10–CV–
4104 (DLI)(JMA), 2012 WL 1067975 (E.D.N.Y. Mar. 29, 2012).
The court granted the defendant’s motion to dismiss the plaintiffs’ claim under Section
12(a) of the Securities Act of 1933. Noting that Section 12 addresses seller liability, the court
found that there were no allegations that the individual-defendant, a former company attorney,
sold or offered to sell the company’s stock to plaintiffs or any other individuals.
Desyatnikov v. Credit Suisse Grp., Inc., No. 10-CV-1870(DLI)(VVP), 2012 WL 1019990
(E.D.N.Y. Mar. 26, 2012).
The court granted the defendants’ motion to dismiss the plaintiff’s claim under Section
12 of the Securities Act of 1933. The court found that any claim made by plaintiff under Section
12(a)(1) of the Securities Act would be subject to the one-year statute of limitations under
Section 13 of the Securities Act, which provides that “if the action is to enforce a liability created
under [Section 12(a)(1)] of this title, [it must be] brought within one year after the violation upon
which it is based.” In this case, the plaintiff filed the complaint nearly two years after purchasing
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the security at issue, and thus, the claim arising under Section 12 was time-barred and dismissed
with prejudice.
B.2
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance
Corp., No. 08 CV 1713 (ERK)(WDW), 2012 WL 601448 (E.D.N.Y. Feb. 23, 2012).
The court granted in part and denied in part the defendants’ motion to dismiss the
plaintiff’s claims under Section 12(a) of the Securities Act of 1933. Plaintiff filed a putative
class action against an issuer of mortgage-backed securities and individual defendant directors
and officers, alleging violations arising from plaintiff’s purchase of certificates. Regarding
Section 12 statutory standing, the court agreed with defendants that each tranche within a
mortgage-backed securities offering was a unique security, and therefore, plaintiff’s standing
was limited only to the tranches from which it actually purchased securities. Similarly, the court
found plaintiff lacked standing under Section 12(a)(2) because plaintiff failed to allege it
purchased the certificates during the IPO or from the defendants directly. On this basis, the court
dismissed these claims but allowed plaintiff an opportunity to replead.
Plaintiff alleged a number of material misstatements and omissions in the offering
documents: (1) in detailing the loan originator’s underwriting standards; (2) regarding appraisal
methods; (3) regarding credit enhancement; and (4) in calculating ratings. The court held that
the plaintiff failed to plead any facts about the loan originator, which generated the loans
underlying three certificates. Given that Section 12 claims “turn on whether the underlying loan
originators’ conduct was different than described by the offering documents,” these claims were
dismissed. The court denied the motion to dismiss as to several claims where plaintiff
sufficiently pleaded that the defendants failed to follow its statements that the loan originators
would use recognized appraisal standards and regarding deviations from the underwriting
guidelines, where it “alleged systematic deviation motivated by management’s desire to increase
the volume of business.” The court dismissed with leave to replead the claims as to the credit
enhancement statements and the certificates ratings, where the plaintiff made no allegations that
the cited “opinions” were not truly held when made in the offering documents.
Cobalt Multifamily Investors I, LLC v. Arden, No. 06 CV 6172 (KMW)(MHD), 2012 WL
3838834 (S.D.N.Y. Aug. 14, 2012).
B.2
The magistrate judge recommended that the district court judge grant plaintiffs’ motion
for summary judgment against one defendant and enter a default judgment against the other. The
plaintiffs’ claims arose under Section 12(a) of the Securities Act of 1933 and alleged that while
the plaintiff company’s three principals were engaged in alleged securities fraud, the defendants
wrongfully profited from the fraud through commissions from the sale of unregistered securities.
On behalf of the plaintiffs, the court-appointed receiver sought recovery of these commissions
through unjust enrichment and disgorgement. The only unsettled claims were against one
defendant who failed to answer and another who failed to contest plaintiffs’ summary judgment
motion. The court found that the receiver plaintiff had established a prima facie violation of
30

Section 12 and that the defendant had not successfully demonstrated that a registration
exemption applied. Defendant had essentially cold-called investors, which the court considered
a general solicitation, making him ineligible for a Regulation D exemption. The default
judgment was granted on similar grounds.
Fed. Housing Fin. Agency v. UBS Americas, Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).
The court denied defendants’ motion to dismiss plaintiff’s claims arising under Section
12(a)(2) of the Securities Act of 1933. Plaintiff, as conservator for Fannie Mae and Freddie
Mac, alleged that the offering documents for twenty-two securitizations related to residential
mortgage-backed securities sponsored or underwritten by defendants contained materially false
statements and omissions. Defendants moved to dismiss, chiefly arguing that plaintiff’s claims
were untimely under Section 13 of the Securities Act, which generally applies to claims under
Section 12(a)(2). Plaintiff countered that the timeliness of its claims was governed not by
Section 13, but rather by the Housing and Economic Recovery Act of 2008 (“HERA”), which
establishes superseding rules governing the timeliness of any action in which the Federal
Housing Finance Agency is a plaintiff. The court agreed that because under HERA plaintiff had
three years from when it was appointed conservator to bring its claims, its claims had not
expired. The court rejected defendants’ argument that plaintiff failed to state a claim under
Section 12 because, among other things, plaintiff properly alleged that various data and
information in defendants’ offering materials were false (these data and appraisals were not mere
statements of opinion); and, because Section 12 does not require scienter, defendants could not
avoid liability by attributing the misstatements to third parties. Finally, defendants argued that
plaintiff did not allege that one defendant who acted as a depositor was a “statutory seller” under
Section 12(a)(2). The court rejected this contention and held that a depositor is included within
the term “issuer,” and under SEC Rule 159A, an issuer is a statutory seller for purposes of
Section 12(a)(2). In sum, the court denied defendants’ motion to dismiss as to all Securities Act
claims.
B.2
Fed. Housing Fin. Agency v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC), 2012 WL 5451188
(S.D.N.Y. Nov. 8, 2012).
The court denied defendants’ motion to dismiss, holding that plaintiffs were not required
to prove reliance under laws interpreted according to Section 12 of the Securities Act of 1933,
and that plaintiffs had not unreasonably delayed to rescind their securities. In one of sixteen
similar actions, the Federal Housing Finance Agency claimed that the lead defendant, corporate
affiliates, and individual defendants violated Section 12 by marketing and selling residential
mortgage-backed securities containing material misstatements or omissions regarding owneroccupancy
status, loan-to-value ratio, and underwriting standards. Defendants moved to dismiss,
asserting two arguments implicating Section 12 of the Securities Act. First, defendants argued
that the District of Columbia Blue Sky Act required plaintiffs to prove reliance on an underlying
untrue statement of material fact or omission to state a material fact. The court disagreed, noting
that the DC Blue Sky Act is interpreted in accordance with Section 12, and Section 12 requires
31
B.2

no such showing of reliance. Second, defendants argued that plaintiffs should not be allowed to
rescind a purchase under Section 12 if there is an “unreasonable delay” before their demand for
rescission. The court disagreed, noting that courts and commentators have said that plaintiffs
may do what they like with securities during the one-year statute of limitations on Section 12
actions, and decide to rescind or not at any point during that time. The court also noted that the
defendants were unable to establish that the plaintiff’s delay in demanding rescission was
unreasonable. The court denied the motion to dismiss on these grounds.
B.2
Fed. Housing Fin. Agency v. Morgan Stanley, No. 11 Civ. 6739 (DLC), 2012 WL 5868300
(S.D.N.Y. Nov. 19, 2012).
The court granted defendant’s motion to dismiss, agreeing that it did not actively
participate in solicitation under Section 12 of the Securities Act of 1933. In one of sixteen
similar actions, the Federal Housing Finance Agency claimed that the lead defendant, corporate
affiliates, and individual defendants violated Section 12 by marketing and selling residential
mortgage-backed securities containing material misstatements or omissions regarding owneroccupancy
status, loan-to-value ratio, and underwriting standards. An underwriter defendant
moved to dismiss, arguing that its preparation and filing of a registration statement did not
qualify as successfully soliciting the purchase, as is required by Section 12. The court agreed
that the defendant was not in contractual privity with the plaintiffs, and to be liable under Section
12, plaintiffs had to show that the defendant actively participated in solicitation. Holding that
merely assisting in preparing and filing registration statements and assisting in marketing and
selling certificates—which was all that plaintiffs alleged—was insufficient to show the requisite
level of participation to impose solicitation liability, the court granted the underwriter
defendant’s motion to dismiss.
Fed. Housing Fin. Agency v. SG Americas., Inc., No. 11 Civ. 6203 (DLC), 2012 WL 5931878
(S.D.N.Y. Nov. 27, 2012).
The court denied defendants’ motion to dismiss, disagreeing that a single word in their
offering documents should act to raise plaintiff’s pleading standard under Section 12 of the
Securities Act of 1933. In one of sixteen similar actions, the Federal Housing Finance Agency
claimed that the lead defendant, corporate affiliates, and individual defendants violated Section
12 by marketing and selling residential mortgage-backed securities containing material
misstatements or omissions regarding owner-occupancy status, loan-to-value ratio, and
underwriting standards. Defendants argued that plaintiff’s offering document, which stated,
“The following is a summary of the underwriting guidelines believed. . . to have been applied,”
transformed the statements into opinions and that the plaintiff was required to prove that
defendants subjectively knew they were false. The court disagreed, noting that the sentence
preceding said, “All of the mortgage loans were originated. . . generally in accordance with the
underwriting criteria described in this section.” The court held that this was “a classic statement
of fact,” and that the subsequent reference to “believed” did not impose a different pleading
standard on the plaintiff.
B.2
32

B.2
Fed. Housing Fin. Agency v. Bank of Am. Corp., No. 11 Civ. 6195 (DLC), 2012 WL 6592251
(S.D.N.Y. Dec. 18, 2012).
The court denied defendants’ motion to dismiss and granted their motion for
reconsideration under Section 12(a)(2) of the Securities Act of 1933. The plaintiff, acting as
conservator for two government-sponsored entities (“GSEs”), had initially alleged that the
offering documents used to advertise and sell certain residential mortgage-backed securities
(“RMBS”) to the GSEs contained material misstatements or omissions. The RMBS certificates
were each related to one of twenty-three securitizations offered for sale pursuant to shelf
registration statements. The defendant bank was either the lead or co-lead underwriter for all
twenty-three securitizations, was the depositor for eighteen securitizations, and a sponsor for
seventeen securitizations. The defendants’ motion for reconsideration pertained to ten certificates
that were issued pursuant to shelf registration statements and base prospectuses. After the
settlement of the GSEs’ contracts for purchasing these certificates, a final prospectus was filed
with the SEC. The plaintiff’s amended complaint alleged that there were false statements in the
final prospectuses. Defendants argued that Section 12 requires any untrue statement to have
been made before the contract of sale and contended that the plaintiff could not assert a Section
12 claim on prospectuses filed after the sale of the ten certificates. Section 12 imposes liability
on individuals who offer or sell a security by “means of a prospectus.” The court stated,
however, that a sale procured by issuing a free writing prospectus is considered a sale made “by
means of” a prospectus. The final prospectuses ultimately include the information contained in
the earlier prospectuses. The court therefore determined that final prospectuses are a “means”
through which defendants offered and sold securities. Defendants also asserted a Rule 159 claim
as support for their argument. Rule 159 provides that information given to the purchaser after
the time of the sale will not be taken into account when determining whether a prospectus or oral
statement contains an untrue statement of a material fact.
The court, after demarcating the difference between Section 11 and Section 12 claims,
stated that under Section 12(a)(2), any sale or offer of a security by means of a free writing
prospectus, whether or not it is filed, will be subject to disclosure liability. The court also noted
that Rule 159 was not intended to change the pleading requirements for Section 12(a)(2). Rule
159 should instead be viewed as an affirmative defense under Section 12(a)(2) if the defendant
can show that false or misleading information in a final prospectus filed with the SEC was not
conveyed at or before the sale. The court held that this determination was fact-specific, and
could not be resolved on the motion to dismiss.
Fed. Housing Fin. Agency v. Ally Fin. Inc., No. 11 Civ. 7010 (DLC), 2012 WL 6616061
(S.D.N.Y. Dec. 19, 2012).
B.2
The court granted defendants’ motions to dismiss plaintiff’s Section 12(a)(2) claim under
the Securities Act of 1933. The plaintiff, acting as conservator for two government-sponsored
entities (“GSEs”), alleged that the offering documents used to advertise and sell residential
33

mortgage-backed securities (“RMBS”) to the GSEs contained material misstatements or
omissions with regard to owner-occupancy status, loan-to-value ratio, and underwriting
standards for the underlying mortgages. This action was one of sixteen related actions before the
court in which similar claims were alleged. The sponsor of the twenty-one securitizations, to
which the RMBS certificates purchased by one of the GSEs pertain, was a non-party corporation.
This corporation was a wholly-owned subsidiary of a named defendant, which, in turn, was a
wholly-owned subsidiary of the lead defendant. Other non-parties were depositors for the
securitizations. Securities law claims were asserted against the lead defendant as well as the
underwriter banks of the securitizations. Groups of defendants filed separate motions to dismiss.
Most of the arguments had been addressed by the court’s previous opinions, and the court
adopted by reference the relevant rulings and reasoning of its prior opinions. The court
dismissed plaintiff’s Section 12 claims against the lead defendant and one of the underwriter
banks in connection with the RMBS certificates, but provided no detail in this particular opinion
of its reasoning.
Freidus v. ING Grp. N.V., No. 09-1049-LAK, 2012 WL 4857543 (S.D.N.Y. Oct. 11, 2012).
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12 of
the Securities Act of 1933, finding that plaintiffs had no standing to pursue their claims. The
plaintiffs alleged injury sustained in connection with their purchases of securities at three
offerings. The lone plaintiff who had purchased $10 million in securities at the relevant offering
had subsequently transferred those securities to an affiliate entity in consideration of that entity’s
assumption of a $10 million liability to a third party. The court ruled that, as a result of this
transfer of the securities for equivalent consideration, plaintiffs lacked both statutory and Article
III standing to bring their claims. The fact that the plaintiffs made an intercorporate transfer to a
company under common ownership did not change the court’s conclusion.
In re Austin Capital Mgmt. Ltd., Sec. & Employee Ret. Income Sec. Act (ERISA) Litig., No. 09
M.D. 2075, 2012 WL 6644623 (S.D.N.Y. Dec. 21, 2012).
The court granted defendants’ motion to dismiss claims arising under Section 12(a)(2) of
the Securities Act of 1933. In this class action, plaintiffs included investors in hedge funds
controlled by a capital management group. The hedge fund capital management group and some
of its managers were named as defendants. Plaintiffs alleged that they had lost money because
the defendant management group had invested in a particular fund that was managed, only
nominally, by an investment manager. Plaintiffs further alleged that the fund was actually
managed by convicted Ponzi schemer Bernard Madoff, and that Madoff had made all investment
decisions and trades. Plaintiffs argued that the defendant had failed to perform adequate due
diligence into Madoff, that it had knowingly engaged in investments with Madoff, and that all
funds invested were ultimately given to Madoff. The Section 12 claim was dismissed because
Section 12(a)(2) governs public securities offerings exclusively, and the offerings made by the
defendant management group were private.
B.2
B.2
34

B.2
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.
2012).
The court granted in part and denied in part defendants’ motion to dismiss plaintiffs’
claims under Section 12(a)(2) of the Securities Act of 1933. Defendants argued that plaintiffs’
claims were time-barred because more than one year had passed since plaintiffs had been placed
on “inquiry notice” of their claims. The court extended the Supreme Court’s decision in Merck
& Co. v. Reynolds, __U.S.__, 130 S. Ct. 1784 (2010) (rejecting the inquiry notice standard in the
context of a Section 10(b) suit), to the instant Section 12 claims. Because plaintiffs could not
have pleaded their claims with sufficient particularity more than one year before filing their
complaint, the complaint was not time barred. Furthermore, none of the claims were barred by
the statute of repose because the commencement of the original class action tolled the statute of
repose for all members of the putative class.
The court also ruled that plaintiffs had adequately pleaded claims for misrepresentations
and omissions regarding underwriting standards and appraisals, but had not pleaded sufficient
facts to support an inference that the ratings agencies disbelieved the ratings at or before the time
of the offerings. Accordingly, the court granted defendants’ motion to dismiss as to the ratingsrelated
claims. The court also noted that plaintiffs alleged with specificity the decline in value
and losses suffered as a result of the sale of the certificates and thus identified legally cognizable
injuries. Finally, the court concluded that plaintiffs had standing to sue with respect to tranches
they did not purchase because all named plaintiffs suffered the same form of injury as the
members of the class, traceable to a single unlawful act.
B.2
In re China Valves Tech. Sec. Litig., No. 11 CIV. 0796 LAK, 2012 WL 4039852 (S.D.N.Y. Sept.
12, 2012).
The court granted defendants’ motion to dismiss the lead plaintiff’s claim under Section
12(a) of the Securities Act of 1933. On behalf of a putative class, plaintiff alleged that
defendants made material misstatements and omissions in their registration statement and
offering documents. Specifically, plaintiff alleged that defendants failed to disclose material
adverse facts about two of the company’s acquisitions and that defendants overstated financial
results in the registration statement and prospectus. Plaintiff based these allegations on
discrepancies between the defendant company’s SEC filings and filings made with the Chinese
State Administration for Industry and Commerce. Defendants moved to dismiss the Section 12
claim, arguing that plaintiff’s allegations were based on averments of fraud and were therefore
required to meet the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil
Procedure. Plaintiff argued that its Section 12 claim was not based on fraud and was not subject
to the heightened pleading standard. The court granted defendants’ motion to dismiss, finding
that plaintiff’s assertions were based upon the assumption that the defendant company’s actions
were intentional and deliberate, and not merely negligent. As such, plaintiff’s Section 12 claim
sounded in fraud and was required to be pleaded with particularity. Because the allegations did
35

not meet the heightened pleading standard of Rule 9(b), plaintiff’s Section 12 claim was
dismissed.
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012).
B.2
The court granted the defendants’ motion for partial reconsideration and judgment on the
pleadings with respect to claims brought under Section 12 of the Securities Act of 1933. As part
of a class action against an issuer and the underwriters of a stock offering, as well as various
executives, plaintiff alleged that the issuer failed to disclose information regarding its financial
condition. In an earlier order, the court had granted the defendants’ 12(b)(6) motion to dismiss
in part and denied it in part. When the case was reassigned to a new judge. defendants moved
for reconsideration of the retained claims and for judgment on the pleadings, alleging that the
misstatements were either inactionable opinions or immaterial. Plaintiff insisted that the offering
documents contained materially false and misleading statements related to the issuer’s ability to
issue commercial paper and the valuation of its assets. The court held that the statements related
to commercial paper actually incorporated into the issuer’s offering documents were not
materially misleading and that plaintiffs failed to plausibly allege how much the issuer’s assets
were inflated, or that this amount was material.
In re Gen. Elec. Co. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).
B.2
The court granted in part and denied in part defendants’ 12(b)(6) motion to dismiss
plaintiff’s claims under Section 12(a) of the Securities Act of 1933. Plaintiff alleged defendants
made materially misleading statements related to their success in meeting commercial paper
needs, the quality of their loan portfolio, the size of future dividends, and the value of their
assets. Noting the high bar defendants must overcome in filing 12(b)(6) motions under the
Securities Act, the court determined that the plaintiff had successfully alleged claims regarding
commercial paper and value of assets, but had not done so for claims related to the loan portfolio
or future dividends. Regarding commercial paper, the court found it was plausible that the
defendants’ statements were misleading in that they were intended to assure investors that there
would be no serious difficulties related to short-term financing, while the facts alleged, taken as
true, indicated otherwise. Regarding the value of their assets, it was sufficiently alleged that the
defendants reclassified their loans to inflate the value of those assets in the relevant prospectus.
Regarding the loan portfolio, the court found that defendants’ statements regarding plans to be
“safe and secure” were inactionable statements of puffery or opinion. Finally, regarding future
dividends, the court found that statements by the defendants involved planned, but not
guaranteed, dividends, and therefore could not be relied upon by a reasonable investor.
36

B.2
In re IndyMac Mortg.-Backed Sec. Litig., No. 09 Civ. 4583 (LAK), 2012 WL 3553083
(S.D.N.Y. Aug. 17, 2012).
The court granted the lead plaintiff’s motion for class certification, appointment as class
representative, and appointment of class counsel. The lead plaintiff sought to represent a class of
plaintiffs in alleging claims arising under Section 12 of the Securities Act of 1933, along with
other claims from the Securities Act. Plaintiff alleged that the offering documents for certain
mortgage pass-through certificates, which were underwritten and registered by certain
defendants, contained misleading statements regarding the evaluating standards applied by the
now-defunct bank that had offered the certificates. The defendants claimed that the plaintiffs
could not satisfy the predominance requirement for class certification, largely because the class
contained investors with diverse levels of sophistication. The court held that “sophistication
does not alone defeat a finding of predominance” and that the defendant must show diversity of
actual knowledge regarding the misleading nature of any statements. The court denied
certification as to only one offering and dismissed the claims as to that offering as well,
including Section 12 claims, because the certificates were acquired in the secondary market.
In re Merrill Lynch Auction Rate Sec. Litig., Nos. 09 MD 2030 (LAP), 10 Civ. 0124 (LAP), 2012
WL 1994707 (S.D.N.Y. June 4, 2012).
The court granted the defendant’s motion to dismiss the plaintiff’s claims under Section
12(a)(1) of the Securities Act of 1933. The plaintiff alleged violations of Section 12 in
connection with the 2007 sale of certain auction rate securities that were first offered to the
public in 2002, for which the defendant was a sponsor and broker-dealer. The court found that
plaintiff’s claim, brought in 2010, was time-barred by both the applicable statute of limitations
(one year from the date of the transaction) and the statute of repose (three years from the first
offering of the securities). The court rejected plaintiff’s attempt to distinguish auction rate
securities from other types of securities subject to the statute of limitations and statute of repose.
Alternatively, the court also held that plaintiff had failed to state a claim because the plaintiff
was, or gave the defendant reason to believe it was, a “qualified institutional buyer” under Rule
144A’s safe harbor for offerings of unregistered securities in private placements.
In re Royal Bank of Scotland Grp. plc Sec. Litig., No. 09 Civ. 300 (DAB), 2012 WL 3826261
(S.D.N.Y. Sept. 4, 2012).
The court granted motions to dismiss filed by both the underwriter defendants and the
individual defendants. Plaintiffs brought claims arising under Section 12(a) of the Securities Act
B.2
B.2
37

of 1933, as well as several other claims under that Act. Plaintiffs’ Section 12 claims, brought on
behalf of a putative class of plaintiffs who bought certain preferred shares from the defendant
bank, were based on alleged failures to disclose and material misrepresentations regarding the
defendant bank’s exposure to subprime mortgages in releases made before the preferred share
offering. The plaintiffs alleged that these material misrepresentations and failures to disclose
made the offering documents for the preferred shares materially untrue and misleading in
violation of Section 12. The court held that when evaluated on the facts as they existed at the
time of the offering, none of the alleged misstatements or failures to disclose could support a
Section 12 claim. The court added that in cases where the defendant bank was aware of risks,
those risks were adequately disclosed.
In re UBS AG Sec. Litig., No. 07-11225-RJS, 2012 WL 4471265 (S.D.N.Y. Sept. 28, 2012).
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section
12 of the Securities Act of 1933. The plaintiffs’ claims stemmed from alleged misstatements
made in a Rights Offering. The defendants first argued that the plaintiffs lacked standing to
bring a Section 12(a)(2) claim because they failed to plead facts sufficient to show that they
purchased their shares directly in the initial public offering. The court agreed, finding that the
amended complaint lacked necessary details about the solicitation of the sale. The defendants
also successfully argued that the plaintiffs failed to allege actionable misstatements or omissions.
In connection with the Rights Offering, the defendant company disclosed that an ongoing
government investigation—news of which had been widely reported—could expose the
company to substantial civil, criminal, and regulatory penalties. The plaintiffs alleged that the
defendants’ disclosures failed to describe the magnitude of the legal issues facing the company.
The court found the company’s disclosures of uncharged illegal conduct to be adequate and that
other statements were non-actionable “expressions of puffery and corporate optimism.” The
court also held that certain alleged misstatements were not material because they were matters of
general public knowledge.
B.2
In re Vivendi Universal, S.A. Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).
The court granted defendants’ motion for partial judgment on plaintiffs’ claims under
Section 12(a) of the Securities Act of 1933. Relying on the Supreme Court’s ruling in Morrison
v. National Australia Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869 (2010), regarding similar claims
under the Securities Exchange Act of 1934, defendants argued that Section 12(a) does not apply
to purchases of securities on foreign exchanges. The court agreed and extended the ruling in
Morrison to the instant case for three reasons: (1) the Securities Exchange Act of 1934 and the
Securities Act were enacted as part of the same set of comprehensive regulations; (2) like the
Exchange Act, the Securities Act lacked an affirmative indication of intent to overcome the
presumption against extraterritorial application; and (3) the SEC had not interpreted the
Securities Act to apply to sale of securities outside the United States.
B.2
38

B.2
Lau v. Mezei, No. 10 CV 4838(KMW), 2012 WL 3553092 (S.D.N.Y. Aug. 16, 2012).
The court granted the plaintiff’s motion for summary judgment as to one defendant
company on a breach-of-contract claim, sua sponte, and granted in part and denied in part the
defendants’ motion for summary judgment as to plaintiff’s claim under Section 12(a) of the
Securities Act of 1933. The plaintiff’s claims, which included a Section 12 claims, arose out of
the plaintiff’s investment in the defendant companies at the suggestion of his accountant, also a
defendant. The plaintiff alleged the defendant accountant materially misrepresented the risks of
the investment. The court denied summary judgment for the defendant accountant on the
Section 12 claim because there were unresolved questions of fact regarding the defendant
accountant’s involvement in the companies and the nature of the offering. The court did grant
summary judgment on the Section 12 claims for the defendant companies and their defendant
owner because there was no evidence that the accountant was acting as an agent for the
companies.
Lewy v. SkyPeople Fruit Juice, Inc., No. 11 CIV. 2700 PKC, 2012 WL 3957916 (S.D.N.Y. Sept.
10, 2012).
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a) of
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit alleging defendants
violated Section 12 by (1) incorporating false statements into the registration statement and
prospectus of their public offering and (2) omitting to disclose a material transaction. To support
their claims, plaintiffs pointed to discrepancies between the information contained in the
defendant company’s financial statements filed with the SEC and those filed with the Chinese
State Administration for Industry and Commerce. Defendants moved to dismiss plaintiffs’
complaint for failure to state a claim. Defendants argued that plaintiffs had not identified any
misstatements or omissions in the offering documents and that the omitted transaction was not
material because it was a related-party transaction. The court found that plaintiffs plausibly
alleged that the financial statements were false. The court also found that the omitted transaction
was plausibly alleged to be material, particularly in light of the defendant company’s new policy
to disclose related-party transactions after experiencing problems in that area.
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., -- F. Supp. 2d --, 2012 WL 4616958
(S.D.N.Y. Sept. 28, 2012).
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section
12 of the Securities Act of 1933, finding that the plaintiffs failed to state a claim and that the
claims fell outside the statute of limitations. The plaintiffs, purchasers of American Depository
Receipts (“ADRs”), alleged that the defendant bank had made various false statements about its
39
B.2
B.2

acquisition of another bank, its exposure to the subprime market, and a rights offer. The court
found that the plaintiffs’ allegations sounded in fraud and were subject to the heightened
pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure. The court found that
some of the alleged factual misstatements were neither literally false nor actionable, as the
allegations were made with the benefit of hindsight about the 2008 financial crisis. With regard
to the defendants’ statements based on opinion or belief, the plaintiffs failed to allege that the
statements were both objectively false and disbelieved by the defendants at the time they were
expressed.
In addition, the court held that the plaintiffs’ Section 12 claims fell outside the statute of
limitations. Plaintiffs argued that they had no notice of the violations until the defendant bank
admitted the extent of its subprime and credit market exposures. This argument was undermined
because (1) the plaintiffs had joined a similar lawsuit against defendants before the alleged
disclosure; (2) the defendant’s share price had declined significantly before the disclosure, such
that a reasonable person could be put on notice that the defendant was experiencing financial
difficulties; and (3) the plaintiffs’ complaint did not contain any information that was not
discoverable before the defendant’s disclosure.
McKenna v. Smart Techs. Inc., No. 11 Civ. 7673 (KBF), 2012 WL 3589655 (S.D.N.Y. Aug. 21,
2012).
The court denied defendants’ motion to dismiss claims arising under Section 12(a) of the
Securities Act of 1933, as well as several other claims under that Act. The plaintiffs alleged that
the defendant company’s pre-initial public offering prospectus failed to disclose the risk of
declining demand for the company’s product. The defendants argued that dismissal was
warranted because the claims “sounded in fraud,” and were, therefore, subject to the heightened
pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure. The defendants also
argued that the defendant company’s disclosures were adequate, and the plaintiffs’ allegations
regarding the defendant company’s awareness of the risk of a demand decrease lacked specificity
and factual plausibility. The court found no fraud allegation in the complaint and concluded that
the plaintiffs’ confidential witnesses, considered together, had established sufficient factual
evidence to support the claim that the defendant was aware of the risk of a demand decrease and
did not adequately disclose it.
NECA–IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10 Civ. 440 (LAK)(HBP), 2012
WL 3191860 (S.D.N.Y. Feb. 9, 2012).
The court granted the defendants’ motion to dismiss the plaintiffs’ claims under Section
12(a) of the Securities Act of 1933. Plaintiffs filed a putative class action against Bank of
America Corporation and certain of its affiliates (“BAC”), as well as a group of underwriter
defendants. Plaintiffs alleged, inter alia, violations of Section 12(a) arising from BAC’s public
40
B.2
B.2

securities offerings. Plaintiffs alleged that the offering documents were materially false and
misleading and failed to disclose the extent to which BAC’s assets and mortgage-backed
securities were impaired, that it lacked the internal controls to properly report on its impaired
assets, that it misrepresented the thoroughness of its due diligence in its decision to acquire
Countrywide in its 8-K filings, and that BAC’s capital base was not accurately represented and
its leverage ratio for its risk-based capital was materially overstated. The court granted
defendants’ motion to dismiss, finding that plaintiffs failed to state a plausible Section 12 claim
because BAC’s statements concerning the sufficiency of its loss reserves, adequacy of its writedowns,
and well-capitalized status were qualified estimates. Such qualified estimates did not
“render those figures false at the time that they were publicly filed with the SEC” but may have
been merely “bad predictions.” As to the claims involving the purchase of another financial
institution reported in SEC filings, plaintiffs alleged that proper due diligence would have
uncovered serious risks associated with that institution’s standards and practices. However, the
court found that just because the due diligence reached incorrect results did not mean that the
statement that it performed extensive due diligence was false. The court further held that BAC’s
statement that certain loan originations were of a higher quality and producing better spreads as
compared to prior years was not actionable when taken in context of the disclosures and
warnings provided in the offering documents as a whole.
N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ. 5310 (DAB), 2012 WL
1076143 (S.D.N.Y. Mar. 29, 2012).
The court granted defendants’ motion to dismiss plaintiff’s claims under Section 12(a) of
the Securities Act of 1933. Plaintiff brought a class action suit alleging that defendants had
failed to disclose in offerings documents that defendants systematically disregarded their own
mortgage underwriting guidelines. The court held that testimony from the defendants’ former
employees concerning instances where defendants deviated from underwriting guidelines did not
tie that conduct to a particular loan used as collateral in the securities offering at issue in this
case. The court held that the plaintiffs ultimately did not cite one specific loan that should not
have been included in the offering or any example of a loan that failed to meet applicable
underwriting guidelines that was used as collateral for the securities offering. The court also
found that the plaintiffs failed to show how any alleged misstatements or omissions would have
been material given the extensive risk disclosures and “general mix” of information available to
the plaintiff in the months preceding the offering. Because plaintiff’s claims were not
sufficiently specific to state a claim and because plaintiff’s claims had already been dismissed
without prejudice, the court dismissed plaintiff’s Section 12 claims with prejudice.
In re Wilmington Trust. Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).
The court granted the defendants’ motion to dismiss plaintiffs’ claims under Section
12(a)(2) of the Securities Act of 1933 without prejudice. The court held that plaintiffs failed to
specifically identify false and misleading statements on which plaintiffs based their claims.
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Plaintiffs’ quotations of allegedly misleading statements were short, without context, and failed
to adequately identify an actionable violation of Section 12.
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In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012).
The court granted movants’ motion to dismiss the trustee plaintiff’s claims for
declaratory relief under the Securities Act of 1933 and the Securities Exchange Act of 1934. The
trustee sought a declaration that commissions and referral fees owed to the debtors were void
because they violated both the Securities Act and the Exchange Act. Specifically, the trustee
sought a declaration that: (1) the interests at issue were securities, as defined by the Securities
Act and the Exchange Act; (2) that movants were not licensed to sell securities; (3) that the sale
of the interests as real estate violated both the Securities Act and the Exchange Act; and (4) that
the agreements between debtors and movants for referral fees and commissions were void
because the sales were illegal. The trustee, however, did not specify which provisions of the
Securities Act and Exchange Act upon which he was relying. The movants assumed he was
relying on Section 12(a) of the Securities Act and argued that Section 12(a) does not provide a
private right of action for a “non-purchaser.” Although the court agreed with this proposition, it
interpreted the trustee’s claim as arising under Sections 5(a) and 5(c) of the Securities Act, and
under Sections 14 and 36 of the Exchange Act. Ultimately, the court found the trustee’s
complaint was deficient under those sections and granted the motion to dismiss with leave to
amend.
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In re Schering-Plough Corp./ENHANCE Sec. Litig., No. CIV. 8-397 DMC/JAD, 2012 WL
4482032 (D.N.J. Sept. 25, 2012).
The court rejected defendants’ argument that plaintiffs lacked standing to pursue claims
under Section 12(a) of the Securities Act of 1933. On behalf of a putative class, plaintiffs filed
suit claiming defendants violated Section 12 by misrepresenting and omitting the results of a
clinical trial of prescription drugs. Plaintiffs moved for class certification and the appointment of
class representatives. Defendants opposed this motion, arguing, among other things, that
plaintiffs lacked standing to bring a Section 12 claim because plaintiffs’ damages were
untraceable, plaintiffs did not experience a loss in the sale of their securities, and plaintiffs
bought the securities on a secondary market. The court granted plaintiffs’ motion, finding
defendants’ arguments to be either premature or without merit. The court held that a plaintiff is
not required to trace Section 12 damages in order to establish standing. The court also found
defendants’ argument that plaintiffs did not experience a loss to be without merit. Finally, the
court held that the determination of whether a security was purchased in a secondary market was
a factual dispute to be resolved at a later stage in the proceedings.
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Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions, Inc., No.
CIV. 10-898 CCC, 2012 WL 3113981 (D.N.J. July 31, 2012).
The court granted defendant’s motion to dismiss plaintiff’s claims with prejudice. In
February 2010, the plaintiff asserted claims against the defendants under Section 12(a) of the
Securities Act of 1933. In its complaint, the plaintiff alleged that defendants made various
misrepresentations in connection with the sale of mortgage-backed securities. The defendants
argued that the plaintiff’s claims were time-barred under Section 13 of the Securities Act, which
provides that a claim must be filed within one year of the plaintiff’s discovery of facts
constituting the violation of the Securities Act. The court found the appropriate question under
Section 13 is whether the plaintiff had “sufficient information of possible wrongdoing to place
[it] on inquiry notice, or to have excited ‘storm warnings’ of culpable activity.” Plaintiff argued
that such notice did not exist until the security rating of its specific tranche of certificates was
downgraded, but the court found that various newspaper articles, public reports, and lawsuits
containing similar allegations exposed the plaintiff to information that was sufficient to put it on
inquiry notice outside of the limitations period. Plaintiff’s claim was, therefore, barred.
B.2
Underland v. Alter, No. 10-3621, 2012 WL 2912330 (E.D. Pa. July 16, 2012).
B.2
The court denied the defendants’ motion to dismiss the plaintiffs’ claim under Section 12
of the Securities Act of 1933. Plaintiffs alleged that certain defendants executed registration
statements containing material misstatements and omissions, and that the accounting and
auditing firm that reviewed the corporation’s financial statements was also liable for certifying
the false and misleading registration statements. The defendants had moved to dismiss, arguing
that plaintiffs failed to state a valid Section 12 claim, and that there was no genuine case and
controversy since plaintiffs could possibly regain the losses through the corporation’s bankruptcy
proceeding.
In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., MDL No. 08-MD-1961 (D. Md.
Nov. 8, 2012).
The court denied plaintiff’s discovery request in this putative class action based on
Section 12 of the Securities Act of 1933. In this multi-district litigation, the named plaintiff of a
putative class, himself lacking standing to pursue a claim under Section 12, sought to use
discovery to obtain the names and addresses of relevant purchasers in order to determine if one
of them had standing to pursue the claim. The court denied the discovery request, reasoning that
as the individual lacked standing, he could not seek discovery on behalf of a putative class. The
individual lacking standing was not able to show that he would benefit from the discovery, as he
himself had no valid claim.
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In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., No. MJG-08-1961-MDL, 2012 WL
2450161 (D. Md. June 26, 2012).
The court granted the defendants’ motion to dismiss the plaintiffs’ claim under Section
12 of the Securities Act of 1933. The plaintiffs failed to demonstrate adequate standing to bring
a Section 12(a)(2) claim under the Securities Act due to their failure to demonstrate that the
securities were purchased directly from the issuer.
Gallman v. Sovereign Equity Grp., Inc., No. AW-11-2750, 2012 WL 1820556 (D. Md. May 15,
2012).
The court denied plaintiffs’ motion for default judgment on their claim under Section
12(a) of the Securities Act of 1933. Plaintiffs invested with defendants under investment
contracts that were subsequently dishonored by defendants. Plaintiffs alleged a violation of
Section 12(a)(2) for misleading communications associated with their investments. Defendants
filed no responsive pleading. Nevertheless, the court denied the plaintiffs’ motion for default
judgment as to their Section 12 claim. Under Section 12(a)(2), standing is limited to those who
purchase securities pursuant to a public offering made via a prospectus and does not extend to
individuals who purchase securities under private sales contracts. Plaintiffs lacked standing
because they did not allege that defendants attempted to sell them securities through a prospectus
or through a registered offering.
Carlucci v. Han, No. 1:12CV451 JCC/TCB, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).
The court granted defendants’ motion to dismiss plaintiff’s claims arising under the
Securities Exchange Act of 1934, state statute, and common law. The court addressed Section
12 of the Securities Act of 1933 in a footnote, noting that Section 12 provides a recognizable
injury for plaintiffs as soon as securities are sold for less than their actual value and not, as
defendants had alleged for plaintiff’s analogous Exchange Act claim, after principal and interest
payments become due.
B.2
FDIC v. Morgan Stanley & Co., No. H-11-4187, 2012 WL 401203 (S.D. Tex. Feb. 7, 2012).
The court granted the plaintiff’s motion to remand the action, involving violations of
Section 12 of the Securities Act of 1933, among other things, to Texas state court. Plaintiff
originally filed the action in state court alleging numerous misrepresentations regarding the
credit quality of the mortgage-backed certificates it purchased from defendant, which attempted
to remove the action to federal court, arguing that the Securities Act claims were baseless. In
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order to successfully do so, defendant bore the burden of showing “that there is no possibility
that plaintiff would be able to establish a cause of action.” The defendant argued that the Section
12 claims were time-barred by the statute of limitations. The court concluded that the defendant
“failed to demonstrate that there is no possibility the Texas district court would . . . find the 1933
Act claims to be timely” and granted remand to Texas state court.
FDIC v. Morgan Stanley & Co., No. H-11-4184, 2012 WL 423415 (S.D. Tex. Feb. 8, 2012).
The court granted the plaintiff’s motion to remand the action, involving violations of
Section 12 of the Securities Act of 1933, among other things, to Texas state court. Plaintiff
originally filed the action in state court alleging numerous misrepresentations regarding the
credit quality of the mortgage-backed certificates it purchased from defendant, which attempted
to remove the action to federal court, arguing that the Securities Act claims were baseless. In
order to successfully do so, defendant bore the burden of showing “that there is no possibility
that plaintiff would be able to establish a cause of action.” The defendant argued that the Section
12 claims were time-barred by the statute of limitations. The court concluded that the defendant
“failed to demonstrate that there is no possibility the Texas district court would . . . find the 1933
Act claims to be timely” and granted remand to Texas state court.
Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, No. 12 C 4642, 2012 WL 5389734 (N.D.
Ill. Nov. 2, 2012).
The court granted defendants’ motion to dismiss plaintiff’s claim arising under Section
12(a) of the Securities Act of 1933 because Section 12 only applies to securities offered or sold
through a public offering. The securities here were sold in a private offering.
Armstrong v. Am. Pallet Leasing Inc., No. C07-4107-MWB, 2012 WL 3906205 (N.D. Iowa
Sept. 7, 2012).
The district court accepted the magistrate judge’s report and recommendation to grant the
plaintiff’s motion for default judgment against defendants for violations under Section 12(a) of
the Securities Act of 1933. Plaintiffs filed suit against defendants for violations of Section 12,
and when none of the defaulting defendants resisted plaintiffs’ motion, the magistrate judge
entered judgment for plaintiffs.
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Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC, No. Civ. 12-254 (RHK/JSM),
2012 U.S. Dist. LEXIS 96263 (D. Minn. July 12, 2012).
The court granted the defendants’ motion to dismiss the plaintiff’s claim under Section
12 of the Securities Act of 1933. Defendants had sought dismissal alleging that plaintiff’s
allegations of fraud failed to satisfy the particularity requirement under Rule 9(b) of the Federal
Rules of Civil Procedure. In its defense, the plaintiff pointed to specific allegations in the
amended complaint. These allegations, however, were all directed at the entity itself and did not
reference individual speakers. The court agreed with the defendants’ argument, noting the
defendants were unable to determine which allegations were directed at them.
Rabbani v. DryShips, Inc., No. 4:12CV130 RWS, 2012 WL 5395787 (E.D. Mo. Nov. 6, 2012).
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a) of the Securities Act of 1933. Plaintiffs alleged that defendants’ statements in prospectuses
regarding plans to spin-off a subsidiary corporation to its own shareholders were materially false
and misleading because shareholders ultimately received only a fraction of subsidiary stock for
each of their shares in the parent company. The court found that the defendants’ statements were
“clearly forward-looking” and applied the “bespeaks caution” doctrine in light of the numerous
cautionary statements in the prospectuses. Because the prospectuses specifically noted that the
spin-off was dependent on market conditions, listed specific risk factors related to world
markets, and explicitly contemplated the possibility that the spin-off would not occur, the court
found that “a reasonable investor would not have ignored such warnings” and concluded that the
“alleged misrepresentations [were] immaterial as a matter of law.” Alternatively, the court noted
that the allegedly misleading statement was accompanied by sufficient cautionary language to
fall within the statutory safe-harbor provision of the Securities Act.
B.2
SMA Irrevocable Trust v. R. Capital Advisors, LLC, No. 4:11CV00697 ERW, 2012 WL 5194332
(E.D. Mo. Oct 19, 2012).
In a suit under Section 12(a) of the Securities Act of 1933, the court dismissed plaintiffs’
claims against a securities dealer as time-barred and for failure to state a claim. Plaintiffs
alleged, among other things, that the securities dealer had misrepresented his position within his
employer financial firm and that plaintiffs relied on these representations in choosing to invest
with the firm. The court found that the one-year limitation period began to run when plaintiffs
received the private-placement memorandum (“PPM”) containing allegedly false and misleading
statements and substantial discrepancies, and not nearly two years later when plaintiffs
discovered the dealer’s true position within the firm when he filed his personal declaration with
the court. The facts contained in the PPM were sufficient to place the plaintiffs on “inquiry
notice” because these circumstances would have alerted a reasonable person to the possibility
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that they had been provided false or misleading information. Because more than one year had
passed since plaintiffs received the PPM, plaintiffs’ claims were dismissed as untimely. The
court also noted that the complaint, liberally construed, failed to allege facts sufficient to
establish liability on the dealer’s behalf or to show reliance upon any misrepresentations made by
the dealer.
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12 of
the Securities Act of 1933. The court held that plaintiffs’ claims were time-barred, as the repose
period for the Section 12 claim began to run on the date of the sale. Plaintiffs argued that they
reasonably believed a California class-action would protect their interests and the three-year
statute of repose in Section 13 of the Securities Act of 1933 should have been tolled during the
pendency of the California action. The court held that, since the plaintiffs in the California class
action had purchased different securities than the ones at issue in the present case, the California
action provided no basis for tolling and held that plaintiffs’ Section 12 claims were time-barred.
Am. Int’l Grp., Inc. v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.-Backed
Sec. Litig.), 834 F. Supp. 2d 949 (C.D. Cal. 2012).
The court granted defendants’ motion to dismiss plaintiffs’ claims arising under Section
12(a) of the Securities Act of 1933 as time-barred. As part of multi-district litigation, plaintiffs
alleged that the offering documents related to certificates originated by defendants contained
various misrepresentations. At the court’s direction, defendants filed a motion to dismiss based
solely on timeliness. The court found plaintiffs’ claims to be time-barred because Section 12
claims are subject to a three-year statute of repose that begins to run on the date of sale.
Plaintiffs filed their complaint more than three years after they purchased each certificate.
Katz v. China Century Dragon Media, Inc., No. LA CV11-02769 JAK (SSx), 2012 WL 6644353
(C.D. Cal. Dec. 18, 2012).
The court denied the plaintiffs’ motion for class certification with respect to the claim
arising under Section 12(a)(2) of the Securities Act of 1933. The plaintiffs purchased shares in
the defendant company either before or after the initial public offering. The defendants included
the company itself, some of its former directors and officers, the company’s former auditor, and
underwriters of the IPO. The plaintiffs argued that defendants made false and incomplete
statements regarding the revenues and income of the company in the prospectus and registration
statements issued with the IPO. The Section 12 claim was brought only against the defendant
company and an underwriter. There was only one proposed class representative who purchased
shares from the underwriter defendant and alleged a Section 12 claim. The court determined that
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the plaintiff failed to meet the “numerosity” requirement under Rule 23(a), which allows for
class certification if a class is “so numerous that joinder of all members is impracticable.” The
Section 12 claim was thus barred from proceeding on a class-wide basis.
In re China Intelligent Lighting & Electronics, Inc. Sec. Litig., CV 11-2768 PSG SSX, 2012 WL
3834815 (C.D. Cal. Sept. 5, 2012).
The court denied defendants’ motion to dismiss plaintiffs’ claim under Section 12(a) of
the Securities Act of 1933. On behalf of a putative class, plaintiffs filed suit, alleging that
defendants violated Section 12 by making misrepresentations and omissions in a prospectus.
The court dismissed their original complaint because it alleged that the plaintiffs purchased their
securities one week before the registration statement at issue was declared effective by the SEC.
Plaintiffs then amended their complaint, alleging that they purchased their shares pursuant to the
initial offering for which the registration statement or prospectus was effective. Defendants
again moved to dismiss the Section 12 claim, arguing that the court should not accept the new
allegations. Plaintiffs opposed the motion, both explaining and certifying the amendments. The
court denied defendants’ motion, holding that plaintiffs adequately pled standing in their
amended complaint.
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP (MANx), 2012 WL
2161498 (C.D. Cal. June 1, 2012).
The court had previously dismissed with prejudice certain of plaintiff’s claims under
Section 12(a)(2) of the Securities Act of 1933, see 2012 WL 1798997 (Feb. 17, 2012), but the
plaintiff nevertheless reasserted those same claims in an amended complaint. The court therefore
struck those claims from the amended complaint.
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP (MANx), 2012 WL
1798997 (C.D. Cal. Feb. 17, 2012).
The court granted, in part, the defendants’ motions to dismiss plaintiffs’ claims under
Section 12 of the Securities Act of 1933. Plaintiffs brought suit against various defendants for
violations of federal and state securities laws in connection with the sale of mortgage-backed
securities. The court dismissed the plaintiffs’ Section 12 claims as to all but two tranches of the
securities in question because the statute of repose had run with regard to the others. The court
then further dismissed the Section 12 claims as to the remaining tranches to the extent they
applied to defendants who were not “sellers” under the statute, or from whom the plaintiffs did
not directly purchase the securities. The court provided little reasoning in its opinion, having
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ecently issued several other opinions in related cases concerning the same transactions and
similar parties.
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).
The court granted defendants’ motion to dismiss plaintiffs’ claims under Section 12(a)(2)
of the Securities Act of 1933 but granted plaintiffs leave to amend their complaint. The court
held that plaintiffs’ pleadings failed to allege sufficient facts to show defendants made material
misrepresentations or omissions in offerings documents. Further, the court held that the claimed
material omissions regarding substantial pricing pressures had been properly disclosed, were not
known, or could reasonably have been expected to have a material impact on the issuer’s sales.
The court also found that one defendant that had invested in the entity that offered and sold the
securities at issue in this case was not a “seller” for purposes of Section 12(a)(2). The court held
the investor defendant was not a “seller” because (1) the investor defendant was not the
immediate seller of the securities; (2) there were insufficient allegations that the investor ever
prepared offerings materials or used those materials to solicit the purchase of the securities; and
(3) SEC Rule 159(A)(a) did not apply.
Elliot v. China Green Agricultures, Inc., No. 3:10-CV-0648-LRH-WGC, 2012 WL 5398863 (D.
Nev. Nov. 2, 2012).
The court dismissed plaintiff’s claims under Section 12(a) of the Securities Act of 1933
because plaintiff—the named plaintiff representing a putative class—conceded that he had
purchased the securities through a private offering. Section 12 only applies to publicly offered
securities.
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).
The court issued an amended opinion to clarify its earlier denial of defendants’ motions
to dismiss plaintiffs’ claims under Section 12(a) of the Securities Act of 1933. Defendants
argued that plaintiffs’ complaint failed to establish any misleading statements or omissions in the
relevant offering statements; that the plaintiffs could not establish loss-causation; and that the
fund defendants were not “sellers” of securities under the Securities Act. Viewing the alleged
misstatements holistically rather than discretely, the court determined that the “preservation of
capital” pitch made by defendants in their prospectuses was more material than a vague,
aspirational statement. The court further held that it was sufficiently distinct from the relatively
high-risk strategies actually employed—including the use of “inverse floaters” and a lack of
external valuation methods—to satisfy the pleading requirements of Rule 8(a). Regarding losscausation,
the court determined that it was at least plausible that the losses sustained were caused
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y the defendants’ misrepresentations regarding the volatility of highly leveraged investment
strategies, and found that it would be untimely to rule on issues as complex as loss causation in
the securities fraud context at the pleading stage. Finally, the court found it had been sufficiently
pleaded that the fund defendants were issuers of securities and therefore “sellers” as both “a
matter of logic” and under SEC Rule 159A.
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., No. 11-cv-00624-WYD-
MJW, 2012 WL 6645097 (D. Colo. Dec. 19, 2012).
The court granted the underwriter defendants’ motion to dismiss plaintiffs’ claim under
Section 12(a)(2) of the Securities Act of 1933. Plaintiffs filed an amended securities class action
against underwriter entities, including a thrift holding company and its subsidiary, a bank. The
holding company filed a registration statement with the SEC and later held a public offering at
which it sold twenty million shares of common stock. In the five quarters following the offering,
the defendant holding company realized over $69 million of “other-than-temporary impairment”
(“OTTI”) in its securities. Plaintiffs alleged that the underwriter defendants were liable under
Section 12(a)(2) because they were sellers or solicitors of the shares offered pursuant to the
registration statement, which purportedly contained false and misleading statements and did not
accurately state the holding company’s OTTI. The Section 12 claim thus required plaintiffs to
demonstrate that the defendants had made an untrue statement of material fact. The court found
that an OTTI determination is considered an opinion and that plaintiffs who assert claims under
the Securities Act that are based on opinions must allege that the opinions are objectively and
subjectively false. Plaintiffs’ counsel had conceded in open court that the amended securities
class action did not allege subjective falsity regarding the OTTI claims. The court thus found
that the plaintiffs failed to state a claim upon which relief could be granted, and the Section 12
claim was dismissed.
In re Oppenheimer Rochester Funds Grp. Sec. Litig., No. 09-md-02063-JLK-KMT, 2012 WL
156763 (D. Colo. Jan. 18, 2012).
The court issued an amended order denying defendants’ motions to dismiss plaintiffs’
claims under Section 12(a) of the Securities Act of 1933. In its initial order, the court looked to a
later superseded opinion in In re TCW/DW North Am. Gov’t Income Trust Sec. Litig., 94 F. Supp.
326 (S.D.N.Y. 1996), when considering defendants’ motion. The court determined that while
the superseding opinion differed from the one superseded, the differences between the two did
not affect the court’s ultimate decision. The court reiterated that the determination of whether or
not stated investment objectives are materially misleading involves not only a review of the
statements themselves, but also the totality of other actionable statements and omissions
surrounding them.
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Nat’l Credit Union Admin. Bd. v. RBS Sec., Inc., No. 11-2340-RDR, 2012 WL 4210500 (D. Kan.
Sept. 19, 2012).
The court granted defendants’ motion to certify an interlocutory appeal on whether 12
U.S.C. § 1787(b)(14)(A) (the “extender statute”) applies to claims brought under Section 12(a)
of the Securities Act of 1933. In consolidated cases before the court, plaintiff, acting as
liquidating agent of various credit unions, alleged violations of Section 12 in connection with the
underwriting and sale of residential mortgage-backed securities. Defendants argued that
plaintiff’s Section 12 claims were barred by the statute of repose contained in Section 13 of the
Securities Act of 1933. The statute of repose states that a Section 12 claim may not be brought
more than three years after the sale of a security. It was undisputed that the certificates at issue
were offered and sold more than three years before these claims were filed. Plaintiff asserted,
however, that its claims were timely filed because of provisions of the extender statute that allow
appointed liquidators additional time to bring claims in that capacity. In denying defendants’
motion to dismiss, the court ruled that the extender statute applied to the statute of repose and to
federal and state statutory claims. Defendants sought an interlocutory appeal of this ruling. The
court granted defendants’ motion to certify an interlocutory appeal, finding that the issues
defendants sought to appeal were controlling questions of law, that there were substantial
grounds for difference of opinion as to these questions, and that an immediate appeal to
determine these issues might materially advance the litigation.
Nat’l Credit Union Admin. Bd. v. RBS Sec., Inc., Nos. 11-2340-RDR, 11-2649-RDR, 2012 WL
3028803 (D. Kan. July 25, 2011).
In both cases the court granted, in part, defendants’ motion to dismiss certain claims
under Section 12 of the Securities Act of 1933 as they concerned specific offerings. The court
noted the defendants’ focus on the alleged untimeliness of plaintiffs’ Section 12 claims but still
found in favor of a timely claim by plaintiffs due in part to its application of 12 U.S.C. § 1787
(the “extender statute”). In its analysis, the court found that in the case of some offerings, the
risk disclosures provided in the offering document gave insufficient notice of the alleged
misrepresentations and omissions. However, for others, the court found a lack of specific
allegations to adequately substantiate the claim.
In re Thornburg Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2012 WL 6004176 (D.
N.M. Nov. 26, 2012).
The court granted the underwriter defendants’ motion to dismiss and denied the plaintiff
class’s motion for reconsideration because the class failed to show that underwriters violated
Section 12 of the Securities Act of 1933, or if they did violate Section 12, that plaintiffs had
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standing to complain. Plaintiffs and defendants reached a class settlement regarding four public
offerings that the class alleged were made in violation of Section 12. In its order granting
plaintiffs’ motion for final approval of settlement, the court recounted its prior denial of
plaintiffs’ claims against defendant underwriter, which was that the court had determined that
plaintiffs failed to show that any statement from the underwriters was materially false or
misleading. The court denied plaintiffs’ motion for reconsideration, holding that the
underwriters’ Form 10-K was not materially false or misleading and that plaintiffs lacked
standing to challenge the only public offering that the Form 10-K would implicate.
Padilla v. Winger, No. 2:11CV897DAK, 2012 WL 1379228 (D. Utah Apr. 20, 2012).
The court granted the defendants’ motion to dismiss plaintiffs’ claim arising under
Section 12(a)(1) of the Securities Act of 1933. Plaintiffs alleged that an individual acting as the
agent of the defendants operated a Ponzi scheme and violated Section 5 of the Securities Act by
selling unregistered securities. Because Section 13 of the Act provides a one-year statute of
limitations for a claim under Section 12(a)(1), the court held that plaintiffs’ claim was barred by
the statute of limitations. The statute of limitations began to run when the plaintiffs invested
their money, and the one-year limitations period expired over four years before plaintiffs brought
their lawsuit.
B.2
Bamert v. Pulte Home Corp., No. 6:08-CV-2120-ORL-22, 2012 WL 3292875 (M.D. Fla. Aug.
10, 2012).
The court adopted the magistrate judge’s recommendation to dismiss the plaintiffs’
claims with leave to amend and denied in part and granted in part a defendant’s limited objection
to the recommendation. The plaintiffs alleged a property management agreement they entered
into with the defendants was an “investment contract” and subject to the registration
requirements of the Securities Act of 1933. The plaintiffs, however, improperly brought their
claims under Section 5 of the Securities Act, rather than Section 12. The defendants argued that
before the court could allow them to amend, the plaintiffs were required to demonstrate their
claims were not “futile.” The magistrate judge recommended that since plaintiffs had only
amended their complaint once as a matter of course, a further opportunity to amend was
appropriate. The court adopted this recommendation and agreed that plaintiffs did not bear the
burden of demonstrating that amendment would not be futile.
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3. Section 17
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In re Vivendi Univ., S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012)
Plaintiffs asserted Section 17(a) claims based on misrepresentations concerning shares
that were not listed for trading purposes on any United States exchange. The court dismissed
Plaintiffs’ claims, holding that Morrison v. National Australia Bank Lt., which barred suits
52

ought in the United States pursuant to Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 for securities traded on a foreign stock exchange, applied equally to actions
brought under Section 17(a) of the Securities Act.
SEC v. Stoker, 865 F. Supp. 2d 457 (S.D.N.Y. 2012); SEC v. Stoker, 873 F. Supp. 2d 605
(S.D.N.Y. 2012); SEC v. Stoker, Litigation Release 22541 (Nov. 21, 2012).
The SEC alleged that Brian Stoker, a Director at Citigroup who structured and marketed
collateralized debt obligations (“CDOs”), violated Sections 17(a)(2) and (3) by making material
omissions in his “pitch book” to potential investors. The court first denied Stoker’s motion to
dismiss the alleged violation of Section 17(a)(2), holding that Stoker need not have obtained
money directly, but it was enough that he was an agent for Citigroup, which obtained millions
due to the alleged misrepresentations and omissions. The court also held that it was plausible
that Stoker’s compensation increase during the period was due in part to the alleged fraud. In
addition, the court held that Stoker need not be the “maker” of the statement, as described in
Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011), for the purposes of
Section 17(a), and only need to “use” the statement to obtain money, regardless of the
statement’s source. Finally, the court held that Section 17(a)(3) was not necessarily duplicative
of Section 17(a)(2), so long as there was some device or scheme separate from the material
misrepresentation or omission.
The court also denied Stoker’s subsequent motion for summary judgment, restating the
conclusions of law contained at the motion to dismiss stage and holding that there was a fact
issue with respect to whether the CDO documents contained material misrepresentations and
omission, whether Stoker obtained money as a result, and whether Stoker intentionally or
negligently designed a CDO that harmed investors.
On July 31, 2012, following a two-week trial, a jury found Stoker not liable for the
alleged violations.
SEC v. Mudd, No. 11 Civ. 09202, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10, 2012).
In this action, the SEC alleged that defendant officers of the Federal National Mortgage
Association (“Fannie Mae”) had understated how much of its portfolio consisted of “subprime”
mortgages and “Alt-A” loans. The SEC alleged that the defendants were liable under Section
17(a)(2) because they had obtained money by means of false statement in that they had received
bonuses tied to Fannie Mae’s performance and their own performance goals. The defendants
moved to dismiss the Section 17(a)(2) claim against because the SEC had failed to specifically
allege that there was an offer or sale of FNMA stock during the relevant period. The court
denied the defendants’ motion to dismiss, noting that Supreme Court precedent requires that the
“offer or sale” requirement in securities fraud cases should be read broadly. Thus, the court took
judicial notice of the fact that Fannie Mae stock was sold on the New York Stock Exchange,
which was sufficient to state a claim under Section 17(a)(2).
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SEC v. O’Meally, No. 06 Civ, 6483, 2012 U.S. Dist. LEXIS 76072 (S.D.N.Y. May 30, 2012).
The SEC asserted fraud claims in this case under Section 10(b) of the Securities
Exchange Act and Section 17(a) of the Securities Act arising from the defendants’ market timing
practices he employed while at Prudential Securities. Among other facts relied on by the SEC,
the defendant and his firm had received hundreds of letters from 60-70 mutual funds asking
defendant to stop his market timing strategies. A jury found that he the defendant had acted
negligently in violation of Section 17(a)(2) and (3), but found the defendant not liable on all
other claims. The defendant moved for a judgment as a matter of law, claiming the SEC had not
properly established the level of care required under Section 17(a) because there had not been
expert testimony to establish the level of care required regarding the technical aspects of market
timing transactions. The court noted that there were indeed technical issues at the trial relating to
market timing transaction, but also straightforward, everyday tasks such as receiving letters from
mutual funds and warnings from his employer to stop his market timing practices. Because the
jury’s finding of liability Section 17(a)(2) and (3) could have been based on his failure to
properly respond to these letters and warnings, the court rejected the defendant’s argument that
an expert was required to establish the applicable standard of care. The court also found the
evidence was sufficient to support a finding of liability.
SEC v. Pentagon Capital Management, 844 F. Supp. 2d 377 (S.D.N.Y. Feb. 14, 2012).
The SEC brought this enforcement action under Section 17(a) of the Securities Act and
Section 10(b) of the Securities Exchange Act against a hedge fund and its CEO for allegedly
engaging in market timing and late trading activities in certain mutual funds. After a bench trial,
the district court found that defendants’ market timing trading activates did not violate Section
17(a)(1) because the SEC had not established scienter. Despite showing that the defendants had
a “general intent to deceive,” the SEC had not shown an effort to defraud the funds because it
had not shown what the funds’ rules were with respect to the trading at issue. The SEC also
argued that the defendants were liable for violations of Section 17(a)(2) and (3) with respect to
market timed redemptions or exchange of mutual fund shares. Noting the lack of any particular
rules promulgated by the SEC rules or the funds with respect to market timing, the court found
no untrue statements or material omissions and no practice that would operate as a fraud on the
funds and, thus, no liability under Section 17(a)(2) and (3). The defendants argued that they did
not “make” any false statements and, thus, were not liable under the Janus Capital Group v.
First Derivative Traders, 131 S. Ct. 2296 (2011). The court rejected the Janus argument on
multiple grounds, including the fact that Janus was not a case brought by the SEC. The court
also rejected the suggestion that Janus could apply to Section 17(a) cases because the word
“make,” the key to the ruling in Janus, is not present in Section 17(a).
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SEC v. True N. Fin. Corp., No. 10-3995, 2012 U.S. Dist. LEXIS 161044 (D. Minn., Nov. 9,
2012).
The SEC alleged that the defendants made misrepresentations to brokers and investors in
the offer and sale of interests in a fund that was an unregistered investment pools. While the real
estate projects the fund was financing were defaulting, the defendants continued to market the
fund in Offering Memoranda, which the SEC alleges contained various misstatement in violation
of Rule 10b-5 and Section 17(a), including, among other things, improper risk assessments,
improperly described investment strategies, misleading terminology with respect to the default
and foreclosure, and misstatements regarding the fund’s liquid assets. With respect to the Rule
10b-5 and Section 17(a)(1) claims, the court denied Defendants’ motion for summary judgment,
holding that several fact issues remained concerning materiality and scienter. The Court also
denied the defendants’ motions as to Section 17(a)(2) and (3) liability for statements regarding
the fund's purportedly successful strategy and its use of investor funds after the defaults. The
court held that a reasonable finder of fact could determine that the defendants had a duty to
disclose that the real estate market collapse negatively impacted the fund, particularly given their
purported expertise in real estate finance. The court also held that that a finder of fact could
determine that the defendants did not exercise ordinary reasonable care in not explicitly stating in
clear, non-misleading terms that nearly all the parties that obtained financing from the fund were
insolvent and that, as a result, an increasing percentage of investor funds would go to expenses
rather than interest-earning investments.
SEC v. Sentinel Management Group, No. 07 C 4684, 2012 U.S. Dist. LEXIS 57579 (N.D. Ill.
Mar. 30, 2012).
In this action, the SEC alleged that defendant investment advisors had improperly
intermingled the assets of three investment portfolios and had allegedly made false
representations regarding, among other things, the quality of investments in at least two of its
portfolios. Defendants also allegedly used assets of the most conservative fund to collateralize
short-term loans and used loans of more than $500 million to pay brokers redeeming reverse
repurchase agreements from its most aggressive portfolio. Sentinel defaulted on the loans and
declared bankruptcy. After Sentinel consented to the entry of a judgment, the SEC moved for
summary judgment against two remaining defendants. One of the defendants cross-moved for
summary judgment. As to that defendant, the court found genuine issues of material fact on all
claims, including the Section 17(a)(1) claim. With respect to the other defendant, the court
analyzed the applicability of Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296
(2011), to claims under Section 17(a)(1). The court held that Janus did not apply to Section
17(a) claims because Janus was based on the Supreme Court’s interpretation of “make,” which is
not present in Section 17(a). In addition, the court said the Janus Court’s concern about
expansion of private suits under Rule 10b-5 did not apply to claims brought by the SEC.
Because the evidence showed that the defendant actively participated in the scheme to defraud,
obtained money be means of misrepresentations and engaged in a course of fraudulent business,
the SEC was entitled to summary judgment on is claims under Sections 17(a)(1) through (a)(3).
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SEC v. Perry, No. CV111309R, 2012 U.S. Dist. LEXIS 136596 (C.D. Cal., Sept. 24, 2012).
The SEC filed an enforcement action against Perry, the CEO of IndyMac Bank, alleging
violation of Section 17(a)(1) and (2) of the Securities Act on the grounds that Perry profited from
omissions in IndyMac’s Form 10-Q regarding its capitalization ratio. Since 2000, IndyMac
Bank had been required in its capital ratios to double risk-weight subprime assets pursuant to an
order by the Office of Thrift Supervision (“OTS”). In February 26, 2008, however, the OTS
Director granted the Bank’s request that the Bank would not need to double risk-weight its
subprime assets for purposes of determining whether its capital ratios exceeded the regulatory
minimums for a “well-capitalized” institution. In its parent company’s Form 10-Q for the first
quarter of 2008 the Bank reported a total risk-based capital ratio without double risk-weighting
subprime assets. The court granted Perry summary judgment on the SEC’s scienter-based claims
because the SEC filings accurately disclosed the Bank’s operating capital ratios and it was not
misleading to omit information regarding the waiver granted by OTS concerning the double riskweighting.
The court also granted Perry’s motion for summary judgment on the Section 17(a)(2
claim. The court held that, although liability may attach even when actual transactions have not
been consummated (i.e. stock offers were made during the relevant time period), Section
17(a)(2) reaches only parties that obtain money or property in connection with these transactions.
Because Perry made no money in connection with the allegedly fraudulent statements after they
were made he was not liable. The court further held that Mr. Perry’s status as a salaried
employee and shareholder, without more, was insufficient under Section 17(a)(2) because Perry
did not sell any of his stock during the relevant time period, nor was his compensation tied to
what was said in the subject SEC filings.
SEC v. Sells, No. C11-4941CW, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal., Aug. 10, 2012).
The SEC filed claims against Sells, the Senior Vice President of Commercial Operations,
and Murawski, the Director of Nation Sales, at Hansen Medical, Inc., a medical equipment
company that manufactured a complex catheter unit used in hospitals, alleging that they violated
Sections 17(a)(1) and 17(a)(3) of the Securities Act. Hansen maintained a strict public policy for
determining when revenue from the sales of the catheter units could properly be recognized,
requiring an installation completion form, clinical training form, and subsequent review from
Hansen’s management and accounting divisions. Under pressure to report high revenues, Sells
and Murawski allegedly employed various methods to report revenue on a sale even when it was
not proper to do so under the company’s policy as described to the public. Sells moved to
dismiss the Section 17(a) claims on the grounds that he was not a “maker” of any statements
under Janus. The court denied his motion because the word “make,” on which the Supreme
Court was focused in Janus, is absent from the operative language of Section 17(a).
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B.3
SEC v. Radius Capital Corp., No. 2:11-cv-116-FtM-29DNF, 2012 U.S. Dist. LEXIS 26648
(M.D. Fla. Mar. 1, 2012).
The SEC alleged in this case that the defendants made false statements to Ginnie Mae
and investors that loans packaged in a mortgage-backed security were eligible for Federal
Housing Administration insurance. The defendants sold more than $23 million in mortgagebacked
securities that defaulted. Ginnie Mae had guaranteed the securities, and was required to
pay investors after defendant’s default. Many of the loans, in fact, were not insured, and Ginnie
Mae suffered substantial losses. The defendants moved to dismiss the SEC’s complaint. The
court found that by signing documents necessary to obtain Ginnie Mae guarantee mortgagebacked
securities, the defendants both made false statements (as required by Section 10(b) of the
Securities Exchange Act) and used false statements (as required by Section 17(a) of the
Securities Act). The SEC also pursued fraud claims regarding statements the defendants had
made in the prospectuses. The court found the complaint’s allegations insufficient to state a
claim that the defendants had “made” false statements in the prospectuses. The court declined to
dismiss claims under Section 17(a)(2), however, finding that the complaint sufficiently alleged
that Radius used false claims found in the prospectuses to obtain money or property, regardless
of who made the actual statements.
In the Matter of Aladdin Capital, Adm. Proc. File No. 3-15134, 33 Act Release No. 9374, 2012
SEC LEXIS 3911 (Dec. 17, 2012).
This action involved an investment management program run by Alladin Management, a
registered investment advisor, and Alladin Capital, a registered broker-dealer. The SEC alleged
that the respondents marketed equity tranches of collateralized debt obligations (“CDOs”) to
their clients and received commissions from the CDO underwriters for doing so. Allegedly, one
of respondents’ key marketing tools was the claim that respondents would co-invest in the same
equity tranches of the CDOs along with its clients. This promise of co-investment created an
alignment of interests with investors that were attractive to investors as the equity trances of the
CDOs were particularly risky. Respondents themselves touted that they had “skin in the game.”
Contrary to respondent’s representations, the SEC alleged that respondent did not co-invest on a
number of the products it marketed. The SEC claimed respondents, by failing to co-invest as
represented, had violated Section 17(a)(2) of the Securities Act. Respondents settled with the
SEC, agreeing to pay disgorgement of $900,000, interest of $268,000 and a civil money penalty
of $450,000.
In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-15098, 33 Act
Release No. 9368, 2012 SEC LEXIS 3569 (Nov. 16, 2012).
The SEC alleged that, from approximately 2005 to 2010, Credit Suisse and affiliated
entities entered into a number of financial settlements with mortgage loan originators related to
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early defaulting mortgage loans Credit Suisse had previously sold to securitization trusts it had
sponsored. Credit Suisse allegedly received many millions of dollars in these settlement, but
kept the proceeds of those settlements and left the loans in the trusts without notifying or
compensating the securitized trusts that owned the loans. Credit Suisse allegedly failed to
disclose these settlement practices to its mortgage-backed securities investors despite its
knowledge that investors were focused on early payment defaults and viewed such early
payment defaults as a red flag suggesting a possible breach of underwriting standards or other
loan origination problem. The SEC alleged that this negligent conduct violated Section 17(a)(3)
of the Securities Act. Credit Suisse agreed to pay disgorgement of $55,747,769, prejudgment
interest of $13,000,000, and a civil money penalty in the amount of $33,000,000 to the SEC for
the undisclosed settlement.
Additionally, in 2006, Credit Suisse closed two securitizations collateralized by $1.9
billion of subprime mortgage loans purchase from mortgage loan originators. The mortgage sale
documents contained an investor protection known as a “First Payment Default” covenant that
required the mortgage loan originator to repurchase any loan that failed to make its first
mortgage payment. If the originator failed to repurchase the mortgage Credit Suisse was
required to do so. Credit Suisse touted the “First Payment Default” covenant when marketing
the securitizations, but, in fact, did not required the originator to repurchase all of the defaulting
loans as required by the governing documents. The SEC alleged that this negligent conduct
violated Section 17(a) (3) of the Securities Act. To resolve these allegations, Credit Suisse
agreed pay disgorgement of $10,056,561, prejudgment interest of $2,200,000, and a civil money
penalty in the amount of $6,000,000 to the SEC.
In the Matter of Wells Fargo Brokerage Services, LLC, Adm. Proc. File No. 3-14982, 33 Act
Release No. 9349, 2012 SEC LEXIS 2626 (Aug. 14, 2012).
Wells Fargo and a former Vice President made recommendations to certain institutional
customers, mostly municipalities and non-profit institutions, to purchase commercial paper
backed largely by high-risk mortgage-backed securities and collateral debt obligations. The SEC
alleged that the respondents sold these securities without understanding them, instead relying
almost entirely upon the credit ratings that credit rating assigned to the commercial paper. The
respondents allegedly did not read the private placement memoranda for these offerings. The
respondents allegedly ignoring the nature and risk of these investments and did not distinguish
them from other, less risky investments. As a result, Wells Fargo is alleged to have violated
Sections 17(a)(2) and (3) by negligently recommended the asset-backed commercial paper
programs without obtaining adequate information about them to form a reasonable basis for
recommending these products and without disclosing the material risks of these products. In
settling the matter, Wells Fargo agreed to pay $65,000 in disgorgement and a civil money
penalty of $6.5 million. The former Vice President settled and agreed to pay a civil money
penalty of $25,000.
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C. Liabilities under the Securities Exchange Act of 1934
1. Section 10(b) and Rule 10b-5
a. Churning
C.1.a
Robert L. McCrary v. Steifel, Nicolaus & Co. Inc.,687 F.3d 1052 (8th Cir. 2012).
The court affirmed the district court’s ruling in part and reversed in part. The Plaintiffs
alleged that their accounts sustained losses as a result of Defendants’ churning and unauthorized
trading in violation of section 10b-5. On appeal, Plaintiffs argued that the district court erred by
refusing to enjoin their arbitration claim, and by dismissing Plaintiffs’ putative class and
individualized actions. The court reversed the dismissal of Plaintiffs’ individual securities fraud
claims as the complaint was comprised of both individual and class claims. The court also found
that the Plaintiffs’ churning, unauthorized trading and misrepresentation claims were insufficient
to satisfy the uniformity requirements under Rule 23(b)(3) due to their individualized nature.
Lastly, the court held that Plaintiffs’ injunction request was properly denied as Plaintiffs failed to
provide any legal authority to support their position.
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C.1.a
In the Matter of JP Turner & Company, LLC and William L. Mello, 2012 WL 3903395 (S.E.C.
Release No. 3-15014, Sept. 10, 2012)
The administrative law judge ordered Respondent Mello to be suspended from
association with any broker, dealer or investment advisor for five months and pay a civil money
penalty of $45,000 to the SEC. The SEC alleged that JP Turner and Mello failed to establish
procedures and systems reasonably designed to detect churning of customer accounts. The judge
held that JP Turner’s policies and procedures failed to “(i) specify the manner in which an
internal review of an account flagged by the AARS was to occur; (ii) provide any guidelines for
analyzing the accounts identified on the AARS, other than the levels themselves; or (iii) require
contact or follow up of the trading activity with the customer, particularly when the AARS
repeatedly flagged as actively traded a customer’s account.”
C.1.a
Securities and Exchange Commission, In the Matter of Michael Bresner, Ralph Calabro, Jason
Konner, and Dimtrios Koustoubos, Administrative Proceeding File No. 3-15015, December 18,
2012.
The administrative judge denied the Respondent’s motion to sever. The Order Instituting
Proceedings by the SEC alleged that the Respondent, Michael Bresner (“Bresner”) failed to
exercise supervision over registered representatives who were allegedly churning their
customers’ accounts. The judge held that Bresner failed to show good cause as to why the SEC
should be required to try two cases. Bresner argued that the allegations and proceeding pending
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
representatives could appeal the decision and ultimately prolong the action against Bresner.
b. Suitability
C.1.b
Iconix Brand Group Inc. v. Merrill Lynch, Pierce Fenner & Smith Inc., 2012 WL 6097440 (2d
Cir. Dec. 10, 2012).
The Second Circuit dismissed Plaintiff, Iconix Brand Group Inc.’s securities fraud claim
alleging misrepresentations and omissions with respect to its investments in Auction Rate
Security (“ARS”) suitability, liquidity and safety. Plaintiff alleged that Merrill Lynch failed to
disclose the ARS support bids which prevented auction failures and concealed the risks of
illiquidity of the securities. The court held that a review of the offering memorandum for the
ARS at issue would have disclosed the risks to “any minimally diligent investor” and lead to a
suitability determination by the institutional customer.
Baker Hughes Inc. v. BNY Mellon Capital Markets LLC, 2012 WL 5634397 (S.D. Tex. Nov. 4,
2012).
C.1.b
The court dismissed Plaintiff’s securities action on the basis of res judicata. Plaintiff’s
initial action against Defendant was litigated under the FINRA forum and ultimately dismissed.
Plaintiff alleged, among other securities violations, that Defendant violated 10b-5 by failing to
disclose that the securities at issue were comprised of “complicated credit default swaps.” The
court held that Plaintiff’s complaint failed as a matter of law as it arose from the same set of facts
as the claims submitted to arbitration.
Cody v. Sec. Exchange Comm., 693 F.3d 251 (1st Cir. 2012).
C.1.b
The district court affirmed the findings from the FINRA action against Petitioner. A
FINRA panel initially found that Petitioner had, among other securities laws, violated FINRA
Rule 2310 and 2111 by conducting unsuitable and excessive trading for the purpose of
generating substantial commissions on behalf of his clients. As a result, Petitioner received a
three month suspension and was fined $27,500. The court held that Petitioner had no right to
depart from the agreed upon investment strategy without his customer’s agreement despite the
positions ultimately turning a profit. Defendant argued that there was no wrong doing because
the securities at issue were profitable. The court responded by ruling that the outcome of the
investment value impacted civil damages but not professional misbehavior.
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C.1.b
Securities and Exchange Commission, v. Wealth Mgmt., 2012 WL 1424683 (E.D. Wis. Apr. 24,
2012).
The court granted the government’s motion for summary judgment. The SEC alleged
that Defendant, James Putnam, the founder of Wealth Management, invested their retired clients
in speculative real estate and life insurance investments. The government further alleged that
Defendant failed to disclose the receipt of commissions from the sale of life insurance policies to
its customers. The court held that Defendant Putnam misrepresented the suitability of his funds’
investments for retirees with the investment objectives of wealth preservation, failing to disclose
the contents of these investment products.
In re Merrill Lynch Auction Rate Sec. Litig., 851 F.Supp. 2d 512 (S.D.N.Y. 2012).
C.1.b
The court granted Defendant’s motion to dismiss with respect to Plaintiff’s Section 10(b)-
5 claims. Plaintiff alleged that Merrill Lynch failed to disclose the unsuitable nature of the
Auction Rate Securities (“ARS”) that were recommended to Plaintiff. The court held that
Plaintiff failed to prove that “the [D]efendant knew or reasonably believed the securities were
unsuited to the buyer’s needs.” The court also found that Plaintiff’s complaint did not satisfy its
own framework for analyzing the knowledge and scienter requirements for a 10b-5 suitability
claim.
Barrett v. J.P. Morgan Sec. Inc., 2012 WL 4754171 (FINRA Sept. 24, 2012).
C.1.b
The FINRA arbitration panel (the “panel”) dismissed Claimant’s action. Claimant
alleged, among other things, violations of 10(b), 10b-5 and suitability with respect to Claimant’s
investment in Auction Rate Securities (“ARS”). The panel held that Respondent did not engage
in any violations with respect to suitability, fraud and misrepresentation. The panel reasoned that
Claimant was a sophisticated investor who was aware of the various risks associated with ARS,
including the risk of liquidity.
C.1.b
In the Matter of Michael Bresner; Ralph Calabro; Jason Konner; and Dimitrios Koustoubos,
2012 WL 3903387 (S.E.C. Release No. 3-15015, Sept. 10, 2012).
The initial administrative law judge (the “initial judge”) ordered that a public hearing
take place concerning the allegations that Respondents willfully violated Section 17(a) of the
Securities Act and Section 10(b) of the Exchange Act. Specifically, found the judge found that
Respondents Konner and Koutsoubos each engaged in unsuitable trading activity that far
exceeded the frequency of trades identified in the suitability questionnaire signed by the
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defrauded customers. The initial judge also found that Respondent Bresner failed to reasonably
supervise Konner and Koutsoubos.
C.1.b
Seymour Topple v. Steven Andrew Jennings, 2012 WL 1898052 (FINRA May 16, 2012).
The arbitration panel dismissed Claimant’s claim and recommended that Respondent’s
CRD be expunged. Claimant alleged the following causes of action: breach of contract, breach
of fiduciary duty, suitability, misrepresentation, omission of facts, violation of Rule10b-5, fraud,
negligence, negligent misrepresentation, violation of FINRA Rules and respondeat superior.
Claimant requested compensatory damages in the amount no less than $441,000 and lost
opportunity costs in the amount of $100,000. The panel held that Claimant sold the investments
at issue contrary to Respondent’s advice during the financial crisis in October 2008.
C.1.b
Winifred B. Loria et. al. v. Elmer Wayne Bullis Arnold Dorman Next Fin. Group, Inc., 2012 WL
1795777 (FINRA May 7, 2012).
The arbitration panel held Respondents liable for $75,000 in compensatory damages and
$150,000 in punitive damages. Claimants asserted the following causes of action: fraud,
constructive fraud, violation of Section 10 of the Securities Exchange Act and Rule 10b-5
thereunder, violation of the Virginia Securities Act, suitability, violations of the Securities Act of
1933 and the ’34 Act, violation of state, federal, FINRA, NASD and NYSE rules and
regulations, breach of fiduciary duty, negligence, unauthorized transactions, breach of contract,
and failure to supervise. At the close of the hearing, Claimants requested an unspecified amount
of punitive damages, professional fees in the amount of $156,000 and losses, commission
returns, managed fees, returns, general fees and costs totaling an amount of $294,000.
Tim Haug v. VSR Fin. Servs. Inc., 2012 WL 259180 (FINRA Jan. 17, 2012).
C.1.b
The arbitration panel found Respondent VSR Financial Services, Inc. liable for
$63,750.00 in compensatory damages, $13,958.03 in costs, $300 as reimbursement and $30,000
in attorneys’ fees. Claimants asserted the following causes of action: violations of the Kansas
Securities Act, violations of Rule 10b-5 of the Securities and Exchange Act and/or the common
law tort of fraud, suitability/fraud, breach of fiduciary duty, negligence, and failure to supervise.
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c. Insider Trading
C.1.c
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).
Shareholder brought derivative suit, alleging that various financial institutions
underwrote and issued initial public offerings (“IPO”) that utilized methods to inflate the
companies’ aftermarket stock price to a level above the initial IPO, in violation of “short-swing”
stock transactions by insiders under Section 16(b) of the Securities Exchange Act of 1934. The
district court dismissed 24 complaints on the grounds that the two-year limitations period of
Section 16(b) expired before shareholder filed suit. The Ninth Circuit reversed in part. The
Ninth Circuit held that Section 16(b) claims are tolled until the insider discloses the transactions
in a Section 16(a) filing. The Supreme Court vacated the judgment and remanded the case on the
grounds that Section 16(b) claims are not tolled until the filing of a Section 16(a) statement.
Huppe v. WPCS Int’l Inc., 670 F.3d 214 (2d Cir. 2012).
C.1.c
Shareholder filed derivative suit, alleging that limited partnerships realized “short-swing”
profits in violation of Section 16(b) of the Securities Exchange Act of 1934. The district court
granted shareholder’s summary judgment motion. The Second Circuit affirmed. The court of
appeals addressed whether “a beneficial owner’s acquisition of securities directly from an
issuer—at the issuer’s request and with the board’s approval—should be exempt from the
definition of a “purchase” under Section 16(b), on the theory that such a transaction lacks the
‘potential for speculative abuse’ that Section 16(b) was designed to curb.” The Second Circuit
found that such transactions are covered by Section 16(b). The limited partnerships were
beneficial owners, despite that the limited partnerships’ delegated their “rights and power” to
their respective general partners to vote and control investments of their securities portfolios.
Levitt v. Brooks, 669 F.3d 100 (2d Cir. 2012).
C.1.c
Defendant failed to pay outstanding legal fees to plaintiff, who served as counsel to
defendant in connection with charges of securities fraud, insider trading, and other criminal
offenses. The district court granted plaintiff’s motion to compel payment of outstanding legal
fees. The Second Circuit affirmed. It held that the district court did not abuse its discretion in
exercising ancillary jurisdiction over the fee dispute. Further, the district court complied with the
Federal Rules of Civil Procedure, did not violate defendant’s due process rights and did not
deprive defendant of his right to a jury trial.
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Chechele v. Scheetz, 466 Fed.Appx. 39 (2d Cir. 2012).
C.1.c
Shareholder filed derivative suit, alleging that corporation’s former president and chief
executive officer realized “short-swing” profits in violation of Section 16(b) of the Securities
Exchange Act of 1934. The district court granted defendant’s motion to dismiss. The Second
Circuit affirmed. It held that the district court properly declined to consider certain S.E.C. filings
“for the truth of their assertions.” Also, shareholder failed to allege that defendant was part of an
ownership group.
Rosenthal v. New York University, 482 Fed.Appx. 609 (2d Cir. 2012).
C.1.c
University refused to certify student as qualified for the Master of Business
Administration (“MBA”) degree because student was convicted of violating federal securities
laws for providing his brother, an active securities trader, with material nonpublic information.
The district court granted university’s motion for summary judgment. The Second Circuit
affirmed. It held that university could reasonably believe that such conduct did not warrant an
MBA degree. University was within its “contractual rights to discipline” student. Further,
student failed to show that university acted “arbitrarily, irrationally, or in bad faith” in denying
him MBA degree.
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012).
C.1.c
Corporation brought action against investors for disgorgement of alleged “short-swing”
insider profits. The district court granted in part corporation’s motion for summary judgment
and entered judgment against investors in the amount of $4,965,898.95. The Second Circuit
affirmed. It held that: (1) the “rarely-construed ‘debt exception’ to liability” under Section 16(b)
of the Securities Exchange Act of 1934 did not apply, rejecting investors’ theory that they
acquired a newly issued note in satisfaction of defaulted debt owed by corporation pursuant to an
earlier note; (2) the “borderline transaction” exception did not apply because investors had
access to inside information about the corporation; (3) the newly issued note evidenced
differences that were “sufficiently material” to constitute a new security; (4) investors were
“beneficial owners” for purposes of Section 16(b) and therefore subject to disgorgement of
profits; and (5) the district court properly denied the investors’ motion for reconsideration.
U.S. v. Contorinis, 692 F.3d 136 (2d Cir. 2012).
C.1.c
Appellant was convicted of conspiracy to commit securities fraud and insider trading.
The district court ordered forfeiture in the amount of $12.65 million. The Second Circuit held
that the jury instructions pertaining to the definition of material nonpublic information were
proper. Further, the district court acted within its discretion to admit evidence regarding other
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trades. However, the district court erred in ordering appellant to forfeit gains acquired by his
employer but not by him because neither he nor others acting in concert with him ever received
or controlled those gains. Therefore, the Second Circuit vacated the forfeiture order and
remanded the case to determine the proper forfeiture amount.
SEC v. Obus, 693 F.3d 276 (2d Cir. 2012).
C.1.c
The S.E.C. brought an action against defendants, alleging insider trading in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The S.E.C. alleged that
one of the defendants learned of material non-public information regarding an acquisition during
the course of his employment, and shared that information with his friend, who then relayed it to
his boss, who in turn, traded on the information. The district court granted summary judgment in
favor of defendants. The Second Circuit vacated and remanded, holding that the S.E.C.’s
evidence created genuine issues of material fact under the misappropriation theory as to each of
the defendants. Under the misappropriation theory, the employee had a duty to keep information
about the acquisition confidential and breached that duty by tipping his friend. The two
remaining defendants had tippee liability because they “inherited” employee’s duty of
confidentiality, they had reason to know employee breached his fiduciary duty, and they traded
on that information.
Donoghue v. Bulldog Investors Gen. P’ship, 696 F.3d 170 (2d Cir. 2012).
C.1.c
Shareholder brought derivative suit against hedge fund partnership and its principal for
disgorgement, alleging that principal received “short-swing” profits in violation of Section 16(b)
of the Securities Exchange Act of 1934. Shareholder alleged that between November 2009 and
March 2010, while continuing to own more than 10% of the issuer’s equity securities, principal
purchased and then sold additional shares on the open market. The district court denied
principal’s motion to dismiss and entered judgment in favor of shareholder in the amount of
$85,491.00, representing the profits realized by principal from the “short-swing” transaction. On
appeal, principal argued that the district court lacked jurisdiction because there was “no live case
or controversy” to afford shareholder standing. The Second Circuit affirmed. It held that a
Section 16(b) violation causes injury to the issuer and confers standing under Article III of the
Constitution because “injury depends not on whether the §16(b) fiduciary traded on inside
information but on whether he traded at all.”
Mill Bridge V, Inc. v. Benton, No. 11-1184, 2012 WL 4017804 (3d Cir. Sept. 13, 2012).
C.1.c
Appellant former shareholder brought securities fraud action against appellee insider
buyers of shareholder’s shares, alleging that appellee failed to disclose material non-public
information regarding merger discussions that would have affected the market value of
appellant’s shares. The district court denied appellant’s request to extend the close of discovery.
65

The district court also held that information regarding the potential merger was not “material.”
The Second Circuit affirmed. It held that the district court did not abuse its discretion in denying
appellant additional discovery. Further, it held that the merger discussions had not yet become
“material,” despite a signed confidentiality agreement. Finally, the Third Circuit held that
appellant failed to demonstrate sufficient facts that appellee knew of the merger negotiations at
the time of the stock sale.
SEC v. Delphi Corp., No. 11-2624, 2012 WL 6600324 (6th Cir. Dec. 18, 2012).
C.1.c
Defendant appealed jury’s finding of civil liability for violations of federal securities laws
with regard to erroneous accounting during his employment as chief accounting officer for
corporation. Defendant argued that there was insufficient evidence of scienter. The Sixth
Circuit affirmed. It held that there was sufficient evidence that defendant “acted recklessly or
turned a blind eye” to the sale transaction. The Sixth Circuit also found that defendant ignored a
number of red flags pertaining to the rebate transaction. Defendant should have conducted a
critical investigation of both transactions before approving the accounting.
Israni v. Bittman, 473 Fed. Appx. 548 (9th Cir. 2012).
C.1.c
Shareholder filed derivative suit, alleging that corporation’s directors intentionally made
misleading public statements about the corporation’s financial position in an effort to sell their
own stock at inflated prices and increase their own compensation. The district court dismissed
the complaint. The Ninth Circuit affirmed. It held that shareholder failed to allege demand
futility. The Ninth Circuit found that: (1) shareholder failed to raise reasonable doubt that
directors were disinterested; (2) shareholder failed to establish sufficient facts that directors’ fees
were “unusual or uncustomary;” (3) shareholder failed to establish that committee membership
indicated that directors saw and failed to act on inside information; and (4) shareholder failed to
allege that directors were “beholden to an interested party.”
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ---, 2012 WL 6634351 (9th Cir. Dec. 21,
2012).
C.1.c
Investors filed securities fraud class action against corporation, its chief executive officer
(“CEO”) and former chief financial officer (“CFO”), alleging numerous violations under the
Securities Exchange Act of 1934, including alleged insider trading. The district court granted
defendants’ motion to dismiss, finding that the corporation issued falsified financial reports, but
that plaintiffs failed to establish scienter. The Ninth Circuit reversed in part, finding that scienter
was adequately pleaded under Section 10(b) and Rule 10b-5 to substantiate an insider trading
claim. The Ninth Circuit held that the corporation, CEO and former CFO were “deliberately
reckless” in reporting misleading financial results, in light of their receipt of accurate reports that
66

the corporation did not meet its financial projections. Each time, the corporation made
adjustments in overstating operating income and earnings. The Ninth Circuit held that in “the
face of repeated such adjustments, the company cannot simply close its eyes with a sigh of
relief.”
Hubbard v. BankAtlantic Bancorp, Inc., No. 11-14703, 2012 WL 6013216 (11th Cir. Dec. 3,
2012).
C.1.c
In a securities fraud class action, the district court granted in part and denied in part
appellant’s motion for Rule 11 sanctions pertaining to allegations in the complaint and amended
complaint. Appellant challenged the denial of sanctions as to appellee’s claims of insider
trading, accounting fraud, manipulated loan loss reserves, and damages caused by securities
fraud. The Eleventh Circuit affirmed, concluding that appellant did not meet its high burden of
proving that the trial court abused its discretion in finding that the claims were not sanctionable.
Lenartz v. Am. Superconductor Corp., --- F. Supp. 2d ---, 2012 WL 3039735 (D. Mass. July 26,
2012).
C.1.c
Plaintiffs brought a securities fraud class action on behalf of two groups of purchasers of
common stock against a power technologies company and certain of its officers and directors.
One group alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5, and the other group alleged violations of Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933. Defendants moved to dismiss. Plaintiffs attempted to raise an inference
of scienter by alleging that defendants engaged in accounting fraud and that four individual
defendants collectively sold shares of their personally-held common stock for proceeds of over
$14.9 million during the class period. Plaintiffs further alleged that although the sales were
made pursuant to a stock trading plan that was adopted in accordance with Rule 10b5-1, the
individual defendants adopted or amended the plan to take advantage of inflation in the price of
the stock, as they were in possession of material, nonpublic information. The district court found
that plaintiffs failed to show that the insider sales were unusual or suspicious in timing or
amount: one individual defendant’s stock sales were not suspicious because the defendant’s
trades during the class period were almost equally as large as his trades before the class period,
and the other two individual defendant’s stock sales were not suspicious in timing because the
sales occurred after the stock price had dropped dramatically. Thus, the district court held that
because the insider trading allegations failed to create a strong inference of scienter, plaintiffs’
Rule 10b-5 claim necessarily failed.
67

Brodzinsky v. Frontpoint Partner LLC, No. 11CV10 WWE, 2012 WL 1468507 (D. Conn. Apr.
26, 2012).
C.1.c
Plaintiffs brought a securities fraud class action against defendants and funds controlled
by one of the defendants, alleging violation of Sections 10(b), 20A, and 20(a) of the Securities
Exchange Act of 1934, based on defendants’ participation in an insider trading scheme, to which
both individual defendants had pleaded guilty in the criminal actions brought against them.
Defendants moved to dismiss plaintiffs’ complaint. The district court held that plaintiffs lacked
standing to pursue their Section 10(b) and 20A claims because plaintiffs’ trades were not
contemporaneous with the alleged insider trading. Plaintiffs’ trades occurred within two weeks
of the alleged insider trading, which the district court found to be beyond the period considered
to be the market relevant to the alleged insider trading. Because plaintiffs’ Section 20(a) claims
were premised on liability for the Section 10(b) and 20A claims, and plaintiffs lacked standing to
bring their Section 10(b) and 20A claims, the district court also dismissed plaintiffs’ Section
20(a) claims.
Hutchins v. NBTY, Inc., No. CV 10-2159 LDW, 2012 WL 1078823 (E.D.N.Y. Mar. 30, 2012).
C.1.c
Plaintiff brought a securities fraud class action against a nutritional supplement company
and its CEO/chairman and its CFO/president, alleging violations of Section 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss the amended
complaint. Plaintiff alleged that company insiders collectively sold 1,655,063 shares of their
personally-held common stock during the class period, generating over $73 million in proceeds,
which amounted to 24 times the amount of insider sales in the prior year. Plaintiff further
alleged that the individual defendants sold 9.4% and 50.9% of their stock, generating $21.2
million and $29.5 million respectively. The district court held that plaintiff sufficiently alleged
“unusual” sales by the company’s insiders – particularly by the individual defendants – during
the class period to raise a strong inference of scienter, and denied defendants’ motion to dismiss.
Levy v. Huszagh, No. 11-CV-3321, 2012 WL 4512038 (E.D.N.Y. Sept. 28, 2012).
C.1.c
Plaintiff filed shareholder derivative suit against certain officers and directors of
company, alleging improprieties in how company stated its loan loss allowance. Defendants
moved to dismiss the complaint on the basis of plaintiff’s failure to satisfy the demand
requirement. Plaintiff alleged that the entire company board was responsible for concealing how
the company stated its loan loss allowance; and defendants made suspicious insider trades for
profit based on knowledge of the true loan loss allowance. The district court granted defendants’
motion, finding that plaintiff failed to demonstrate that defendants’ alleged actions were so
egregious to preclude demand and that defendants exercised valid business judgment.
68

Barbara v. MarineMax, Inc., No. 12-CV-0368, 2012 WL 6025604 (E.D.N.Y. Dec. 4, 2012).
C.1.c
Plaintiffs alleged breach of contract, breach of fiduciary duty, violation of the Delaware
Uniform Commercial Code and federal securities laws, unjust enrichment, tortious interference
and fraud against defendants resulting from plaintiffs’ sale of their boat business to defendants
for cash and stock. Plaintiffs alleged breach of fiduciary duty for alleged insider sales of
corporate stock, during the period when plaintiffs attempted to lift stock restrictions, which
caused the stock value to fall dramatically. Plaintiffs alleged that defendants knew that plaintiffs
planned to sell their stock once the restrictions were lifted and thereby traded on “material
inside” information. The district court dismissed this claim because it was derivative in nature.
The district court ultimately granted defendants’ motion to dismiss on all of plaintiffs’ claims,
except for breach of contract for failure to lift the stock restrictions.
U.S. v. Rajaratnam, No. 09 CR 1184 RJH, 2012 WL 362031 (S.D.N.Y. Jan. 31, 2012).
C.1.c
Defendant was found guilty on all fourteen counts in an indictment charging him with
conspiracies to commit and the commission of various insider trading schemes. After calculating
the applicable sentencing guideline range to be 235 to 293 months in prison based on a total
offense level of 38 and a criminal history category of I, the court sentenced defendant to a total
of 132 months in prison on all counts. In this opinion, the court set forth the basis for that
calculation.
SEC v. Contorinis, No. 11-3-CR, 2012 WL 512626 (S.D.N.Y. Feb. 3, 2012).
C.1.c
The S.E.C. brought an action against defendant related to his involvement in an insider
trading scheme that generated more than $12 million in profits and avoided losses, in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The S.E.C. filed a motion
for summary judgment against defendant, arguing that defendant was collaterally estopped from
challenging facts established at his parallel criminal trial, where defendant was found guilty of
conspiracy to commit securities fraud and securities fraud. The district court granted the
S.E.C.’s motion for summary judgment as to liability, holding that because defendant was
convicted of securities fraud in a criminal proceeding, he was collaterally estopped from
relitigating the underlying facts in his subsequent civil trial. The court also granted the relief
sought by the S.E.C., holding (i) that a permanent injunction enjoining defendant from violating
Section 10(b) of the Exchange Act and Rule 10b-5 was warranted because defendant acted
knowingly in making illegal trades, made multiple trades over the course of several weeks,
profited substantially from his conduct, and consistently maintained that his past conduct was
blameless; (ii) that defendant shall disgorge his profits plus prejudgment interest; and (iii) that
defendant pay a civil penalty of $1,000,000.
69

C.1.c
Chechele v. Elstain, No. 11-3889, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).
Plaintiff brought a shareholder derivative suit against the company’s trustee and fifteen
corporate entities controlled by the trustee, which owned more than ten percent of the company’s
outstanding common shares. Plaintiff alleged that defendants violated Section 16(b) of the
Securities and Exchange Act of 1934 by purchasing the company’s stock from the company’s
underwriters at its public offering and then selling that stock within six months for a profit.
Defendants moved to dismiss, arguing that their purchase of stock was permissible under Rule
16b-3, and therefore exempted from the prohibition on short swing insider profits, because it was
authorized by the company’s board. The district court disagreed with defendants. The district
court noted that the issue presented was discrete and novel. The plain language of Rule 16b-3
provides that “[t]ransactions between an issuer and its officers or directors” that meet certain
conditions are exempt, and because defendants were insiders who purchased stock from
underwriters, who had been hired by the company to do a public offering, rather than from the
issuer, the exemption did not apply. The district court denied defendant’s motion to dismiss for
four reasons: (1) the underwriting agreement did not bind the underwriters to sell shares to
defendants, so the underwriters were independent actors not synonymous with the issuer; (2) the
transaction occurred on the open market as part of a public offering, which altered the prices at
which other shares were sold and impacted other buyers; (3) Rule 16b-3 would not exempt an
officer’s or director’s purchase of the issuer’s stock in a public offering pursuant to a “friends
and family” allocation, confirming the plain meaning of the Rule; and (4) defendants provided
no powerful reason to depart from the plain language of the Rule.
U.S. v. Skowron III, 839 F. Supp. 2d 740 (S.D.N.Y. 2012).
C.1.c
Defendant pleaded guilty to and was convicted of conspiring to commit securities fraud
and to obstruct an S.E.C. investigation. The conduct underlying defendant’s conviction
consisted of an insider trading scheme and an ensuing cover-up. Defendant’s former employer
sought restitution under the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. § 3663A,
for (i) the full disgorgement amount it paid to the S.E.C. to settle S.E.C. claims against defendant
and the hedge funds defendant managed; (ii) legal fees and related costs incurred responding to
the government investigation of defendant; and (iii) a portion of the total compensation
defendant’s former employer paid to defendant. The district court concluded that defendant’s
former employer was a “victim” under the MVRA because defendant’s offenses directly and
proximately harmed the employer, deprived the employer of honest services of its employee,
diverted corporate time and energy in the defense of defendant, injured the employer’s
reputation, and caused the employer to incur substantial legal costs during the S.E.C.
investigation. Finding defendant’s former employer to be a “victim,” the district court granted
the former employer restitution for legal fees and costs and twenty percent of defendant’s total
compensation.
70

C.1.c
U.S. v. Gupta, 848 F. Supp. 2d 491 (S.D.N.Y. 2012).
Defendant charged with insider trading and subject to a parallel civil enforcement
proceeding moved for pretrial discovery in both cases, seeking the memoranda and notes of an
S.E.C. attorney who attended the interviews of forty-four witnesses conducted jointly by the
United States Attorney’s Office (“USAO”) and the S.E.C.. Finding that the USAO had
conducted a “joint investigation” with the S.E.C., the district court held that the USAO’s duty to
learn of any favorable evidence to the defendant extended to reviewing materials in the
possession of the S.E.C. for Brady evidence and directed the USAO to review the S.E.C.’s
memorandum for any Brady material, and if any was found, to disclose it to the defense. With
respect to defendant’s motion in the civil case, the district court held that defendant had
demonstrated substantial need for Brady material in connection with preparing for his criminal
trial to overcome the work product protection afforded to the S.E.C.’s notes and memorandum,
but only to the extent of any Brady material.
SEC v. Gupta, 281 F.R.D. 169 (S.D.N.Y. 2012).
C.1.c
The S.E.C. brought an insider trading civil enforcement action against defendants.
Following the deposition of a non-party witness, defendants moved to compel the non-party
witness to answer questions about meetings with and documents shown to the non-party witness
by attorneys from the S.E.C. and United States Attorney’s Office (“USAO”). The district court
held that when an attorney discloses work product to prepare a non-party witness for a
deposition, and that non-party witness does not share a common interest with the attorney’s
client, there has been a deliberate, affirmative, and selective use of work product that waives the
privilege. Finding that the S.E.C. and USAO waived any work product protection they had over
legal strategy in their questioning and documents shown to the non-party witness when they
prepared the non-party for his deposition, the district court ordered that defendants could
question the non-party witness about his deposition preparation meetings with the S.E.C. and
USAO.
U.S. v. Gupta, 2012 WL 1066817 (S.D.N.Y. Mar. 27, 2012).
C.1.c
Pursuant to 18 U.S.C. §§ 2515, 2518(1) and the Fourth Amendment, defendant moved to
suppress wiretap intercepts and the evidence derived from the wiretaps in his criminal trial for
insider trading. The district court agreed with the reasoning in an order addressing the same
arguments in defendant’s co-conspirator’s case and held that: (1) the wiretap of defendant’s
phone had the “bona fide” purpose of investigating wire fraud, which is permitted under Title III,
and so long as the government acts in good faith with respect to informing the court of the crimes
it is investigating in connection with the wiretap, the government is free to use evidence obtained
from an authorized wiretap in the prosecution of a crime not listed in Section 2516; and (2) under
71

the Franks doctrine, the government’s failure to inform the judge who authorized the wiretap of
the parallel S.E.C. investigation was immaterial to the judge’s finding of necessity for the
wiretap. Thus, the district court denied defendant’s motion to suppress the wiretaps and the
evidence derived from them.
U.S. v. Gupta, 2012 WL 1066804 (S.D.N.Y. Mar. 27, 2012).
C.1.c
Defendant charged with insider trading moved to dismiss Count 2 of the superseding
indictment charging defendant with securities fraud as unconstitutionally vague; to dismiss or
consolidate Counts 3 and 4 of the superseding indictment as multiplicitous; to strike prejudicial
surplusage from the superseding indictment; and to compel the government to provide additional
details in its bill of particulars. The district court denied all four of defendant’s motions, holding
that: (1) the allegations of Count 2 satisfied the requirement of a “definite written statement of
the essential facts constituting the offense charged,” as they sufficiently apprise defendant of
what the government intends to prove such that defendant can prepare his defense and avoid the
potential for double jeopardy; (2) defendant’s motion to consolidate Counts 3 and 4 was
premature; (3) the words, “for example” and “among other things,” which preceded allegations
of how defendant benefited from his business dealings with his co-conspirator, did not in any
material respect broaden or alter the essential allegations of the crimes charged, but simply
indicated that the government’s proof will not be limited only to items of proof that the
indictment specified; and (4) defendant had already received most if not all of the additional
information he sought in the superseding indictment, the substantial discovery provided by the
government, the additional discovery made available to defendant through his parallel civil
action, and the previously ordered bill of particulars.
In re Pfizer Inc. Sec. Litig., 282 F.R.D. 38 (S.D.N.Y. 2012).
C.1.c
Investors filed a securities fraud class action against a pharmaceutical manufacturer and
its corporate officers, claiming violations of Sections 10(b), 18, 20(a), and 20A of the Securities
Exchange Act of 1934, Rule 10b-5, and state laws. Investors moved for class certification. The
district court certified the class under Rule 23(b)(3), finding that plaintiffs satisfied the
requirements of Rule 23(a), that common questions of law and fact predominated over individual
issues, and that a class action was the superior method of adjudicating the matter. The district
court also held that certification of a Section 20A subclass for insider trading claims was
appropriate because a distinct legal issue common to some members of the class existed and
would expedite resolution of the case. In addition to proving a predicate violation of Section
10(b), the subclass must also establish that they purchased the company’s stock
contemporaneously with a sale by an individual defendant, and that the individual defendant
possessed material nonpublic information at the time of the sale. Thus, the subclass was
warranted.
72

In re CRM Holdings, Ltd. Sec. Litig., No. 10-Civ. 975 RPP, 2012 WL 1646888 (S.D.N.Y. May
10, 2012).
C.1.c
Plaintiffs filed a securities fraud class action against a holding company and several of its
officers and one of its board members, alleging (1) violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 as to all defendants; (2) violation of Section 10(b) as to
three of the individual defendants for insider trading; and (3) violation of Section 20(a) as to all
four individual defendants. The court held that plaintiffs failed to allege anything “unusual” or
“suspicious” about the individual defendants’ stock sales during the class period. The stock sales
simply did not demonstrate “an intent to deceive, manipulate , or defraud,” as required by
Section 109b) and Rule 10b-5. Finding that there were no facts to raise an inference of scienter,
the court concluded that plaintiffs failed to state a claim under Section 10(b) and Rule 10b-5.
Because the court found that plaintiffs failed to state an underlying Section 10(b) violation
against defendants, the court dismissed plaintiffs’ Section 20(a) claim as well.
SEC v. Bankosky, No. 12 Civ. 1012 HB, 2012 WL 1849000 (S.D.N.Y. May 21, 2012).
C.1.c
Defendant traded in the securities of four companies based on material, nonpublic
information that he obtained while working as a director of business development for a
pharmaceutical company. The district court entered a consent judgment against defendant that
permanently enjoined him from future violations of the securities laws and held him liable for
disgorgement for the profits he gained. Pursuant to 15 U.S.C. § 78u(d)(2), the S.E.C. moved to
prohibit defendant permanently from acting as an officer or director of a public company. In
deciding the motion, the district court considered “(1) the ‘egregiousness’ of the underlying
securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the defendant’s ‘role’ or
position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s
economic stake in the violation; and (6) the likelihood that misconduct will recur” and held that
defendant was prohibited for a period of ten years from acting as an officer or director of any
public company.
SEC v. Compania Internacional Financiera, No. 11 Civ. 4904, 2012 WL 1856491 (S.D.N.Y.
May 22, 2012).
C.1.c
The S.E.C. brought an action against three defendants, alleging that defendants traded on
the basis of material, nonpublic information. The S.E.C. and one defendant stipulated to the
dismissal of the action without prejudice. With regard to the other two defendants, the S.E.C.
filed a motion pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure to dismiss its
complaint without prejudice. The two defendants opposed the motion, arguing that the action
should be dismissed with prejudice. The district court analyzed the Zagano factors and held that
(1) while the S.E.C. could have acted earlier and avoided some prejudice to defendants, its
73

failure to do so was not due to lack of diligence, but in part due to defendants’ conduct during
discovery; (2) there was no evidence that the S.E.C. acted with any undue vexatiousness in
initiating or maintaining the action against defendants; (3) the parties had not completed
discovery in part due to defendants’ conduct so the case was not ripe for adjudication on the
merits; (4) much of the expense had been incurred in discovery, which could be re-used in any
future litigation, and defendants failed to identify any concrete harm or prejudice that would
result from dismissal without prejudice; and (5) the S.E.C.’s explanation for the dismissal was
adequate, as a dismissal without prejudice was in the interest of justice because the S.E.C. was
unable to obtain critical information during the discovery period due to defendants’ conduct.
Because the weight of the Zagano factors favored the S.E.C. and defendants would not suffer
substantial legal prejudice if the action were dismissed without prejudice, the district court
granted the S.E.C.’s Rule 41(a)(2) motion to dismiss without prejudice.
Roth ex rel. Leap Wireless Int’l, Inc. v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524
(S.D.N.Y. 2012).
C.1.c
Plaintiff brought a derivative shareholder action against a corporation, another
shareholder, and its parent, alleging that defendant shareholder failed to comply with the
reporting and disgorgement requirements of Section 16(b) of the Securities Exchange Act of
1934 during the time that it held more than ten percent of the corporation’s common stock.
Defendants moved to dismiss the complaint for failure to state a claim. The district court
explained that in order to be liable under Section 16(b), defendant shareholder must have been a
statutory insider at the time of the sale and the purchase of the securities at issue. The district
court held that the equivalent of the sale was the writing of the short call options on September
30, 2009, and the equivalent of the purchase was the expiration of the options in January 16,
2010. Because defendant shareholder was no longer a ten percent owner on the options’
expiration date, under the plain language of the statute, it could not be held liable under Section
16(b). Thus, the district court granted defendants’ motions to dismiss the shareholder derivative
complaint.
XL Specialty Ins. Co. v. Level Global Investors, L.P., 874 F. Supp. 2d 263 (S.D.N.Y. 2012).
C.1.c
Plaintiff insurer filed a lawsuit against defendant insureds seeking (1) a declaration that
under the “prior knowledge exclusion” of its policy with defendants, it has no duty to cover any
defendant in connection with the S.E.C. and United States Attorney Office’s actions against
defendant for alleged insider trading; and (2) restitution of all defense costs already advanced to
the defendants. Defendants moved for a preliminary injunction requiring plaintiff to resume
advancing their defense costs in connection with the federal investigations. The district court
granted the defendants’ motion, holding that (1) the failure to receive defense costs under a
professional liability insurance policy at the time they were incurred constituted an immediate
and direct injury sufficient to satisfy the irreparable harm requirement for a preliminary
injunction; (2) the balance of hardships tipped in favor of the defendants; (3) the defendants
74

demonstrated that there were sufficiently serious claims going to the merits on the question of
whether the prior knowledge exclusion was ambiguous; and (4) plaintiff did not have a duty to
advance costs while plaintiff (insurer) and defendants (insureds) litigated whether the claims
asserted against defendants in the federal criminal action were covered or excluded under
defendants’ insurance policy with plaintiff.
Lerner v. Immelt, No. 10 Civ. 1807 DLC, 2012 WL 2197456 (S.D.N.Y. June 15, 2012).
C.1.c
Plaintiff filed a shareholder derivative action against nominal defendant corporation for
breach of fiduciary duty, insider trading, unjust enrichment, and other wrongs by former and
current directors and officers of defendant corporation. The district court granted defendants’
motion to dismiss. The district court also granted plaintiff leave to amend and submit a proposed
amended complaint within thirty days based on plaintiff’s counsel’s representation that he
recently received thousands of documents from the SEC that would support more particularized
allegations. Although plaintiff filed a motion for leave to amend within thirty days, plaintiff did
not include a proposed second amended complaint, but instead requested leave to amend on an
undetermined date within six months. Holding that plaintiff had disregarded the court’s order
and had not been diligent in pursuing the action, and finding that leave to amend would result in
undue delay and undue prejudice to defendants, the district court denied plaintiff’s motion for
leave to amend.
Mercer v. Gupta, -- F. Supp. 2d --, 2012 WL 3095300 (S.D.N.Y. July 27, 2012).
C.1.c
Plaintiff brought an action pursuant to Section 16(b) of the Securities Exchange Act of
1934 against defendant, a former director of a company, seeking to recover short swing profits
that defendant allegedly realized from passing inside information about the company to a nonparty,
who was convicted of insider trading in a separate criminal action. Plaintiff did not allege
that defendant purchased or sold any of the company’s stock within a six-month period, but
instead argued that defendant was a “beneficial owner” of the non-party’s illegal trading because
(1) defendant received quid pro quo payments from the non-party for the inside information; (2)
defendant had the “opportunity to profit” from the short-swing transaction; and (3) defendant’s
financial interest in the funds managed by the non-party was an indirect pecuniary interest in the
short-swing trades. The district court dismissed the action, finding that (1) while a tipper can be
held liable under Section 16, the tipper did not become a “beneficial owner” of the tippee’s
trades by virtue of payments received in exchange for insider information; (2) neither an
insider’s “business dealings” with a person who realizes short-swing profits, nor allegations of
improved business prospects between the insider and the actual trader constitute a pecuniary
interest in the short-swing transactions for the insider; and (3) the safe harbor defense of Rule
16a-1 applied such that defendant would not be deemed to have a pecuniary interest in the
portfolio that was managed by the non-party.
75

George v. China Auto. Sys., Inc., No. 11 Civ. 7533 KBF, 2012 WL 3205062 (S.D.N.Y. Aug. 8,
2012).
C.1.c
Plaintiffs brought a securities fraud class action against a power steering components and
systems manufacturer, several of its officers and directors, and its former auditor, alleging
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To establish
scienter, plaintiffs alleged that the individual defendants collectively sold over $40 million in the
manufacturer’s shares pursuant to 10b5-1 plans entered into during the class period in order to
profit from the allegedly inflated value of the stock. The district court held that the defendant
manufacturer could not invoke the 10b5-1 plan’s existence to disarm any inference of scienter
when the trading plan was entered into during the class period. The district court also held that
the individual defendants’ trading was unusual because (i) the individual defendants made a
collective net profit of nearly $42 million; (ii) four of the seven individual defendants sold over
fifty percent of their stock during the class period and two of the remaining individual defendants
sold over twenty-five percent of their stock during the class period; and (iii) those same
individual defendants did not sell any stock in the year and a half prior to the class period and
have not sold any stock since the end of the class period, whereas they sold more than 2.3 million
shares during the class period. Thus, the district court concluded that plaintiffs’ allegations
sufficiently raised a strong inference of scienter, and denied defendant manufacturer’s motion to
dismiss.
C.1.c
George v. China Auto. Sys., Inc., No. 11 CIV. 7533 KBF, 2012 WL 4493107 (S.D.N.Y. Sept. 25,
2012).
Following plaintiffs’ second amended complaint, defendant auditor moved to dismiss the
claim brought against it under Section 10(b) of the Securities Exchange Act of 1934. The district
court denied the motion, finding the allegations of the second amended complaint sufficiently
stated a claim against auditor. Specifically, the second amended complaint adequately stated the
size and magnitude of the restatement surrounding the convertible notes at issue. Further, the
alleged “rampant insider trading” claims, which indicated that 85% of the insider trading
occurred prior to the audit opinion, should have served as a red flag to the auditor to “dig deeper
and insure the propriety of the financial statements.” Taken collectively, there was a strong
inference of scienter.
Chechele v. Morgan Stanley, --- F.Supp.2d ---, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012).
C.1.c
Stockholder brought suit against corporation in which she nominally held stock, and
related entities, seeking recovery of “short-swing” profits pursuant to Section 16(b) of the
Securities Exchange Act of 1934. Defendants moved to dismiss. The district court granted
defendants’ motion. First, the court held that stockholder’s claim was time barred under Section
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16(b). Plaintiff’s claim was not equitably tolled because plaintiff knew, or should have known,
the facts of fraudulent concealment necessary to plead her Section 16(b) claim. Second, plaintiff
failed to provide specific factual allegations, beyond speculation, sufficient to establish that
defendants may have engaged in other short-swing transactions.
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., --- F.Supp.2d ---, 2012 WL
4714799 (S.D.N.Y. Sept. 27, 2012).
C.1.c
Shareholders brought action alleging securities fraud, breach of warranty, negligent
misrepresentation, and unjust enrichment against corporation, its joint-venture partner, and their
directors and officers. Defendants moved to dismiss. The district court granted defendants’
motion. In their breach of warranty claim, shareholders claimed that the corporation breached its
representation and warranty when it sold warranties within six months of the closing of the
securities purchase and product participation agreement between corporation and its jointventure
partner, putting its ownership of the joint-venture over 10% and subjecting it to Section
16(b) of the Securities and Exchange Act of 1934. The district court held that under Section
16(b), to be a beneficial owner “at the time of purchase,” an insider must be a beneficial owner
before the purchase, which corporation did not become until after the closing.
In re Fannie Mae 2008 ERISA Litig., No. 09 Civ. 1350 PAC, 09 MDL 2013 PAC, 2012 WL
5198463 (S.D.N.Y. Oct. 22, 2012).
C.1.c
Plaintiffs brought action on behalf of all current and former employees of Federal
National Mortgage Association (FNMA), who are or were plan participants in FNMA’s
employee stock option plan. Plaintiffs alleged that defendants breached their duty under the
Employee Retirement Income Security Act (ERISA) by failing to properly manage the FNMA’s
employee stock option plan and breached their duty under ERISA of avoiding conflicts of
interest, and that the director defendants failed to adequately monitor the plan management
defendants. The plan management defendants argued that they could not be liable for breach of
their duty of prudence because divesting the plan’s assets of FNMA stock would constitute
insider trading. The district court rejected that argument. At the motion to dismiss stage,
plaintiffs’ prudence claim withstood any potential securities fraud violation competing with an
ERISA obligation.
U.S. v. Gupta, --- F.Supp.2d ---, 2012 WL 5246919 (S.D.N.Y. Oct. 24, 2012).
C.1.c
Defendant was found guilty of one count of conspiracy and three counts of substantive
securities fraud for providing material non-public information during September and October
2008, “when our financial institutions were in immense distress and most in need of stability,
repose, and trust.” The district court reviewed the sentencing guidelines to determine whether 24
77

months’ imprisonment was appropriate. The district court reasoned that defendant’s actions
rested on his “egregious breach of trust” and affirmed the sentence.
SEC v. One or More Unknown Purchasers of Sec. of Global Indus., Ltd., No. 11 Civ. 6500 RA,
2012 WL 5505738 (S.D.N.Y. Nov. 9, 2012).
C.1.c
The United States Attorney for the Eastern District of New York (U.S. Attorney) moved
to intervene in a civil action and stay discovery pending completion of an ongoing grand jury
investigation into an insider trading scheme. The S.E.C. did not oppose the motion. The district
court found that the civil case related to alleged fraudulent trades of stock that were among trades
at issue in the criminal investigation. In balancing the interests, the district court found that the
S.E.C. did not oppose the U.S. Attorney’s motion, defendant’s interest did not weigh against a
stay, and the district court’s interest of efficient resolution and the public interest in effective
prosecution of securities cases justified a stay of discovery of the civil case.
U.S. v. Whitman, No. 12 CR 125 JSR, 2012 WL 5505080 (S.D.N.Y. Nov. 14, 2012).
C.1.c
Defendant was convicted of conspiracy to commit insider trading and substantive insider
trading in violation of federal securities laws. During the charging conference, the district court
held that the following were proper jury instructions: (1) an “employee’s duty to keep material
non-public information confidential is defined by federal common law”; (2) a tippee must have a
general understanding that in sharing inside information, the insider breached a duty of
confidentiality “in exchange for some personal benefit”; and (3) to be criminally liable, a tippee
must have “specific intent to defraud the company to which the information relates.”
Warchol v. Green Mountain Coffee Roasters, Inc., No. 10 Civ. 227, 2012 WL 256099 (D.Vt.
Jan. 27, 2012).
C.1.c
Plaintiffs brought a securities fraud class action against specialty coffee company and
several individual defendants, including the company’s CEO, CFO, and Chairman of the Board
of Directors, alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b). Defendants moved to dismiss for failure to state a claim. Plaintiffs attempted
to demonstrate scienter by alleging that the company permitted lucrative insider stock sales,
evidencing motive and opportunity to commit the fraud. However, the district court held that
plaintiffs failed to demonstrate scienter: (i) plaintiffs failed to allege that any individual
defendants or other insiders sold stock during the class period or that the company department
presidents who did sell stock during the class period were parties to the fraud; and (ii) although
one department president’s stock sale had taken place a week before the company announced the
S.E.C. investigation and the company’s Q3 10-Q financial restatement, and one day after the
company claimed that it was first contacted by the S.E.C., none of the other transactions had
78

taken place near the dates on which the officers were likely to maximize profits on the basis of
that knowledge, and a number of the company’s directors had made stock purchases during the
class period.
Taylor v. Kissner, No. 11-1184, 2012 WL 4461528 (D. Del. Sept. 27, 2012).
C.1.c
Shareholder brought derivative suit against current and former members of corporation’s
board of directors after its merger with another corporation, which allegedly violated their
fiduciary duties to shareholders. The board of directors moved to dismiss. Among other
allegations, shareholder alleged that two of the corporate officers engaged in insider trading. The
district court granted the motion to dismiss. It held that shareholder’s insider trading allegations
were conclusory and did not demonstrate that the two directors were in possession of material
nonpublic information when they sold their stock. Further, shareholder failed to demonstrate
demand futility because he did not allege sufficient facts that the two directors were incapable of
exercising valid business judgment.
Sec. Police and Fire Prof’l of Am. Ret. v. Pfizer, Inc., No. 10-CV-3105 MCA, 2012 WL 458431
(D.N.J. Feb. 10, 2012).
C.1.c
Plaintiffs brought a securities fraud class action against a pharmaceutical company and
several of its senior executives alleging that defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, and that the individual defendants engaged in insider
trading, in violation of Sections 20(a) and 20A of the Exchange Act. Defendants moved to
dismiss under Rule 12(b)(6). The district court granted defendants’ motion to dismiss, holding
that plaintiffs failed to plead with particularity any false or misleading statements made by
defendants and failed to establish that defendants had a duty to disclose the information at issue
or that such information was material. Because claims under Sections 20(a) and 20A require a
predicate violation of the Exchange Act and plaintiffs failed to adequately plead a claim under
Section 10(b), the district court held that plaintiffs failed to state a claim for insider trading.
SEC v. Berlacher, No. Civ. A. 07-03800, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012).
C.1.c
After a bench trial, the district found that defendant had engaged in two instances of
securities fraud, but that there was insufficient evidence to find defendant liable on two other
counts of fraud and one count of insider trading. Specifically as to the insider trading count, the
district court found that defendant’s expert’s use of an event study to determine the materiality of
the information at issue was more consistent with the Third Circuit’s post hoc analysis to
determine materiality than the S.E.C.’s expert’s approach, and consequently held that defendant
had not engaged in insider trading because the information at issue was not material. Pursuant to
the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412, defendant moved for attorneys’
79

fees and costs expended in defending against the S.E.C. enforcement action, arguing that the
S.E.C. was not substantially justified in bring the insider trading and fraud claims against him
and that the S.E.C.’s demand was in excess of the judgment it obtained. The district court,
however, held that the EAJA did not entitle defendant to an award of attorneys’ fees because,
viewing the case in its entirety, the position of the S.E.C. was substantially justified and the
S.E.C.’s demand was not in excess of the judgment it obtained.
SEC v. McGee, --- F.Supp.2d ---, 2012 WL 4025409 (E.D. Pa. Sept. 13, 2012).
C.1.c
The S.E.C. brought securities fraud action against stock brokers and purported tippees,
alleging violations under the misappropriation theory of liability under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss. The district
court denied the motions. It held that the S.E.C. exercised its rulemaking authority, and the rule
was not void for vagueness. With respect to the sufficiency of the complaint, the district court
held that the rule delineating a relationship of trust and confidence under the misappropriation
theory was valid. The initial broker obtained material nonpublic information during the course
of a confidential relationship between himself and the source of information. The S.E.C.
sufficiently alleged that the broker who misappropriated the information had a duty of trust and
confidence. Further, the S.E.C. sufficiently alleged that the other broker acted with requisite
scienter to support tippee liability. The tippee knew the information was tainted. Finally, the
S.E.C. sufficiently alleged that the defendants, the tippees’ family members, received ill-gotten
gains to support disgorgement. However, the district court granted the motion to dismiss as to
one defendant, who was the father of the tippee, because there were insufficient facts to support a
“plausible inference” that the father acted with requisite scienter.
U.S. v. McGee, --- F.Supp.2d ---, 2012 WL 4025342 (E.D. Pa. Sept. 13, 2012).
C.1.c
Defendant was charged with two counts of insider trading in violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 and 10b5-2, and perjury. The indictment
charged that defendant obtained confidential, nonpublic information during the course of a
confidential relationship, arising out of defendant’s Alcoholics Anonymous membership.
Defendant then allegedly traded on the basis of such information. The district court denied
defendant’s motion to dismiss the securities fraud counts, holding that the S.E.C. exercised its
rulemaking authority, which was “not arbitrary, capricious, or manifestly contrary to the statute.”
The S.E.C. did not broadly define the nature of the confidential relationship essential to impose
liability under the misappropriation theory. Further, the rule was not void for vagueness as
applied to defendant. Finally, the indictment sufficiently alleged the elements of the offense
under Section 10(b) and Rule 10b-5, and sufficiently alleged a confidential relationship under
Rule 10b5-2.
80

In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., 876 F. Supp. 2d 616 (D.Md. 2012).
C.1.c
Plaintiffs brought a securities fraud class action against a syndicator company and several
of its officers, alleging that they had failed to disclose costs necessary to restate the company’s
financial statements to comply with a change in the law, in violation of federal securities laws.
Defendants moved to dismiss the complaint. Plaintiffs attempted to demonstrate scienter by
arguing that timing and sales of stock by some of the individual defendants were suspicious due
to the large percentage of holdings sold and the gross proceeds yielded. However, the district
court disagreed and held that the trading that took place by insiders was not unusual or
suspicious. Because any inference of fraudulent intent based on the timing and volume of insider
sales was slight, the court concluded that the allegations did not raise an inference of scienter.
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 1551703 (S.D. Tex.
Apr. 30, 2012).
C.1.c
Plaintiff filed an amended complaint against defendants, alleging that defendants
breached the duty of care, breached the duty of loyalty and good faith, engaged in self-dealing,
and engaged in insider trading. Defendants moved to dismiss the complaint. Plaintiff conceded
that defendants were entitled to dismissal of the insider trading claim. Thus, the court dismissed
plaintiffs’ insider trading claim.
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 5879608 (S.D. Tex.
Nov. 20, 2012).
C.1.c
In its amended complaint, plaintiff alleged that defendants breached the duty of care,
breached the duty of loyalty and good faith, engaged in self-dealing, and engaged in insider
trading. Plaintiff voluntarily dismissed the count of insider trading. Pending before the District
Court were two motions for summary judgment based on standing and res judicata, neither
pertaining to the dismissed insider trading allegations.
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 6160873 (S.D. Tex.
Dec. 11, 2012).
C.1.c
In its amended complaint, plaintiff alleged that defendants breached the duty of care,
breached the duty of loyalty and good faith, engaged in self-dealing, and engaged in insider
trading. Plaintiff voluntarily dismissed the count of insider trading. Pending before the District
Court were various motions, none pertaining to the dismissed insider trading allegations.
81

City of Pontiac Gen. Emp.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).
C.1.c
Investors brought a securities fraud class action against a medical equipment
manufacturer and two of its officers, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5. Defendants moved to dismiss the complaint.
Plaintiffs argued that stock sales by the individual defendants during the class period
demonstrated the requisite scienter, but the court disagreed. While insider trading at a suspicious
time or in an unusual amount is a factor relevant to scienter, insider trading “is suspicious only
when it is dramatically out of line with prior trading practices at [a] time calculated to maximize
the personal benefit from undisclosed inside information.” The court held that there was no basis
for inferring scienter because (1) plaintiffs failed to allege that one of the individual defendants
sold any stock during the class period; (2) plaintiffs failed to show that the other individual
defendant’s stock sales were out of line with his history of prior trading; and (3) the individual
defendants’ losses of more than $10 million each from the shares they retained undermined an
inference of scienter. The court concluded that plaintiffs alleged, at most, poor management
decisions, and granted defendants’ motion to dismiss.
Stuckey v. Online Res. Corp., ---F.Supp.2d ---, 2012 WL 5467522 (S.D. Ohio Nov. 9, 2012).
C.1.c
Stockholder filed derivative suit against acquiring corporation, alleging breach of merger
agreement, fraud, and breach of escrow agreement. Following a bench trial, the district court
found in favor of plaintiff. The district court found that defendant violated state securities laws
when it knowingly made false representations in the merger agreement. Defendant’s main
argument was that an S.E.C. comment letter was not material. Defendant incorrectly relied on a
statute prohibiting insider trading. The statute was inapplicable because defendant was the seller
and it “obviously knew” about the S.E.C. comment letter.
N. Miami Beach Gen. Emp. Ret. Fund v. Parkinson, No. 10 C 6514, 2012 WL 4180566 (N.D. Ill.
Sept. 19, 2012).
C.1.c
Shareholder brought suit against certain officers and directors, alleging seven claims for
breach of fiduciary duty, corporate waste, gross negligence, unjust enrichment, insider trading,
and aiding and abetting conspiracy. Plaintiff alleged that several individual defendants engaged
in insider trading by selling stock at times when they knew, on the basis of material nonpublic
information, that the stock was artificially inflated. The district court granted defendants’ motion
to dismiss, finding, among other things, that a majority of the directors remained disinterested
and did not engage in the allegations of insider trading. Also, the complaint failed to specify the
“negative developments” that constituted material nonpublic information. Similarly, plaintiff
failed to allege impropriety. Thus, plaintiff’s claim for insider trading was nothing more than
82

“trading in the normal course by directors who received a substantial portion of their
compensation in the form of stock and stock options.”
SEC v. Berrettini, No. 10-CV-01614, 2012 WL 5557993 (N.D. Ill. Nov. 15, 2012).
C.1.c
Defendant employee prepared a due diligence report pertaining to whether his employer
should acquire three medical service companies. The employee shared the information gained
during his due diligence with his co-defendant, a president of another company, who
occasionally contracted with his employer. The president traded shares on the basis of this inside
information and reaped substantial profits. The S.E.C. alleged that defendants’ conduct
amounted to insider trading, and defendants moved for summary judgment. The district court
denied defendants’ motions for summary judgment, finding sufficient evidence that defendant
employee shared material nonpublic information, breached his duty of confidentiality, obtained a
benefit, and acted with scienter. Similarly, defendant president acted with requisite scienter.
Wade v. WellPoint, Inc., ---F.Supp.2d ---, 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012).
C.1.c
Investor brought putative class action against corporation and its officers and directors,
alleging defendants artificially inflated corporation’s stock price in violation of the Securities
Exchange Act of 1934. Plaintiff moved to file a second amended complaint. The district court
denied the motion. Investor asserted allegations regarding “suspicious” stock sales, whereby
certain “insider” defendants sold shares of their stock to take advantage of artificial price
inflation caused by defendants’ misrepresentation. The court held that investor failed to
sufficiently plead scienter. Plaintiff failed to allege facts pertaining to trading history, and the
stock sales were not unusual or suspicious regarding the timing and amount of the stock sales.
SEC v. Bauer, No. 03-C-1427, 2012 WL 2217045 (E.D. Wis. June 15, 2012).
C.1.c
The district court had granted the S.E.C.’s motion for summary judgment, finding that
defendant possessed material, nonpublic information when she redeemed her shares of a short
duration fund, but declined to enter judgment immediately as the remaining claims could affect
the remedies at issue. Subsequently, the S.E.C. dismissed the remaining claims with prejudice
and moved for the entry of judgment pursuant to Rule 65 of the Federal Rules of Civil
Procedure. The S.E.C. sought (i) a permanent injunction enjoining defendant from committing
future violations of the securities laws and acting as, among other things, an officer, director,
member of any board; (ii) the disgorgement of funds equal to the losses defendant avoided with
prejudgment interest; and (iii) a civil penalty equivalent to three times the avoided losses. The
district court held that the S.E.C. did not demonstrate a reasonable likelihood of future violations
to support its request for a permanent injunction, finding that the defendant’s conduct was an
isolated incident and that defendant has made assurances that she will not violate securities laws
83

again, and denied the S.E.C.’s motion for final judgment of permanent injunction. The district
court also granted the S.E.C.’s motion for disgorgement in part. concluding that the S.E.C. was
entitled to disgorgement of the losses avoided with prejudgment interest, but held that the
S.E.C.’s request for a civil penalty was excessive.
In re Apollo Group, Inc. Sec. Litig., Nos. CV-10-1735-PHX-JAT, CV-10-2044-PHX-JAT, CV-
10-2121-PHX, JAT, 2012 WL 2376378 (D. Ariz. June 22, 2012).
C.1.c
Plaintiffs brought a class action against a postsecondary education institution and several
of its officers and directors, alleging that (i) defendants made false and misleading statements of
material fact and/or failed to disclose material facts in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5; (ii) the individual defendants engaged in
insider trading and sold stock while in possession of material, adverse, nonpublic information in
violation of Sections 10(b), 20A, and 20(a) and Rule 10b-5. Defendants moved to dismiss the
amended complaint. Because plaintiffs’ insider trading allegations were based on defendants’
knowledge that certain statements were materially false and misleading, and plaintiffs’ failed to
adequately allege scienter with regard to those statements, the district court held that plaintiffs
failed to allege that defendants were in possession of material, nonpublic information and
dismissed plaintiffs’ insider trading claims.
Smith ex rel. Apollo Group, Inc. v. Sperling, No. CV 11-722 PHX JAT, 2012 WL 3064261 (D.
Ariz. July 26, 2012).
C.1.c
Plaintiff brought a shareholder derivative suit against various officers and directors of a
postsecondary education institution, alleging violations of federal securities laws and state law
claims for breaches of fiduciary duties, abuse of control, gross mismanagement, unjust
enrichment, corporate waste, and insider trading. Defendants moved to dismiss the complaint,
arguing that plaintiff lacked standing to bring the action on behalf of the institution. The district
court held that plaintiff failed to satisfy the contemporaneous/continuous ownership requirement
of Rule 23.1 and therefore lacked standing to bring a shareholder derivative suit based on alleged
acts that occurred prior to plaintiff’s stock ownership. Accordingly, the district court granted
defendants’ motions to dismiss.
In re First Solar Derivative Litig., No. CV-12-00769-PHX-DGC, 2012 WL 6570914 (D. Ariz.
Dec. 17, 2012).
C.1.c
Nominal defendant filed motion to stay derivative action pending resolution of a
securities class action involving substantially the same issues. The district court granted
defendant’s motion because both the derivative action and the class action relied on “the same
84

misrepresentations, omissions, and underlying facts,” including that corporation withheld and
misrepresented material information regarding its products and engaged in insider trading.
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012 WL 137457
(C.D. Cal. Jan. 17, 2012).
C.1.c
Shareholder plaintiffs brought a shareholder derivative suit on behalf of the company
against the company’s directors. Plaintiffs asserted violations of Sections 14(a) and 29(b) of the
Securities Exchange Act of 1934, breach of fiduciary duty, corporate waste, unjust enrichment,
and insider trading, based on the director defendants’ alleged illegal promotion of Botox for offlabel
uses not approved by the FDA. The district court granted defendants’ motion to dismiss for
failure to state a claim with prejudice because plaintiffs had failed to adequately plead demand
futility under the two tests recognized by applicable Delaware law. The district court found that
the director defendants were disinterested because there was no evidence that they would be
subject to a substantial likelihood of liability, and that there was no evidence that the director
defendants would have broken the law or acted in a way that would be an invalid exercise of
business judgment.
Talley v. Mann, No. CV 11-05003, 2012 WL 946990 (C.D. Cal. Feb. 14, 2012).
C.1.c
Plaintiffs filed a shareholder derivative action against a biopharmaceutical company’s
officers and directors alleging that they breached their fiduciary duties to the company by
engaging in a systematic effort to misrepresent facts to the investing public relating to the FDA’s
approval of the company’s lead product candidate. Plaintiffs asserted claims for (i) breach of
fiduciary duty; (ii) breach of fiduciary duty for insider selling and misappropriation of
information; (iii) violations of Cal. Corp. Code § 25402; (iv) violations of Cal. Corp. Code §
25403; and (v) unjust enrichment. Defendants moved to dismiss the complaint, arguing that
plaintiff failed to adequately allege demand futility and state a claim. Plaintiff did not make a
demand on the company prior to filing suit, and argued that a demand would have been futile.
However, the district court found that plaintiff had not adequately pleaded demand futility based
on a control theory or a substantial likelihood of liability theory, and granted defendants’ motion
to dismiss.
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012 U.S. Dist. LEXIS
22065 (C.D. Cal. Feb. 22, 2012).
C.1.c
Shareholder plaintiffs brought a shareholder derivative suit on behalf of the company
against its directors, asserting violations of Sections 14(a) and 29(b) of the Securities Exchange
Act of 1934, breach of fiduciary duty, corporate waste, unjust enrichment, and insider trading.
Defendants moved to dismiss the complaint. The district court granted the motion to dismiss on
85

the grounds that plaintiffs field to establish demand futility. Plaintiffs moved for reconsideration
on the grounds that the district court failed to consider material facts. The district court denied
plaintiffs’ motion for reconsideration, holding that plaintiffs’ motion did not provide any new
facts that call into question the court’s conclusion in its order granting the motion to dismiss.
SEC v. King Chuen Tang, No. C-09-05146 JCS, 2012 WL 10522 (N.D. Cal. Jan. 3, 2012).
C.1.c
The S.E.C. filed a complaint alleging that defendants, a group comprised of trading
partners and their friends and relatives, engaged in extensive insider trading in the securities of a
mattress manufacturer and a computer and data processing services company. Three of the
defendants moved for summary judgment. As to the first defendant (a purported tipper), the
district court granted the motion in part, finding that there was an issue of material fact as to
whether the defendant lied about not tipping another defendant on one occasion, but that the
S.E.C. had not submitted admissible evidence that the defendant had access to insider
information on another occasion. As to the second defendant (a purported tippee), the district
court denied the motion, holding that there was a question of fact as to whether defendants
knowingly traded on insider information. While the S.E.C. offered evidence of telephone calls
and subsequent suspicious trading patterns by defendant, sufficient to support a reasonable
inference of insider trading, defendant argued that the trading was in line with his normal trading
patterns, raising an inherently factual question more appropriately decided by the jury. As to the
third defendant (a purported tippee), the district court denied the motion for summary judgment,
finding that there were questions of fact as to whether he received any inside information and
whether the information he did receive was material.
Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).
C.1.c
Plaintiff brought a class action against a teeth alignment company and an individual for
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as to both
defendants, insider trading violations of Section 10(b) and Rule 10b-5 as to the individual
defendant, and violation of Section 20(a) of the Exchange Act as to both defendants. Defendants
moved to dismiss plaintiff’s second amended complaint under Rule 12(b)(6). The district court
granted defendants’ motion to dismiss. The district court found that the allegations in the second
amended complaint were essentially identical to the allegations in the first amended complaint
and remained insufficient to demonstrate a material misrepresentation or omission, scienter, or
loss causation.
Applestein v. Medivation, Inc., 861 F. Supp. 2d 1030 (N.D. Cal. 2012).
C.1.c
Plaintiffs brought a securities class action against a biopharmaceutical company and its
senior officers, asserting a claim for securities fraud pursuant to Section 10(b) of the Securities
86

Exchange Act of 1934 and Rule 10b-5, and a derivative claim under Section 20(a) of the
Exchange Act. Plaintiffs’ case concerned the clinical testing of a drug used to treat Alzheimer’s
disease. Defendants moved to dismiss plaintiffs’ third amended complaint. The district court
held that the individual defendants’ stock sales of $22 million were insufficient to create a strong
inference of scienter because defendants also lost $82 million in stock value when the phase
three of the drug testing results were released. The court found that while suspicious insider
trading can be indicative of scienter, “[i]nsider trading is suspicious only when it is dramatically
out of line with prior trading practices at times calculated to maximize the personal benefit from
undisclosed inside information.” Accordingly, the court granted defendants’ motion to dismiss
with prejudice, finding that further amendment would be futile. .
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 11 Civ. 4904 JPO, 2012 WL 1868874
(N.D. Cal. May 22, 2012).
C.1.c
Plaintiffs filed a securities class action against a medical device manufacturer and several
of its employees, alleging that defendants misled investors about the company’s financial
prospects knowing that the financial guidance was false and misleading when issued, and that
each individual defendant reaped significant proceeds from insider sales. Plaintiffs assert
violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. Defendants
moved to dismiss plaintiffs’ amended complaint. The district court held that plaintiffs failed to
plead a material misrepresentation or omission. The district court also held that plaintiffs’
allegations did not create a strong inference of scienter. Plaintiffs’ allegations provided no
context by which the court could assess whether the individual defendants’ stock sales were
suspicious. The district court found that although some of the individual defendants may have
profited richly from their stock sales during the class period, the court was unable to determine
what percentage of such defendants’ stock holdings was sold, or whether the sales deviated from
defendants’ stock sale patterns. Because plaintiffs failed to plead a material misrepresentation or
omission and facts supporting an inference of scienter, and because plaintiffs’ failed to correct
deficiencies in their amended complaint, the district court granted defendants’ motion to dismiss
with prejudice.
In re Finisar Corp. Derivative Litig., No. C-06-07660 RMW, 2012 WL 2873844 (N.D. Cal. July
12, 2012).
C.1.c
Plaintiffs brought a derivative suit against a technology company and several of its
current and former directors and officers, asserting that defendants violated federal securities and
state laws by manipulating option grants, making false statements in S.E.C. filings and press
releases, engaging in illegal insider trading, and causing financial and reputational harm to the
company. Although plaintiffs did not identify individual transactions, but instead alleged the
total number of shares sold by each defendant during the relevant time period, the court held that
such allegations were sufficient to state a claim for insider trading under Delaware and California
law because plaintiffs also had sufficiently alleged scienter (i.e., knowledge of backdating) as to
87

four of the five individual defendants accused of engaging in insider trading. Consequently, the
district court granted the motion to dismiss as to one of the individual defendants, but denied the
motion to dismiss as to the remaining four defendants.
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., No. 11-2340-RDR, 2012 WL 3010992
(N.D. Cal. July 23, 2012).
C.1.c
Plaintiffs brought a securities fraud class action against a technology company and three
individual defendants, alleging violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 against all defendants, and violations of Sections 20(a) and 20A of the
Exchange Act against the individual defendants. As evidence of scienter, plaintiffs alleged that
the individual defendants engaged in stock sales that were suspicious, unusual, and inconsistent
with prior sales. The district court held that the allegations concerning the individual defendants’
stock sales during the class period did not support a strong inference of scienter: one individual
defendant had only made one sale of a mere two percent of his total holdings; another made nondiscretionary
sales pursuant to a Rule 10b-5 trading plan made prior to the class period; and
while the third individual defendant may have displayed unusual stock trades, absent
corroborating evidence, such allegations were insufficient to support an inference of scienter.
Finding that plaintiffs failed to plead both a material misrepresentation or omission and scienter,
the district court granted defendants’ motion to dismiss the Section 10(b) claims. Because
plaintiffs failed to plead a primary securities law violation, the district court also concluded that
plaintiffs failed to plead a violation of Sections 20(a) and 20A, and granted defendants’ motion
to dismiss those claims.
Westley v. Oclaro, Inc., ---F.Supp.2d ---, 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012).
C.1.c
Shareholders brought class action against corporation, its board chairman and chief
executive officer, and its chief financial officer, alleging false and misleading statements about
the corporation’s fiscal future, in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5. Defendants moved to dismiss. The district court granted defendants’
motion. With regard to alleged misleading statements about good visibility into customers’
needs made by defendants, plaintiffs asserted that the court should not take into consideration the
lack of insider trading by the individual defendants. However, the court determined that it could
consider the “presence of absence of insider trading” as part of its “holistic approach” in
evaluating scietner. As such, there were insufficient facts to support a strong inference of
scienter.
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Luciani v. Luciani, No. 10-CV-2583 JM WVG, 2012 WL 4953110 (S.D. Cal. Oct. 17, 2012).
C.1.c
Plaintiffs filed amended complaint, alleging that defendants engaged in California
securities fraud, federal securities fraud, California insider trading, fraud by a fiduciary and
breach of fiduciary duty. Defendants filed a motion for summary judgment on the basis that
plaintiffs failed to establish admissible evidence of damages due to the alleged fraudulent
nondisclosures. The district court denied the motion. It held that the expert opinion submitted
by plaintiffs provided enough evidence to withstand the motion for summary judgment.
Moreover, the district court found that plaintiffs may recover additional damages, beyond out-ofpocket
damages, under the claims alleged.
In re Novatel Wireless Sec. Litig., No. 08CV1689 AJB RBB, 2012 WL 5463214 (S.D. Cal. Nov.
8, 2012).
C.1.c
Plaintiffs filed class action, alleging that defendants engaged in fraudulent scheme to
inflate company’s stock so that defendants could sell their stock for a profit. Defendants filed a
motion to exclude testimony of plaintiff’s expert pertaining to Rule 10b5-1 trading plans,
pursuant to Federal Rules of Evidence (“FRE”) 403, 702, 703 and 704. The district court denied
defendants’ motion to exclude the expert’s testimony pursuant to FRE 403, 702 and 703 because
the expert’s training and experience provided a sufficient basis for his opinions about the trading
plans, and his discussion of the trading plans went to the weight of his testimony, not
admissibility. The district court granted defendants’ motion to exclude the testimony pursuant to
FRE 704 because the expert offered his legal opinions.
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 475653 (D. Nev. Feb. 14, 2012).
C.1.c
The S.E.C. alleged that defendant engaged in insider trading when he gave his codefendant
confidential information regarding the company’s impending negative announcement
about its stock, which his co-defendant relied on in selling the company’s stock. The S.E.C.
asserted that defendants violated Section 10(b) of the Securities Exchange Act of 1934, Rule
10b-5, and Section 17(a) of the Securities Act of 1933 by engaging in insider trading. Defendant
moved the district court to exclude various items of evidence and anticipated arguments. The
district court held the following: (1) evidence that defendant offered tips regarding nonpublic
information concerning the company at any time other than February 26, 2007 was admissible
because the evidence was relevant to establish defendants’ relationship; (2) the S.E.C.’s expert’s
opinion testimony regarding the co-defendant’s rationale for trading was admissible because it
would give the jury much needed context regarding market conditions and dynamics; (3) the
S.E.C.’s expert’s opinion regarding the co-defendant’s trading strategy and experience was
admissible as to relevant market conditions and whether the co-defendant’s explanations
comport with the reality of the market, but not as to whether the explanations are credible; (4) the
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S.E.C.’s expert’s opinion regarding the co-defendant’s trading was admissible with limiting
instructions to prevent unfair prejudice; (5) evidence or argument relating to the September 2007
phone call between defendants was admissible because it was relevant to show that defendant
was aware of the S.E.C. investigation and improper trading, and that defendants share
information related to the buying and selling of securities; and (6) the admissibility of evidence
or argument relating to pretrial motion practice was tabled for another time.
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 3096646 (D. Nev. July 30, 2012).
C.1.c
The S.E.C. brought a civil enforcement action against defendant, alleging that defendant
engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934,
Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The parties settled all matters in the
case except for the S.E.C.’s motion for a permanent officer and director ban against defendant
pursuant to Sections 20(e) and 21(d)(2) of the Exchange Act. In considering the Patel factors
relevant to determining whether to grant an officer and director ban, the district court found that
(1) defendant’s securities law violation was not egregious, as defendant did not personally gain
any profit from his alleged insider tipping besides sold-out Broadway tickets, for which
defendant paid face value; (2) defendant was not a repeat offender; (3) although defendant was
an executive officer at the time when he traded the insider information, abused his fiduciary
position, and violated his employment agreement and the company’s code of conduct, defendant
did not do so in an effort to defraud investors out of money or otherwise profit at the expense of
shareholders; (4) defendant had a “high degree” of scienter regarding the impropriety of his
conduct; (5) the fact that defendant was able to obtain tickets at face value for a sold-out
Broadway show in exchange for insider information qualified as a pecuniary gain, but the gain
paled in comparison to the monetary benefits gained by other defendants in similar cases; and (6)
there was no evidence that defendant was likely to violate the federal securities laws in the
future. On that basis, the district court held that a permanent officer and director bar was
inappropriate. However, the district court ordered a two year ban in addition to the three years
defendant had already not served as an officer or director, resulting in a total restriction of five
years from the date when the action was first filed.
U.S. v. Ovist, No. 11-CV-00076-BR, 2012 WL 5830296 (D. Or. Nov. 16, 2012).
C.1.c
A grand jury indicted defendant on one count of wire fraud for defendant’s alleged
preparation of fraudulent residential loan applications. Defendant was subsequently charged in a
superseding indictment on three counts of bank fraud and 12 counts of wire fraud. As
background to those charges, the Federal Housing Finance Agency (“FHFA”) filed civil actions
against various financial institutions, alleging that those institutions sold faulty subprime
mortgage-backed securities. Further, the S.E.C. filed a civil action against three senior
executives of Countrywide Financial Corporation alleging fraud and insider trading related to
alleged fraudulent statements made during the loan securitization process, allegations which
resulted in a stipulated settlement without admission of liability. Also, the Board of Governors
90

of the Federal Reserve (“Federal Reserve Board”) entered a cease and desist order and
assessment of civil penalties pertaining to violations by Wells Fargo & Company and Wells
Fargo Financial, Inc. of federal and state rules applicable to home mortgage lending. Defendant
alleged that in the present criminal case, the allegations of FHFA, S.E.C. and Federal Reserve
should be precluded from evidence because the filings were not “statements” within the meaning
of Federal Rule of Evidence (“FRE”) 801 and were irrelevant. The district court concluded that
the allegations were not “admissions by a party opponent” under FRE 801(d)(2) because the
FHFA, S.E.C. and Federal Reserve Board were not the same party as the government for
purposes of the instant action. Further, the allegations were not relevant to defendant’s
misrepresentations. The district court also denied defendant’s motion to dismiss certain counts
of the superseding indictment, and denied as moot the government’s motion in limine to preclude
evidence of the financial institution’s fault.
Prissert v. Emcore Corp., --- F.Supp.2d ---, 2012 WL 4504512 (D.N.M. Sept. 28, 2012).
C.1.c
Shareholders brought derivative class action against corporation and certain officers and
directors, alleging securities fraud and “control person” liability. Defendants moved to dismiss
the complaint, and the district court granted defendants’ motion. With respect to the securities
fraud claim, plaintiffs alleged that one of the individual defendants engaged in insider trading
during the class period. The district court rejected that argument because plaintiffs failed to
establish “any meaningful trading history” to support the alleged suspicious nature of the
transactions, and therefore, failed to create an inference of scienter.
In re Thornburg Mortg., Inc., --- F.Supp.2d ---, 2012 WL 6004176 (D.N.M. Nov. 26, 2012).
C.1.c
Investors brought consolidated class action, alleging that corporation, officers, directors
and underwriters made false or misleading statements in their offering documents, in violation of
the Securities Act of 1933 and the Securities Exchange Act of 1934. Investors moved for final
approval of the proposed settlement, plan of allocation, and certification of class for settlement,
and counsel sought award of attorneys’ fees and costs. In a prior memorandum opinion and
order on plaintiff’s motion for reconsideration, the court found that the “abstain-or-disclose rule”
applied in insider trading cases, but not to plaintiffs’ claims under the Securities Act.
Kinnett v. Strayer Educ., Inc., No. 10-CV-2317-T-23MAP, 2012 WL 933285 (M.D. Fla. Jan. 3,
2012).
C.1.c
Plaintiff brought a securities fraud class action individually and on behalf of a class of
purchasers of for-profit school defendant’s common stock, alleging that defendants violated
Sections 10(b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5. Defendants
moved to dismiss the complaint arguing that plaintiff failed to state a claim for securities fraud
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and failed to satisfy the heightened pleading requirements of Rule 9(b) and the PSLRA. The
district court granted defendants’ motion to dismiss in part because the requisite scienter could
not be inferred from the fact that the individual defendants had sold shares after press releases
announcing strong enrollment numbers, as plaintiff did not demonstrate that any inside
information existed.
Howard v. Nano, No. 11 CV 366 MCR CJK, 2012 WL 3668045 (N.D. Fla. Aug. 25, 2012).
C.1.c
Plaintiff alleged that he and defendant were members of the board of directors for a
company, whereby defendant sent email communications to other board members and the
S.E.C., making false claims that plaintiff engaged in insider trading. The lower court dismissed
the cause of action for libel per se because plaintiff failed to establish personal jurisdiction.
Plaintiff filed a motion for relief from judgment or to alter and amend the judgment. The district
court denied the motion on the grounds that plaintiff did not demonstrate “manifest error of fact
or law” to necessitate reconsideration of the personal jurisdiction issue because the email
communications were not sent to or accessed in Florida.
SEC v. Li, Release No. 3379, Litigation Release No. 22324, 2012 WL 1894168 (Apr. 9, 2012).
C.1.c
An Arizona federal court entered final judgment against former chief executive officer
and director (“CEO”) of corporation. The court ordered the CEO to pay disgorgement plus
prejudgment interest, an insider trading penalty and a civil penalty. The court also imposed an
officer and director bar against the CEO. The S.E.C. previously obtained a permanent injunction
against the CEO prohibiting him from future violations of the securities laws. The S.E.C. also
previously revoked the registration of each class of the corporation’s securities registered under
the Securities and Exchange Act of 1934.
In re H. Clayton Peterson, Release No. 3391, Release No. 67282, Release No. 34-67282,
Release No. AE-3391, 2012 WL 2411469 (June 27, 2012).
C.1.c
The S.E.C. issued an order of suspension of Clayton Peterson. Peterson was convicted of
securities fraud and conspiracy to commit securities fraud for tipping his son with insider
information regarding an impending acquisition. The S.E.C. found that Peterson had been
convicted of a felony pursuant to Rule 102(e)(2) of the S.E.C.’s Rules of Practice. Accordingly,
the S.E.C. suspended Peterson from appearing or practicing before the S.E.C.
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C.1.c
In re John Jantzen, Release No. 472, 2012 WL 5422022 (Nov. 6, 2012).
In the civil action brought by the S.E.C. against defendant and his wife, the District Court
for the Western District of Texas entered a final judgment permanently enjoining defendant and
his wife from violating federal securities laws and ordering disgorgement in the total amount of
$29,374.20 and imposed civil monetary penalties of $26,920.50 each on defendant and his wife.
Subsequently, the S.E.C. issued an order instituting administrative proceedings pursuant to
Section 15(b) of the Securities Exchange Act of 1934. The Division of Enforcement and
defendant filed motions for summary disposition. To determine whether a an associational bar
was warranted, the administrative law judge (“ALJ”) analyzed the well-established public
interest factors listed in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979). Although the
Division requested a permanent associational bar, the ALJ found that defendant had made a
persuasive showing with respect to some of the Steadman factors. Consequently, the ALJ
granted the Division’s motion for summary disposition; denied defendant’s motion for summary
disposition; and barred defendant from associating with a broker, dealer, investment adviser,
municipal securities dealer, transfer agent, or nationally recognized statistical rating organization
for five years.
In re Jilaine H. Bauer, Esq., Release No. 68214, 2012 WL 5493356 (Nov. 13, 2012).
C.1.c
The S.E.C. had issued an order instituting proceedings against defendant, which
temporarily suspended defendant, an attorney, from appearing or practicing before the S.E.C.
based on the findings of the Eastern District of Wisconsin that defendant violated federal
securities laws by engaging in insider trading. Defendant filed a petition requesting that her
temporary suspension be lifted. The S.E.C. found that continuing defendant’s temporary
suspension served the public interest and protected the SEC’s processes because as a licensed
attorney who continued to work in the securities field as a compliance consultant, defendant was
in a position to harm the S.E.C.’s processes if the temporary suspension was lifted and defendant
was permitted to practice before the S.E.C. Accordingly, the S.E.C. denied defendant’s petition
and ordered that the proceeding be set down for a public hearing before an administrative law
judge.
SEC v. Treadway, Litigation Release No. 22251, 2012 SEC LEXIS 433 (Feb. 3, 2012).
C.1.c
A New York federal court entered a final judgment against defendant, an attorney, for
insider trading. The judgment enjoined defendant from violation Sections 10(b) and 14(e) of the
Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3. It also orders defendant to pay
full disgorgement of ill-gotten gains plus prejudgment interest and a civil penalty. The S.E.C.
also issued an administrative order suspending defendant from appearing or practicing before the
S.E.C. as an attorney.
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SEC v. CytoCore, Inc., Litigation Release No. 22260, 2012 SEC LEXIS 537 (Feb. 16, 2012).
C.1.c
An Illinois federal court entered a default judgment against defendant Daniel J. Burns, in
an action filed by the S.E.C. The S.E.C. alleged that Burns, former chairman of the board of
directors of CytoCore, Inc., engaged in insider trading and other illegal acts. The court’s final
judgment enjoined Burns from violations of the Securities and Exchange Acts of 1934 and
Securities Act of 1933, and the rules promulgated thereunder, ordered him to pay disgorgement
plus prejudgment interest, and permanently barred him from acting as an officer or director of a
public company.
SEC v. Woodruff, Litigation Release No. 22271, 2012 SEC LEXIS 664 (Feb. 28, 2012).
C.1.c
A Colorado federal court entered final judgment in a civil action against defendant.
Defendant, without admitting or denying the S.E.C.’s allegations, consented to the entry of a
final judgment that enjoined him from violations of the Security and Exchange Act of 1933 and
the Securities Act of 1933, and the rules promulgated thereunder, ordered him to pay
disgorgement plus prejudgment interest, and imposed a civil penalty. In addition, the judgment
barred defendant from acting as an officer or director of a public company for a period of five
years.
SEC v. Jantzen, Litigation Release No. 22273, 12012 SEC LEXIS 693 (Mar. 1, 2012).
C.1.c
A Texas federal court entered summary judgment against defendants, husband and wife,
for insider trading in violation of the Securities and Exchange Act of 1934. The S.E.C.’s
complaint alleged that the wife, a former assistant to an executive at Dell, learned through an
internal Dell email, material nonpublic information and thereafter tipped her husband to the
inside information. The husband then used this information to illegally profit from trading
securities. The court enjoined the defendants from future violations of the Exchange Act and
ordered them to pay disgorgement plus prejudgment interest. The court deferred final ruling on
the S.E.C.’s request for monetary penalties, pending submission of further briefing by the parties.
SEC v. Keung, Litigation Release No. 22284, 2012 WL 1894130 (Mar. 12, 2012).
C.1.c
A New York federal court entered final judgment against defendant in an insider trading
action involving tipping and trading prior to an announcement of an acquisition. The final
judgment permanently enjoined her from violating Section 10(b) of the Securities and Exchange
Act of 1934 and Rule 10b-5 and ordered her to pay a civil penalty. Defendant consented to the
94

final judgment, without admitting or denying the allegations against her in the complaint.
Defendant also agreed to the issuance of an administrative order barring her from association
with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer
agent, or nationally recognized statistical rating organization and barring her from participating
in the offering of a penny stock, with right to reapply for both after ten years.
SEC v. Acord, Litigation Release No. 22282A, 2012 WL 1894129 (Mar. 12, 2012).
C.1.c
After a two-week trial, a jury found defendant liable for insider of corporate securities
before an announcement of corporate acquisition in violation of Section 10(b) of the Securities
and Exchange Act of 1934 and Rule 10b-5. The jury found another defendant not liable for the
same charge. The guilty defendant was ordered to pay disgorgement plus prejudgment interest
and a civil penalty. Additionally, on December 22 and December 23, 2010, a Florida federal
court entered final judgment of permanent injunctions by consent, against 3 defendants,
including guilty defendant, enjoining those defendants from violations of Section 10(b) and Rule
10b-5. The court ordered defendants to pay disgorgement plus prejudgment interest and a civil
penalty.
SEC v. Hardin, Litigation Release No. 22297, 2012 WL 1894142 (Mar. 19, 2012).
C.1.c
A New York federal court entered final judgment against company in an insider trading
case. The S.E.C. alleged that a former managing director at company engaged in insider trading
on behalf of company hedge fund prior to an announcement of an acquisition. Company agreed
to a final judgment ordering it to disgorge illicit trading profits plus prejudgment interest.
SEC v. Cutillo, Litigation Release No. 2299, 2012 WL 189144 (Mar. 20, 2012).
C.1.c
A New York federal court entered final judgment against defendant. The S.E.C. charged
defendant Michael Kimelman, a securities trader, with trading on inside information regarding an
announced acquisition. Defendant Kimelman consented to the entry of final judgment which
permanently enjoined him from violations of 10(b) of the Securities and Exchange Act of 1934
and Rule 10b-5, and ordered him to pay disgorgement plus prejudgment interest. In a related
S.E.C. administrative proceeding, defendant Kimelman consented to entry of an S.E.C. order
barring him from association with any broker or dealer, investment advisor, municipal securities
dealer or transfer agent, and barring him from participating in any offering of a penny stock.
Additionally, in a related criminal case, defendant Kimelman was found guilty of securities fraud
and conspiracy to commit securities fraud.
95

C.1.c
SEC v. Longoria, Litigation Release No. 22308, 2012 WL 189153 (Mar. 27, 2012).
A New York federal court entered final judgment on consent as to defendant in the
S.E.C.’s insider trading case. The S.E.C. alleged that defendant was a consultant who passed
material nonpublic information about certain companies to other persons. The other persons then
made illegal profits by trading on that information. The final judgment permanently enjoined
defendant from violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule
10b-5. The S.E.C. separately recovered illegal trading profits from defendant’s tippees. In a
parallel criminal action against defendant, she was ordered to pay more than $3 million in
forfeiture and was sentenced to a 48-month term of imprisonment.
SEC v. Adondakis, Litigation Release No. 22325, 2012 WL 1894169 (Apr. 10, 2012).
C.1.c
A New York federal court entered final judgment on consent as to Diamondback Capital
Management LLC (“Diamondback”) in the S.E.C.’s insider trading case. The final judgment
against Diamondback permanently enjoined the firm from violations of the Securities and
Exchange Act of 1934, Rule 10b-5, and the Securities Act of 1933. It further ordered
Diamondback to pay disgorgement plus pre-judgment interest, and ordered Diamondback to pay
a civil penalty.
SEC v. Longoria, Litigation Release No. 22358, 2012 WL 1894201 (May 8, 2012).
C.1.c
A New York federal court entered a final judgment on consent as to Fleishman in the
S.E.C.’s insider trading case. The case alleged insider trading by ten individuals and one
investment advisor entity, for illegally tipping hedge funds and other investors, as well as
illegally trading on material nonpublic information. The S.E.C. alleged that Fleishman, as vice
president of sales of the so-called “expert network” firm, facilitated the transfer of material
nonpublic information to firm consultants and clients. The final judgment permanently enjoined
Fleishman from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, and ordered disgorgement of ill-received profits in the amount of $49,510.00. In a
parallel criminal action, Fleishman was sentenced to 30-month term of imprisonment. Because
he is currently serving his prison term, the S.E.C. did not seek civil penalty in its final judgment.
Fleishman also consented to the entry of an order by the S.E.C. to institute proceedings under
Section 15(b) of the Exchange Act, barring Fleishman from association with any investment
adviser, broker, dealer, municipal advisor, transfer agent, or nationally recognized statistical
rating organization, and from participating in any offering of a penny stock.
96

C.1.c
SEC v. Khan, Litigation Release No. 22364, 2012 WL 1894207 (May 10, 2012).
A Georgia federal court entered a consent order, requiring defendant Georgia-based
doctor, to pay more than double the amount of profits obtained through alleged insider trading of
pharmaceutical company stock. The doctor received material nonpublic information of a tender
offer by a Japanese company to purchase all of the company’s shares. Thereafter, he opened an
online brokerage account to transfer approximately one-third of his liquid net worth, and
purchased shares of the company stock before the public announcement of acquisition. The
doctor sold all of his shares of the stock following the announcement for the profit of $47,171.
The doctor was ordered to pay a total of $100,857.79, representing disgorgement, prejudgment
interest and a civil penalty. The doctor also consented to permanent injunctions against
violations of Section 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5
and 14e-3.
SEC v. Compania Int’l Financiera S.A., et al., Litigation Release No. 22378, 2012 WL 1943783
(May 29, 2012).
C.1.c
A New York federal court granted the S.E.C.’s motion to dismiss without prejudice its
complaint against defendants in a civil action alleging insider trading. The complaint alleged
that defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and
Rules 10b-5 and 14e-3, by trading prior to a public announcement regarding an acquisition
through tender offer. The motion sought to dismiss two of the three defendants, without
prejudice, because the S.E.C. was unable to obtain critical information during the discovery
period. The federal court granted the motion in the “interest of justice.”
SEC v. Peterson, Litigation Release No. 22404, 2012 WL 2457467 (June 28, 2012).
C.1.c
A New York federal court entered final judgment on consent as to H. Clayton Peterson
and his direct and indirect tippees. The S.E.C. alleged that H. Clayton Peterson, former director
of company learned through confidential board meetings that company was about to be acquired
by another corporation. H. Clayton Peterson tipped his son about the acquisition. The son used
this material nonpublic information to trade company securities for his own accounts, his family
members, his investment club and investment clients, and to tip certain friends. One of these
friends used the material nonpublic information to trade shares from his own account, for his
family members and for hedge funds managed by the friends’ registered investment advisory
firm. The final judgments entered permanently enjoined each defendant from violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Additionally H. Clayton
Peterson and his son were ordered to pay disgorgement of the illegal profits generated by the
son’s trading and the trading of his tippees, as well as prejudgment interest. Similarly, the friend
and investment advisory firm were ordered to pay disgorgement of the illicit profits gained. The
97

final judgment also barred H. Clayton Peterson from serving as an officer or director of any
public company. Additionally, the S.E.C. issued an order in a related administrative proceeding
suspending H. Clayton Peterson from appearing or practicing before the SEC as an accountant.
Moreover, the S.E.C. issued an administrative order barring the son and friend from association
with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor,
transfer agent, or nationally recognized statistical rating organization.
SEC v. Dunn, Litigation Release No. 22439, 2012 WL 3224452 (Aug. 8, 2012).
C.1.c
A Nevada federal court barred former executive at Shuffle Master, Inc. from serving as
an officer or director of a public company for five years. The order was based on a 2009
complaint file by the S.E.C. against executive and another individual for insider trading. The
S.E.C.’s complaint alleged that the executive shared material, nonpublic information about
Shuffle Master’s financial condition with another individual, who then used this information to
illegally profit from trading Shuffle Master stock. The S.E.C.’s lawsuit had been previously
settled as to all issues except the officer and director bar issues. The order found that the
executive abused his fiduciary position, and violated his employment agreement and the
company’s code of conduct, by sharing confidential information. The court further found that
the executive was aware that sharing information was improper but chose to ignore company
policy when he divulged the confidential information.
SEC v. Clay Cap. Mgmt., Litigation Release No. 22464, 2012 WL 3801333 (Aug. 31, 2012).
C.1.c
The S.E.C. brought an enforcement action against a New Jersey hedge fund and its
former chief investment officer (“CIO”) for their roles in an insider trading scheme. The S.E.C.
alleged that the former CIO’s brother-in-law and his close friend each tipped confidential
information to the former CIO, who in turn traded on the basis of such non-public information.
The hedge fund and former CIO agreed to have judgment entered against them on consent,
without admitting or denying the S.E.C.’s allegations, and further agreed to disgorge $2 million,
a reduced amount based on the financial conditions of the hedge fund and former CIO.
SEC v. LoBue, Litigation Release No. 22519, 2012 WL 5267548 (Oct. 25, 2012).
C.1.c
The S.E.C. filed an insider trading civil action against defendant, a former director of
store operations at a clothing store, alleging that defendant used material, nonpublic information
about sales and expenses of the company’s stores to purchase the company’s common stock in
advance of earnings announcements. Without admitting or denying the allegations in the
complaint, defendant consented to the entry of a proposed final judgment permanently enjoining
him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5;
98

ordering defendant to pay disgorgement of $60,735.60 plus prejudgment interest of $6,749.33;
and imposing a civil penalty of $60,735.60.
SEC v. Flanagan, Litigation Release No. 22524, 2012 WL 5360953 (Oct. 31, 2012).
C.1.c
In August 2012, defendant, a certified public accountant and former partner at a major
accounting firm, pleaded guilty to one count of criminal securities fraud for engaging in insider
trading after he obtained material, nonpublic information about several of the firm’s clients. On
October 26, 2012, the United States District Court for the Northern District of Illinois sentenced
defendant to twenty-one months of incarceration followed by supervised release of twelve
months and ordered defendant to pay a $100,000 penalty. The criminal charges arose out of the
same facts that were the subject of a civil action and related administrative and cease-and-desist
proceedings, in which the SEC had alleged that defendant violated Sections 10(b) and 14(e) of
the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The administrative action had
found that defendant violated the S.E.C.’s auditor independence rules on seventy-one occasions
by trading in the securities of nine of the firm’s audit clients. Without admitting or denying the
S.E.C.’s allegations and the findings in the administrative order, defendant had consented to the
entry of an order of permanent injunction, to pay disgorgement with prejudgment interest and
civil penalties, and to a denial of the privilege of appearing or practicing before the S.E.C. as an
accountant.
SEC v. Gupta and Rajaratnam, Litigation Release No. 22582, 2012 WL 6726432 (Dec. 27,
2012).
C.1.c
A New York federal court entered a final judgment, on consent, ordering defendant
Rajaratnam to disgorge his share of profits gained and losses avoided as a result of insider
trading, plus prejudgment interest on that amount. Pursuant to the final judgment, defendant
Rajaratnam must pay $1,299,120 in disgorgement and $147,738 in prejudgment interest, for a
total of $1,446,858.
In re Kimelman, 94 A.D.3d 148 (N.Y. App. Div. 2d Dep’t 2012).
C.1.c
The Grievance Committee for the Ninth Judicial District moved to strike an attorney’s
name from the roll of attorneys based upon the attorney’s felony conviction. The attorney, one
of several conspirators who engaged in an insider trading scheme utilizing nonpublic information
provided by certain of the conspirators, was found guilty upon a jury verdict for securities fraud
and conspiracy to commit securities fraud. The New York Appellate Division found automatic
disbarment based on the attorney’s felony conviction and granted the motion to strike the
attorney’s name from the roll of attorneys to reflect the attorney’s disbarment.
99

C.1.c
In re Goldfarb, 96 A.D.3d 12 (N.Y. App. Div. 2d Dep’t 2012).
The Grievance Committee for the Second, Eleventh, and Thirteenth Judicial Districts
moved to strike an attorney’s name from the roll of attorneys, on the theory that the attorney was
automatically disbarred based on his felony conviction. The attorney had engaged in insider
trading by passing material nonpublic information from other attorneys and their clients to a
securities trader who made stock purchases on the basis of such information. The attorney
pleaded guilty to securities fraud and conspiracy to commit securities fraud. He admitted that he
participated in the scheme, knew that the other attorneys involved were likely breaching a
fiduciary duty, and that what he was doing was wrong and illegal. The New York Appellate
division found automatic disbarment based on the attorney’s felony conviction and granted the
motion to strike the attorney’s name from the roll of attorneys to reflect the attorney’s
disbarment.
Steinhardt v. Howard-Anderson, No. C. A. 5878-VCL, 2012 WL 29340 (Del. Ch. Jan. 6, 2012).
C.1.c
Plaintiffs filed a lawsuit on behalf of a class of stockholders of a company alleging that
the company’s directors breached their fiduciary duties in approving a merger at an unfair price.
Defendants moved for sanctions against some of the plaintiffs for trading shares of the
company’s stock on the basis of confidential information obtained in the litigation. The
confidentiality order governing the case prohibited parties and non-parties who receive
confidential discovery material from purchasing, selling, or otherwise trading in the securities of
any company on the basis of such confidential information. After the confidentiality order was
in place and defendants had almost completed their document production, one named plaintiff
and the funds he managed (also named plaintiffs) began short selling the stock of the acquisitive
company. At the time the plaintiff and his funds decided to sell, the plaintiff had been receiving
regular written and oral updates about the litigation from another named plaintiff, whose insights
were based on discussions with plaintiffs’ counsel and the discovery record. The court held that
trading by representative plaintiff-fiduciaries on the basis of nonpublic information obtained
through discovery undermines the integrity of the representative litigation process. Thus, by
trading on nonpublic information obtained through litigation, the named plaintiff and his funds
had breached their fiduciary obligations as representative plaintiffs and violated the
confidentiality order. As a remedy for their improper trading, the court (i) dismissed the named
plaintiff and his funds from the case with prejudice and barred them from receiving any recovery
from the litigation, (ii) required them to self-report to the S.E.C., (iii) directed them to disclose
their improper trading in any future application to serve as lead plaintiff, and (iv) ordered them to
disgorge their trading profits.”
100

C.1.c
Cole v. Patricia A. Meyer & Assoc., APC, 206 Cal. App. 4th 1095 (Cal. App. 2012).
Plaintiff brought malicious prosecution and defamation action against attorneys of record
for the plaintiffs in a prior shareholder action against plaintiff and other directors of a software
company that declared bankruptcy after engaging in accounting fraud. The trial court granted
the anti-SLAPP motions as to some defendants and denied it as to other defendants. The parties
appealed. On appeal, the California Court of Appeals reversed the trial court’s order granting the
anti-SLAPP motion as to some defendants and affirmed the order denying the anti-SLAPP
motion as to the other defendants, finding that plaintiff had shown the requisite likelihood of
prevailing on his malicious prosecution claims against all defendants. There was no probable
cause that plaintiff’s trading patterns and overall trading history were suspicious or that plaintiff
maximized his personal benefit from any undisclosed information, which would evince that
plaintiff had engaged in insider trading.
d. Misrepresentations/Omissions
Automotive Indus. Pension Trust Fund v. Textron, Inc., 682 F.3d 34 (1 st Cir. 2012).
C.1.d
The court granted defendants’ motion to dismiss because the complaint failed to
adequately allege scienter, as required for securities fraud claims under Section 10(b); nothing in
complaint suggested that any named officer believed, or was recklessly unaware, that the
backlog of orders’ significance had been undermined by weakened underwriting standards, sales
to intermediates, or any other flaws on which investors relied.
In re Smith & Wesson Holding Corp. Sec. Litig. 669 F.3d 68 (1 st Cir. 2012).
C.1.d
The court affirmed the grant of summary judgment to defendants on the basis that there
was no material omission or misrepresentation sufficient to support a claim that defendants had
violated Section 10(b) or Rule 10b-5 when, once the downward trend in sales became clear, the
company explicitly acknowledged that its forecasts had been undermined and it offered
preliminary negative figures well before the final numbers were in hand, attributing the decline
to a combination of factors that emerged late in the quarter. The court stated that “whether or not
it was negligent to have remained too sanguine in early September, there is no evidence of
anything close to fraud.”
101

C.1.d
Filing v. Phipps, No. 11–4157, 2012 WL 5200375 (6 th Cir. Oct. 23, 2012).
Plaintiff alleged violation by defendant of Section 10(b) and Rule 10b-5 in relation to
failure to disclose discussions with competitor regarding purchase of corporation. The court
affirmed the grant of summary judgment to the defendant, holding that preliminary discussions
that did not result in an acquisition were not material, and not every business negotiation gives
rise to a legal obligation to disclose.
Nolfi v. Ohio Kentucky Oil Corp., 675 F.3d 538 (6 th Cir. 2012).
C.1.d
The court affirmed a jury verdict against defendant on basis that investor justifiably relied
on misrepresentations by corporation and its officers regarding purchase of what was proposed to
be a 50% share in numerous oil wells despite non-reliance clauses in contract, where investor
had been of frail health and mind, he had trusted officer as friend, neither investor nor his
associates had information regarding corporation’s business model, there was fiduciary
relationship under Ohio law, and officer had initiated most of transactions by approaching
investor and giving him little time to make a decision.
S.E.C. v. Delphi Corp., No. 11–2624, 2012 WL 6600324 (6 th Cir. Dec. 18, 2012).
C.1.d
The court affirmed jury verdict holding chief accounting officer liable for violations of
Section 10(b) and Rule 10b-5 because, with respect to the four transactions at issue, the jury
could have reasonably concluded that the defendant demonstrated a pattern of shielding himself
from the true facts of the transactions by over-reliance on information provided by subordinates
and/or by elevating the form of the transaction over the substance. Therefore, there was
sufficient evidence to support jury’s determination that the defendant acted with scienter as to
the reporting of the transactions.
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9 th Cir. 2012).
C.1.d
The court held that the failure of corporation’s principal to disclose to a then-potential
investor that he was civil defendant in securities fraud case, which involved completely different
company that was unrelated to corporation in which investment was sought except by principal’s
association, and which was unconnected to investment, was not material omission providing
basis for investor’s securities fraud claim.
102

C.1.d
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ----, 2012 WL 66343 (9 th Cir. 2012).
Investors adequately pleaded scienter, under PSLRA, for corporation, chief executive
officer (CEO), and former chief financial officer (CFO), as required to support securities fraud
claims under Section 10(b) and Rule 10b–5; investors’ allegations, viewed holistically, gave rise
to strong inference that corporation, CEO, and CFO were deliberately reckless to truth or falsity
of their statements regarding corporation’s financial results, particularly gross margin
percentages, and inference was cogent and equally as compelling as competing inference that
they were simply overwhelmed with integration following merger. CEO and CFO were handson
managers regarding operational details and financial statements and would have been aware
of merger complications, they received accurate reports that gross margins and earnings were
short of projections, and in response they directed baseless adjustments to financial statements,
failed to further inquire once projections were met, and encouraged employees to engage in
“aggressive” accounting to ensure hitting other financial targets.
S.E.C. v. Smart, 678 F.3d 850 (10 th Cir. 2012).
103
C.1.d
The court affirmed the summary judgment entered against defendant on the basis that he
misrepresented or omitted material facts in connection with offer, sale, or purchase of securities,
and did so with scienter in violation of Section 10(b) and Rule 10b-5, where defendant told
investors that their money would be placed in secure investment vehicles like mutual funds, but
then pooled money into one account and used it to engage in risky financial ventures, make
partial payments to other investors, and cover his and his wife’s personal expenses, and also
ignored investors’ inquiries about status of their funds and provided false accountings.
S.E.C. v. Morgan Keegan & Co., Inc., 678 F.3d 1233 (11 th Cir. 2012).
C.1.d
The court held that for purposes of the materiality element of securities fraud in a SEC
civil enforcement action under Section 10(b) or Rule 10b–5, a misstatement or omission by an
individual broker to an individual investor, as opposed to the public as a whole, may be included
in the analysis of the total mix of information available to the hypothetical reasonable investor.
C.1.d
Embraceable You Designs, Inc. v. First Fidelity Group, Ltd., No. 09–cv–03271, 2012 WL
6012852 (C.D. Cal. Dec. 3, 2012).
The court granted plaintiff summary judgment on Section 10(b) and Rule 10b-5 claims,
holding there was no genuine issue of fact that there were a number of misstatements or
omissions of material facts during the offer and sale of bonds to plaintiff, including an assurance
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
worthless, and one of the defendants had been convicted of aiding and abetting wire fraud and
money laundering.
S.E.C. v. Wilde, No. SACV 11–0315, 2012 WL 6621747 (C.D. Cal. Dec. 17, 2012).
C.1.d
The court granted plaintiff summary judgment on claims that defendants misrepresented
and omitted material facts in connection with the offering and sale of a “prime bank” or “high
yield” investment scheme. The plaintiff presented a comprehensive and largely undisputed set of
documents, declarations, depositions, and admissions showing that there was no genuine issue of
material fact regarding defendants’ violation of federal securities laws and liability for the illgotten
gains obtained through their illegal conduct.
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).
C.1.d
Shareholders failed to allege sufficient facts to show that corporation and its officers and
directors, underwriters, and majority shareholder omitted facts from prospectus that were
necessary to make challenged statements not misleading, as required to state a claim for violation
of Securities Act sections imposing civil liability for misrepresentations in registration
statements and prospectuses, where, despite corporation’s delays in integrating rival company it
acquired, statement that it had already begun to realize synergies from the acquisition was
literally true, integration delays were not inconsistent with the statement, and defendants did
disclose pricing pressures in the prospectus.
C.1.d
Chipman v. Aspenbio Pharma, Inc., No. 11–CV–00163, 2012 WL 4069353 (D. Colo. Sept. 17,
2012).
Motion to dismiss Section 10(b) and Rule 10b-5 claims granted when alleged omitted
information was publicly available and there was no authority that would require a company to
reveal unfavorable, intermediate rulings of a court in a case that did not involve the company
itself.
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F.Supp.2d 249 (D. Conn. 2012).
C.1.d
In denying motion to dismiss, court held that defendant finance company had duty to
disclose, under the Securities Exchange Act of 1934, material information that it was not
conducting initial due diligence of company seeking loan and that it was not appropriately
104

monitoring the loans, contrary to representations the company made in communications to
investors.
Phelps v. Stomber, 883 F. Supp. 2d 188 (D.D.C. 2012).
Wu v. Stomber, 883 F. Supp. 2d 233 (D.D.C. 2012).
C.1.d
Offering to investors in a company which bought residential mortgage-backed securities
on margin was not rendered materially false and misleading, for purposes of Section 10(b) and
Rule 10b–5, by an alleged failure to adequately disclose an increase in the difference between
loan amounts and the market value of loan collateral due to a rise in interest rates that occurred
prior to the offering; failure to use the specific terminology preferred by the investors, i.e.,
“dramatic” and “haircuts,” did not render the disclosures misleading, and information regarding
the interest rates was presented in the context of clear warnings that the company’s business
model was completely dependent on loans, and that even a small increase in the rates could have
devastating results.
S.E.C. v. Merkin, No. 11–23585, 2012 WL 5245561 (S.D. Fla. Oct. 3, 2012).
C.1.d
Summary judgment entered in favor of plaintiff on Section 10(b) and Rule 10b-5 claims
when it was undisputed that defendant authored and published four letters containing false
statements regarding the SEC’s investigation of the issuer.
S.E.C. v. Ehrenkrantz King Nussbaum, Inc., No. 05 CV 4643 (E.D.N.Y. Mar. 15, 2012).
C.1.d
The court granted summary judgment to the plaintiff and held that the defendant made
misrepresentations to various mutual funds when the defendant’s clients’ market timing activity
was stopped by the mutual funds, and defendant then created (or directed the creation of)
multiple mirror accounts with the sole purpose of allowing those clients to continue market
timing without detection.
In re General Elec. Co. Sec. Litig., 857 F.Supp.2d 367 (S.D.N.Y. 2012).
C.1.d
The court held that a subsidiary’s chief operating officer’s statement, “[w]e feel pretty
good about our plans around both collections and our forecast for new volume” was the sort of
vague statement of optimism which was not an actionable misstatement under federal securities
laws.
105

C.1.d
Shenk v. Karmazin, 868 F. Supp. 2d 299 (S.D.N.Y. 2012).
The court granted defendants’ motion for summary judgment on Section 10(b) and Rule
10b-5 claims when the officers and directors of a subscription radio service did not make
materially false statements or omit material facts where service made and kept very specific
promises that were consistent with statements concerning “more choices and lower prices”
resulting from merger of two subscription services.
106
C.1.d
In re Bank of America Corp. Sec., Deriv. and Employee Ret. Income Sec. Act Litig. No. 09 MD
2058, 2012 WL 1353523 (S.D.N.Y. 2012).
The court dismissed Section 10(b) and Rule 10b-5 claims when, at most, the complaint
allegations would only raise an inference that the defendants misjudged the scope of
Countrywide’s potential litigation exposure, and the complaint did not plausibly allege a false
and misleading statement by any defendant regarding the nature, extent or results of preacquisition
due diligence in Countrywide’s litigation and regulatory exposure.
C.1.d
Ross v. Lloyds Banking Group, PLC, No. 11 Civ. 8530, 2012 WL 4891759 (S.D.N.Y. Oct. 16,
2012).
The court dismissed the claims made under Section 10(b) and Rule 10b-5 because the
alleged omissions and misrepresentations were immaterial as broad, optimistic generalizations
about the benefits of an acquisition, and the complaint failed to identify any specific individuals
who knowingly made an alleged misstatement.
C.1.d
S.E.C. v. Greenstone Holdings, Inc., No. 10 Civ. 1302, 2012 WL 1038570 (S.D.N.Y. Mar. 28,
2012).
The court granted summary judgment to the plaintiff, finding defendants liable for
violating Section 10(b) and Rule 10b-5 in connection with false statements made by them about
securities being exempt from registration requirements and their issuance and sale of such
securities.
S.E.C. v. Pentagon Capital Mgmt. PLC, 844 F.Supp.2d 377 (S.D.N.Y. 2012).
C.1.d
After a bench trial, the court held defendant violated Section 10(b) through late-trading
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
critical trading decisions were made well after such time, and advisor-manager was aware its
broker-dealer falsely stamped timesheets to make it appear buy and sell orders had been finalized
by daily pricing time so that mutual funds would give the trades that day’s NAV. Defendant
knew late trading was impermissible and it was obtaining advantage over other investors,
contrary to funds’ rules and Securities and Exchange Commission regulation.
S.E.C. v. Gagnon, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012).
C.1.d
The court entered summary judgment for plaintiff on Section 10(b) and Rule 10b-5
claims when defendant presented investment program as a low-risk, high yield program,
promised investors they would earn “10 to 12.5% on their money per month with No Work and
Little to No Risk!”, and represented he had thoroughly researched those selling the investments
and gave them his stamp of approval. However, he knew one seller was an underemployed auto
worker who sold health supplements for extra income, performed no due diligence, took sellers’
representations at face value without reviewing supporting documents to confirm claims of
exorbitant returns, and failed to disclose that he and sellers were splitting the profits 50/50.
e. Standing
C.1.e
Brodzinsky v. Frontpoint Partner LLC, 2012 WL 1468507 (D. Conn. Apr. 26, 2012).
As shareholders of Human Genome Sciences, Inc., plaintiffs brought a class action suit
against defendants, a group of hedge funds and investments advisors, alleging a violation of
Section 10(b) of the Securities Exchange Act of 1934 in connection with the sale of HGSI stock
based on non-public information. Defendants argued that plaintiffs lacked standing because they
did not purchase shares contemporaneously with any alleged insider sale. Specifically, the
plaintiffs’ purchases occurred approximately two weeks after and two weeks before the time
periods in which defendants made trades based on alleged inside information. The question for
the court was how to interpret the “contemporaneous” requirement, which is not statutorily
defined and has been subjected to differing interpretations in other jurisdictions. The court
rejected the plaintiffs’ argument that “contemporaneous” should span across the time period in
which the alleged trades on inside information were being made. The better interpretation,
according to the court, is that the purchases must be made within a few days of the time the
trades on inside information settle – i.e., typically within a week of the trades.
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F.Supp.2d 249 (D. Conn. 2012).
107
C.1.e
Plaintiffs, investors who incurred losses in an investment fund, brought suit against
defendants for non-disclosures and mismanagement of the fund, alleging they were fraudulently
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
losses because the suit was brought derivatively. Plaintiffs countered that they were asserting
direct claims and therefore had standing based on their assertions of individual harm. The court
noted that there is no clear precedent on whether fraudulent inducement is a direct or derivative
claim. Defendants relied on cases that found that whenever a plaintiff’s harm is due to losses
that are suffered by all shareholders, the plaintiff’s claim is necessarily derivative regardless of
individual losses. Plaintiffs pointed to cases in which fraudulent inducement is held to be a
separate and individual injury, permitting a plaintiff to state a direct claim in addition to a
derivative claim. The court agreed with plaintiffs, finding that fraudulent inducement claims can
be both direct and derivative when plaintiffs suffer an individualized harm not suffered by all
shareholders – namely, when the plaintiff is induced to make its individual purchase or sale.
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012).
C.1.e
Plaintiffs, investors in a Beacon investment fund, brought several class action suits
against individuals and companies associated with the Beacon fund, alleging a violation of
Section 10(b) of the Securities Exchange Act of 1934 in connection with investments with
Bernie Madoff. Certain defendants argued plaintiffs lacked standing because none of the
plaintiffs were induced by those defendants to purchase securities from or sell securities to
Madoff. Instead, these defendants argued, only the Beacon fund had standing because only the
fund made the investments with Madoff. The court rejected defendants’ argument and held that
standing does not require a plaintiff to have personally been induced by the fraud to purchase or
sell a security. Instead, plaintiffs, as direct investors in the fund, were in a “sufficiently close
relationship” with the fund to satisfy the requirement of being “in connection with” the purchase
or sale as required by Section 10(b).
In re Satyam Computer Servs. Ltd. Sec. Litig., 2013 WL 28053 (S.D.N.Y. Jan. 2, 2013).
C.1.e
Plaintiff, a former Satyam employee who participated in certain employee stock option
plans, brought a class action suit asserting violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 in connection with alleged fraud and misstatements by Satyam.
Plaintiff sought to represent a sub-class current and former employees who acquired and
exercised options to purchase Satyam shares through one of Satyam’s five employee stock
options plans pursuant to the allegedly false and misleading statements. Plaintiff participated in
only two of the five options plans, and exercised his options under only one of the plans.
Plaintiff argued he had standing to represent the sub-class because the offering documents
affiliated with each of the five plans were incorporated by reference into the allegedly misleading
registration statements and exercised his options pursuant to Satyam’s annual reports just as
would have been the case for purchasers of any securities during the class period. The court
found that plaintiff did not have standing because a purchaser of securities pursuant to one filing
does not suffer the same injury as a different purchaser who acquires securities pursuant to
108

another filing merely because the two offerings derive from or are incorporated into a common
registration statement.
In re Schering-Plough Corp. / Enhance Sec. Litig., 2012 WL 4482032 (D.N.J. Sept. 25, 2012).
In re Merck & Co. Inc., Vytorin / Zetia Sec. Litig., 2012 WL 4482041 (D.N.J. Sept. 25, 2012).
C.1.e
In these related class actions, plaintiffs, as purchasers of common stock of Schering-
Plough (in one of the suits) or Merck (in the other) asserted violations of Section 10(b) of the
Securities Exchange Act of 1934 in connection with defendants’ suppression and non-disclosure
of a study critical of the effectiveness of defendants’ drug Vytorin. Plaintiffs in the Schering-
Plough suit sought to represent, among others, options traders and preferred stock traders who
traded Schering-Plough securities, despite none of the plaintiffs having purchased any Schering-
Plough options during the class period or incurred a loss on preferred securities issued by
Schering-Plough. Similarly, plaintiffs in the Merck suit sought to represent, among others,
options traders who traded Merck securities, despite three of the four plaintiffs not having traded
any Merck options and the fourth plaintiff conceding he profited from its options trades.
Defendants in both actions argued that plaintiffs did not have standing to bring claims on behalf
of a class that invested in options that plaintiffs themselves did not trade during the class period.
The court found that plaintiffs in both actions had standing on the basis that both option and
stock holders have an interest in proving that stock prices were artificially inflated by the
defendants’ misstatement and omissions.
Freedom Envtl. Servs., Inc. v. Borish, 2012 WL 2505723 (M.D. Fla. June 20, 2012).
C.1.e
Members of Freedom’s board of directors brought suit on behalf of Freedom against the
CEO and stock transfer company alleging violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 based on the loss in stock value due to defendants’ unauthorized
issuance and transfer of shares. The court held that plaintiff did not having standing. First, the
plaintiff, Freedom, was the issuer of the stock and not a purchaser. Second, although the
directors brought the securities claims putatively as the corporate entity Freedom, their claims
are essentially individual claims relating to their individual stock losses. As such, there is no
standing based on the U.S. Supreme Court’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723 (1975), which excluded from standing potential plaintiffs who are related to an issuer who
suffered loss in the value of their investment due to corporate or insider activities in connection
with the change of ownership in the stock. Third, the court found the directors cannot have
standing because they did not allege any sale of securities, and instead alleged only that their
shares were offered in exchange for debt conversion and public relations work.
109

f. Affirmative Defenses
C.1.f
Amarosa v. AOL Time Warner, Inc., 409 Fed. App’x 412 (2d Cir. 2011) (unpublished)
On appeal from a grant of a motion to dismiss, the Second Circuit held, inter alia, that
where an affirmative defense appears on the face of the complaint, it is the appropriate subject of
a motion to dismiss. Here, the defense of no loss causation appeared on the face of the
complaint, and so the district court was correct to grant the motion to dismiss.
S.E.C. v. Gabelli, 653 F.3d 49 (2d Cir. 2011).
C.1.f
On appeal from a grant of a motion to dismiss, Judge Rakoff (sitting by designation) held
that the SEC was not required to plead reasonable diligence in order to survive a motion to
dismiss. That is, because lack of reasonable diligence is an affirmative defense, and the SEC had
pleaded it did not learn of the allegedly unlawful activity until within the 5 year limitations
period.
Costello ex rel. Comdisco Litig. Trust v. Grundon, 651 F.3d 614 (3d Cir. 2011).
C.1.f
Trustee brought claims against former employees to enforce promissory notes. Summary
judgment to trustee was entered, and employees appealed. The Third Circuit vacated and
remanded the lower court opinion. It found, inter alia, that the employees were not required to
bring a private right of action in order to assert defenses under Section 29(b) of the Securities
Exchange Act of 1934, and that the employees were entitled to assert violations of Regulations
G and U as an affirmative defenses. It further found that the Trustee was not entitled to a grant
of summary judgment on the employees’ affirmative defense of Section 10(b) illegality, as the
district court relied on issues not raised by the trustee until its reply. Finally, the Third Circuit
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).
C.1.f
The district court granted a motion to dismiss investors’ Section 20(b) claims under the
Securities Exchange Act of 1934. On appeal, the Sixth Circuit reversed. The investors were not
required to plead lack of good faith. Instead, good faith is an affirmative defense and therefore it
was inappropriate for the lower court to dismiss the complaint for failing to plead lack of good
faith.
110

United States v. Behrens, 644 F.3d 754 (8th Cir. 2011).
C.1.f
United States brought criminal charges under the Securities Exchange Act of 1934. The
defendant pleaded guilty. At sentencing however, he argued that he was entitled to assert the
defense of “no knowledge” under Section 32(a) in order to avoid incarceration. The district
court found that the statute did not allow a party that pleaded guilty to assert the defense. The
Eighth Circuit vacated and remanded the district court’s opinion. It held that a defendant is
permitted to assert the “no knowledge” defense under Section 32(a), given the unambiguous
plain language of Sections 78j(b) and 78ff(a).
United States v. Johnson, 413 Fed. App’x 151 (11th Cir. 2011).
111
C.1.f
On appeal, the Eleventh Circuit held that Section 32 of the Securities Exchange Act was
partial affirmative defense that did not allow for an increase in a penalty beyond the statutory
maximum and thus the defendant was not entitled to have the issue tried to a jury, and the district
court did not err in requiring the defendant to show lack of knowledge by a preponderance of the
evidence.
Easton Cap. Partners, LP v. Rush, No. 09 Civ. 1307(LLS), 2011 WL 3809927 (S.D.N.Y. Aug.
26, 2011).
C.1.f
Investors brought suit against president and CEO alleging, inter alia, violations of
Section 10(b) of the Securities Exchange Act of 1934. Defendant moved for summary judgment,
arguing among other things, that the claims were barred by the statute of limitations, and that the
plaintiff had ratified the investments. The court denied the motion. It found that because the
facts viewed in the light most favorable to the non-movant raised questions as to whether the
affirmative defenses applied, summary judgment was inappropriate.
Farber v. Goldman Sachs Group, Inc., No. 10 Civ. 873(BSJ)(GWG), 2011 WL 666396
(S.D.N.Y. Feb. 16, 2011).
C.1.f
Plaintiff initially filed an action before FINRA alleging, inter alia, violation of Section
10(b) of the Securities Exchange Act of 1934. Defendant successfully argued at FINRA that the
claims should be dismissed based on FINRA Rule 12504(a)(6)(B), which allows claims to be
dismissed where the moving party was not associated with the securities at issue. Subsequent to
dismissal, plaintiff filed suit in federal court, alleging similar claims. The district court
dismissed the claims. It held that because the claims were decided by the FINRA panel, plaintiff
could not raise them in district court in a collateral attack on the arbitration panel decision.
Instead, the plaintiff was required to file a motion to vacate the arbitration award to challenge the
FINRA ruling.

C.1.f
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011).
On motion to dismiss investors’ securities fraud class action, court denied the motion
with respect to the defendants’ affirmative defense of failure to state a claim, as the motion relied
on SEC statements, which were materials not properly before the court on a motion to dismiss.
Stichting Pensioenfonds ABP v. Countrywide Financial Corp., 802 F. Supp. 2d 1125 (S.D.N.Y.
2011).
C.1.f
Investor in mortgage backed security brought claims alleging, inter alia, violations of
section 10(b) of the Securities Exchange Act of 1934. Defendant moved to dismiss, arguing,
inter alia, that the claims were barred by the statute of limitations. The district court granted the
motion. The district court took judicial notice of public press reports, that, together with the
complaint and the documents incorporated into it, showed the claims were barred by the statute
of limitations.
S.E.C. v. Cuban, 798 F. Supp. 2d 783 (N.D. Tex. 2011).
C.1.f
SEC brought enforcement action against defendant alleging, inter alia, violations of
Section 10(b) of the Securities Exchange Act of 1934. Defendant answered and alleged “unclean
hands” as an affirmative defense. SEC moved to strike. The district court held that although
unclean hands was available as an affirmative defense—in disagreement with at least one N.D.
Tex. court—its application was strictly limited. For the defense to be available, the alleged SEC
conduct need be egregious, must occur before the filing of the enforcement action, must cause
the defendant prejudice, and must rise to a constitutional level by showing a direct nexus
between the alleged misconduct and a constitutional injury. The defendant’s allegations did not
rise to the level, and thus the motion to strike was granted.
S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867 (N.D. Tex. 2011).
C.1.f
SEC brought enforcement action against defendant alleging, inter alia, violations of
Section 10(b) of the Securities Exchange Act of 1934. The parties cross-motioned for partial
summary judgment. The court held that because the SEC learned of the operative facts within
the limitations period, the statute of limitations was not tolled due to the doctrine of fraudulent
concealment. However, the parties had agreed to toll claims as of October 30, 2007, thus any
claim which arose 5 years prior to that date was dismissed.
112

C.1.f
Puskala v. Koss Corp., 799 F. Supp. 2d 941 (E.D. Wis. 2011).
Investors brought, inter alia, claims alleging violations of Section 20(a) of the Securities
Exchange Act of 1934. One defendant brought a motion to dismiss, arguing good faith regarding
the alleged unlawful acts. The court found that although an affirmative defense, the defendant
could be successful in his motion if the complaint pleaded sufficient facts to show a good faith
affirmative defense applied. The court, however, denied the motion, finding that although facts
were pleaded that showed the defendant had no knowledge of the violations, the plaintiff pleaded
facts which could lead to a finding of recklessness. This was sufficient to allow plaintiffs to take
discovery on the issue.
Wehrs v. Benson York Group, Inc., No. 07 C 3312, 2011 WL 4435609 (N.D. Ill. Sept. 23, 2011).
C.1.f
Investor brought suit against securities broker, alleging, inter alia, violations of Section
10(b) of the Securities Exchange Act of 1934. Defendants failed to appear and a default
judgment was entered. In relevant part, default judgment against one defendant was vacated as
to damages only. Defendant then argued that he was not liable because plaintiff had both not
mitigated his damages and ratified the transactions at issue. The district court held that because
both issues were affirmative defenses, the defendant waived arguments relying on their
applicability by not answering or otherwise pleading to the complaint.
Yary v. Voigt, No. 11-694 (JNE/FLN), 2011 WL 6791003 (D. Minn. Dec. 27, 2011).
C.1.f
Plaintiffs brought suit alleging, inter alia, violations of Section 10(b) of the Securities
Exchange Act of 1934. Defendant moved to dismiss, arguing several bases for dismissal. The
court found that an affirmative defense of contractual release, though appropriate in some
instances for a motion to dismiss, was not appropriate in the case given that the applicability of
the release was not determinable from the face of the complaint. The plaintiffs had alleged that
they were defrauded by executing the contract containing the release. Secondly, the court found
that the five year statute of repose barred all claims based on acts occurring more than 5 years
before a tolling agreement was entered, which for some claims was apparent from the face of the
complaint.
Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011).
C.1.f
Investors brought a suit alleging, inter alia, violations of Section 10(b) of the Securities
Exchange Act of 1934. Defendant moved to dismiss, arguing that the claims were time-barred in
that the plaintiff knew or should of known of his claims more than 2 years before filing suit. The
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court granted the motion. It found that the court’s previous decisions should have put Allstate on
notice of the defendants’ alleged violations of Section 10(b).
In re Novatel Wireless Sec. Lit., 830 F. Supp. 2d 996 (S.D. Cal. 2011)
C.1.f
Shareholders brought a securities class action alleging fraudulent business practices,
including, inter alia, insider trading in violation of the Section 10(b) of the Securities Exchange
Act of 1934. Defendants argued on summary judgment that the trades-at-issue were made
pursuant to a trading plan, and thus were not actionable under SEC Rule 10b5-1. The Court
denied the defendants’ motion, finding that a disputed issue of fact existed as to whether or not
the sales were an improper use of a Rule 10b5-1 trading window. The trade of 110,000 shares
the day after the stock plan came into effect thus raised a question as to whether those trades
were done with scienter.
Bennett v. Sprint Nextel Corp., No. 099-2122-EFM, 2011 WL 4553055 (D. Kan. Sept. 29, 2011).
C.1.f
Investors brought putative class action against company. Company, in its answer
asserted several affirmative defenses. Investors moved to strike, arguing that the affirmative
defenses lacked factual support in violation of Twombly/Iqbal, or alternatively did not admit or
deny allegations contrary to Federal Rule of Civil Procedure 8. The district court held that,
because of textual and policy reasons, the pleading standards of Twombly/Iqbal did not apply to
affirmative defenses. The court also found that a reference to documents cited in the complaint
did not violate Rule 8. Accordingly, investors’ motion was denied.
Lane v. Page, 272 F.R.D. 581 (D.N.M. 2011).
C.1.f
Shareholders brought a class action lawsuit alleging violations of securities laws.
Corporation answered and asserted several affirmative defenses. Shareholders moved to strike
defenses which did not have supporting facts and those described as “negative” defenses. The
court denied the shareholders’ motion regarding factually unsupported defenses, finding that the
Twombly/Iqbal pleading standards did not apply to affirmative defenses. The court further found
that “failure to state a claim,” as illustrated in Form 30 of the Federal Rules of Civil Procedure,
was a sufficient affirmative defense. Finally, the court struck so-called “negative defenses” that
merely claimed that the shareholders could not prove elements of their claims as redundant, and
struck a preservation of defenses as inappropriate, given Rule 15 and the ability to request leave
to amend the answer.
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C.1.f
Sec. Exch. Comm’n v. Kovzan, 807 F. Supp. 2d 1024 (D. Kan. 2011)
The SEC brought an action against the CFO of a company alleging violations of the
Securities Exchange Act of 1934. The CFO moved to dismiss. The district court granted in part
and denied in part the motion. In relevant part, the district court denied the motion to the extent
the CFO argued that the SEC had not sufficiently pleaded due diligence. The district court found
that the SEC was not required to plead reasonable due diligence beyond the allegation that it had
proceeded with due diligence.
Hochuli v. Delgado, No. 09-23225-CIV, 2011 WL 844240 (S.D. Fla. Mar. 8, 2011)
C.1.f
Investor brought putative class action alleging, inter alia, violations of Section 10(b) of
the Securities Exchange Act of 1934. Defendant asserted an affirmative defense of failure to join
indispensable parties. Specifically, the defendant alleged that failing to bring a claim against the
company—as opposed to the individual—would not allow the court to grant complete relief.
The district court granted the motion to strike. Specifically, the district court found that the
plaintiff could obtain complete relief from the defendant.
2. Section 14
C.2
Blakeslee v. PHC, Inc. (In re PHC, Inc. S'holder Litig.), 2012 U.S. Dist. LEXIS 44616 (D. Mass.
Mar. 30, 2012).
The U.S. District Court for the District of Massachusetts partially granted and partially
denied Defendant’s motion to dismiss claims asserted by Plaintiff Blakeslee for breaches of
fiduciary duties against PHC and the individual Defendants. The Plaintiffs also alleged
violations of Section 14(a) of the Securities Exchange Act of 1934 against PHC and the
Individual Defendants.
Plaintiff Blakeslee originally claimed that the proxy statement for a merger vote was
deceptive and omitted material information. The proxy statement initially addressed, however,
was only a preliminary version. The finalized proxy statement was later filed with the SEC, after
months of review and revision. In a letter to the Court, the Defendants explained that the
finalized version of the proxy statement "reflects numerous material changes that address or
obviate the 'disclosure violations' alleged in Plaintiff's Amended Complaint." Since Blakeslee's
complaint did not allege claims arising from the finalized proxy, the count of his complaint
alleging a violation of Section 14(a) was dismissed without prejudice.
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C.2
IBEW Local 98 Pension Fund v. Central Vermont Public Serv. Corp., 2012 U.S. Dist. LEXIS
36784 (D. Vt. Mar. 19, 2012).
The U.S. District Court for the District of Vermont dismissed Plaintiffs federal securities
law claims without prejudice. Plaintiffs alleged in Count V of their complaint that Defendants
violated Section 14(a) of the Securities Exchange Act by filing incomplete and potentially
misleading proxy statements. The Plaintiffs alleged the omissions were such that a reasonable
shareholder would consider them important in deciding how to vote on the proposed acquisition,
and would view a full and accurate disclosure as significantly altering the total mix of
information made available in the Proxy and in other information reasonably available to
shareholders.
In considering Plaintiffs’ allegation, the court found that Plaintiffs neither identified
specific statements in the Proxy Statement which they contended were false or misleading by
virtue of those omissions, nor explained why they were false or material for the purposes of
satisfying the requirements of the PSLRA. The court stated it would consider the PSLRA in
conjunction with the pleading requirements of Iqbal and Twombly because of how intertwined
Plaintiffs failure to state a claim was with failure to satisfy the heightened pleading standard of
PSLRA. The court found under those standards, although Plaintiffs identified those omissions
they found material, they did not identify any statements which were rendered false or
misleading by virtue of those omissions, which is required to plead a 14(a) violation.
Additionally, the court found that the amended complaint’s unsupported speculation that a
Defendant may have additional, undisclosed conflicts of interest insufficient to state a claim.
Thus, the court dismissed Plaintiff’s count V.
C.2
In re Novell, Inc. S'holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).
The U.S. District Court for the District of Massachusetts granted Defendant’s motion to
dismiss claims asserted by Plaintiffs for violations of Section 14 of the Securities Exchange Act
of 1934. The Defendant Attachmate contended that the Plaintiff had not stated a claim upon
which relief could be granted.
Plaintiffs asserted their 1934 Act claims against Attachmate on two theories: "primary"
liability under § 14(a) and Rule 14a-9(a) for material misstatements and/or omissions in a proxy.
The first theory foundered on Plaintiffs' concession at oral argument that their theory of liability
against Attachmate for material misstatements and/or omissions in Novell’s proxy materials rests
on Attachmate's alleged "ability to control" Novell after the two entered into the merger
agreement. In other words, Attachmate's liability under § 14(a) and Rule 14a-9(a) hinged on it
having control over Novell's proxy materials. Since Plaintiffs' theory of liability against
Attachmate was wholly derivative, Attachmate could not be held liable for a primary violation of
§14(a) or Rule 14a-9(a) without Plaintiffs adequately pleading control of Novell by Attachmate.
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C.2
Bensinger v. Denbury Res. Inc., 2012 U.S. Dist. LEXIS 140801 (E.D.N.Y Sept. 28, 2012).
The U.S. District Court for the Eastern District of New York dismissed Plaintiff’s claim
that Defendants violated Section 14(a) of the Securities Exchange Act of 1934. Plaintiff alleges
that had Defendant used the time period in the proxy statement to value Denbury stock in
connection with the Merger, he would have received a larger number of Denbury shares.
Defendant argues that Plaintiff may not bring his Section 14(a) claim because he was ineligible
to vote on the merger, thus falling outside of the zone of interests 14(a) was designed to protect.
Plaintiff argues that 14(a) protects another voting right that he did have: the right to elect whether
he wanted to receive $50 for each of his Encore shares in all cash, cash and Denbury stock, or all
Denbury stock.
In considering Plaintiff’s Section 14(a) claim, the court stated the kind of voting right the
Plaintiff proposed was not the kind that Congress intended to protect through 14(a). Rather,
Congress aimed to protect corporate suffrage, meaning the right of shareholders to participate in
corporate governance. The proxy statement was not soliciting a proxy with respect to the form of
Plaintiff’s stock payout, and none of the options constituted corporate action. The relevant
corporate action for which proxies were solicited in this case was the proposed merger, and
because Plaintiff lacked a right to vote on the merger, he lacked standing to bring a sec 14(a)
claim. Thus, the 14(a) claim was dismissed.
Shields v. Murdoch, 2012 U.S. LEXIS 133453 (S.D.N.Y. Sept. 18, 2012).
The U.S. District Court for the Southern District of New York denied Defendants’
motion to stay the actions of Plaintiffs Shields, and Iron Workers Mid-South Pension Fund (Iron
Workers) pending resolution of a separate Delaware action also involving Defendants. Plaintiffs
Shields, Stricklin, and Iron Workers filed shareholder derivative actions against the News Corp
Defendants (a group of News Corporation directors and officers), alleging that they violated
Section 14(a) of the Securities Exchange Act of 1934 (among other violations). Another similar
derivative action was filed by other News Corp shareholders, not parties here, in the Delaware
Court of Chancery against the News Corp directors.
In considering Defendants’ motion to stay, the court discussed the Colorado River
Abstention doctrine, stating “the pendency of an action in state court is no bar to proceedings
concerning the same matter in the federal court having jurisdiction…Abstention from exercise of
federal jurisdiction is the exception, not the rule.” The court is required to weigh six factors, with
the balance heavily weighted in favor of the exercise of jurisdiction. The court stated that federal
and state cases are not parallel where the federal action alleges an exclusively federal claim.
Where Plaintiffs alleged that Defendants violated Section 14(a) of the Exchange Act, abstention
would be clearly improper as it is an action exclusively within the jurisdiction of the federal
courts. Application of state law to determine whether the Plaintiffs had adequately shown
demand futility with respect to the 14(a) claims does not require abstention. Federal law supplies
the rule of decision for the elements of the exclusively federal claims, and the futility issue here
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C.2

is not particularly novel or complex. Neither was it persuasive that the Delaware court’s finding
on the demand futility issue would dispose of the instant litigation. The court went on to state
because federal courts have exclusive jurisdiction over Plaintiff’s Section 14(a) claims, they will
not be resolved in the Delaware action, and staying this action in favor of the Delaware action
would thus be improper. Furthermore, the court stated the Defendants had not demonstrated that
Plaintiff’s 14(a) claims were meritless, and in determining abstention under the Colorado river
doctrine, the Court is not required to evaluate the merits of a Plaintiff’s claims.
Finally, the court went on to state that even if the actions were parallel, a stay would not
be appropriate. With respect specifically to the 14(a) claims, staying the federal action would not
avoid piecemeal litigation, because as the Delaware Court of Chancery did not have broad and
comprehensive concurrent jurisdiction to adjudicate the claims asserted in the federal action,
abstention might only serve to encourage piecemeal adjudication of the issues raised in the
federal suit. The court also stated that the fact that federal law supplied the rule of decision for
Plaintiff’s 14(a) claims weighed heavily against abstention. The only factor in favor of abstention
found by the court was that the Delaware action was more advanced. Thus, the court did not
grant Defendants’ motion to stay the 14(a) claims.
Gardner v. The Major Auto. Co., 2012 U.S. Dist. LEXIS 118191 (E.D.N.Y Aug. 21, 2012).
The U.S. District Court for the Eastern District of New York granted Defendants’ motion
to dismiss with respect to Plaintiffs’ claim that Defendants violated Section 14(a) of the
Securities Exchange Act of 1934, and denied the motion with respect to Plaintiff’s breach of
fiduciary claim. On December 30, 2010, Defendant Major circulated a Notice of Special Meeting
for Shareholders to consider a 1-for-3,000,000 reverse split which would render Defendant
Bendell the sole shareholder. The accompanying proxy statement explained that because Bendell
intended to vote in favor of the transaction, its approval was assured, but that a vote was in
Major’s interest because if a majority of unaffiliated stockholders were to approve the
transaction, the company could, in the event it were judicially challenged, use the vote to show
the fairness of the transaction. The proxy statement acknowledged Bendell’s conflict of interest,
but did not disclose his domination of the Board, which recommended a vote in favor of the
proposal. Plaintiffs alleged that Defendants made false statements regarding the fairness of the
transaction in the proxy statement, in violation of Section 14(a) of the Exchange Act and its
regulations. Plaintiffs complain that Bendell abused his fiduciary authority to obtain and approve
an unfairly low price share, by not giving Empire Valuation Consultants more recent financial
information that it requested in making its “Fairness Opinion,” from which the price share was
based on.
In considering Plaintiff’s Section 14(a) claim, the court stated that the Section only
applied to registered securities. The court was not convinced by Plaintiff’s attempt to come under
the statute by saying that Major’s common stock was registered at the time their shares were
purchased, and that Defendants should therefore be held liable as though the stock had never
been deregistered. The court stated neither the Plaintiffs’ brief, nor the court’s own research
yielded any law in support of that interpretation of 14(a). Furthermore, the court found Plaintiffs’
interpretation contrary to the statute’s plain language, which states that 14(a) only governs
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C.2

conduct in respect of any security registered, suggesting once a security is deregistered, its
provisions no longer apply. Thus, the court found no liability under the Exchange Act, and
dismissed the claim.
Gardner v. The Major Auto. Cos., 2012 U.S. Dist. LEXIS 51821 (E.D.N.Y Apr. 12, 2012).
The U.S. District Court for the Eastern District of New York granted Defendants’ motion
to stay discovery pending the outcome of their motion for judgment on the pleadings, and
denying Plaintiff’s motion to compel discovery. The Plaintiffs in this case moved for an order to
compel the Defendants to produce documents and respond to interrogatories served by Plaintiffs
in their initial discovery requests. Defendants cross-moved to stay the discovery pending
resolution of their motion seeking judgment on the pleadings pursuant to Rule 12(c), or dismissal
of the complaint pursuant to 12(b)(6) of the same.
Plaintiffs’ complaint charges the Defendants with violations of Section 14(a) of the
Securities Exchange Act of 1934. The Plaintiffs allege that Defendants: 1) offered a misleading
justification for the buyout transaction, which was designed to benefit Major’s principal officer
and majority shareholder (Defendant Bendell) at the expense of its minority public shareholders
2) failed to create a special committee of disinterested or independent members to evaluate the
fairness of the transaction for the benefit of minority shareholders 3) failed to consider
alternatives to the transaction 5) withheld and failed to consider financial information from the
eighteen months preceding the transaction (resulting in an artificially depressed valuation of the
company); and 6) omitted from their proxy material information regarding Major’s performance
and true value, so as to mislead minority shareholders. Additionally, Plaintiffs complain that the
material omissions in Defendant’s proxy materials violated Section 14(c).
In considering Plaintiff’s motion, the court determined that the automatic stay provision
of the PSLRA mandated a stay of discovery pending the resolution of Defendant’s dispositive
motion, and that both the text of the PLSRA and common sense supported staying discovery
with respect to each of Plaintiff’s three claims. Consistent with the language of the discovery
stay provision, Plaintiffs’ federal securities claim clearly “arose under” the Exchange Act of
1934. Contrary to Plaintiff’s assumption, the statutory text did not draw a distinction between
federal securities claims based on fraud and federal securities claims based on negligence. As
such, the court found that the discovery stay would apply at the very least to the federal securities
claim (and also that it applied to state law diversity claims). Thus, the court granted Defendants’
motion to stay discovery pending the outcome of their motion for judgment on the pleadings, and
denied Plaintiffs’ motion to compel discovery.
In re Still Water Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. Apr. 3, 2012).
The U.S. District Court for the Southern District of New York, granted Defendants’
motion to dismiss claims, under Section 14(a) of the Securities Exchange Act of 1934, asserted
by Plaintiffs fund investors. The ten Defendants were Gerova, a “blank check company,”
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C.2

Stillwater Capital Partners, LLC, the general partner for two investment funds, Stillwater Capital
Partners, Inc., the investment manager for the funds (“collectively SCP”), and various senior
executives. Plaintiffs brought a number of federal and state law claims, alleging that Defendants
mislead investors when the two companies merged, but failed to furnish many material details in
their proxy statements to investors. These details included nondisclosure of three conflicts of
interests related to SCP’s management fees and the nondisclosure of other related party
transactions in which Gerova acquired interests in investments ran by various Gerova insiders,
including the founding director of Gerova and founding board members.
The Section 14 (a) claims ultimately turned on whether the companies were actually
subject to the mandates of Section 14 (a). Gerova claimed to be a foreign private issuer and the
court agreed. Pursuant to 17 C.F.R. § 240.3b-4(c), a foreign private issuer is exempt unless it
meets certain conditions. The court stated that a plain meaning interpretation of the regulation
requires that all two conditions be met before a foreign private issuer loses its exemption status.
The court noted that “Subsection (1) is not phrased as a threshold condition and the word ‘and’
links it with subsection (2),” thus, as a matter of law, Gerova’s failure to meet any parts of
subsection 2 meant that is was a foreign private issuer and as such not subject to Section 14(a)
liability. Additionally, SCP was also not subject to Section 14(a) because the investments were
not subject to Section 12 of the Exchange Act. Pursuant to Section 14(a)’s mandate that it
govern statements with “respect to any security…registered pursuant to section 12 of this title,”
the court found that the proxy statements sent to Plaintiffs concerned shares in securities that
were not registered under Section 12 and thus were not subject to Section 14(a).
Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., 2012 U.S.
Dist. LEXIS 46202 (S.D.N.Y. Mar. 30, 2012).
The U.S. District Court of the Southern District of New York granted in part and denied
in part Defendants’ motion to dismiss Plaintiffs’ putative class action asserting claims for
violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged
that a joint proxy statement related to a merger between offshore oil contractors GlobalSantaFe
Corp. (“GSF”) and Transocean contained false and misleading statements. These statements
involved Transocean’s potential liabilities under environmental laws, Transocean’s false claims
about extensive training and safety programs, and Transocean’s representation that the exchange
price was fair. Defendants assert that Plaintiffs lack standing to bring suit under Section 14(a)
because they did not plead that they were holders of record or entitled to vote on the merger.
In regards to standing, the court stated that “only shareholders who were entitled to vote
on a transaction have standing under Section 14(a) to challenge the proxy materials issued by a
corporation regarding that transaction.” The court found that Plaintiffs met their burden,
demonstrating by a preponderance of evidence that DeKalb Pension Fund had standing through
proffering a fund representative’s sworn declaration. Plaintiff Bricklayers failed to proffer any
facts showing it was eligible to vote or that it retained Transocean shares after the corrective
disclosure began. Thus, the motion to dismiss was granted with respect to Bricklayers.
C.2
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In considering Plaintiffs’ Section 14(a)claims, the court found that Plaintiffs were not
subject to the heightened pleading requirements of PLSRA Section 78u-4(b)(2). Plaintiffs’
fraud-type allegations, including Defendants’ knowingly falsifying statements and their policy of
disobeying safety regulations to boost earnings, were sufficient to bring the Defendants under the
Rule 9(b) standard. The court found that the Plaintiffs did not need to plead that Transocean was
in violation of any specific environmental law or regulation at the time of the merger because of
the breadth of the representations made in the proxy statement.
Corre Opportunities Fund, LP v. Emmis Commc’n Corp., 2012 U.S. Dist. LEXIS 124298 (S.D.
Ind. Aug. 31, 2012).
The U.S. District Court for the Southern District of Indiana denied Plaintiffs’ motion for
a preliminary injunction for various violations including Section 14(a) and (e) of the Securities
Exchange Act of 1934. Defendants acquired Preferred Stock through total return swap (TRS)
transactions and reissued Preferred Stock to a Retention Plan Trust.
In considering the alleged violation of Section 14(a) the court noted the exception set
forth in Rule 14(a)(2), which provided that disclosures required in accordance with proxy
solicitations are not required for any solicitation by a person in respect of securities of which he
is the beneficial owner. In those cases disclosure is not required because voting rights follow the
economics of the stock. The court likened this to the instant TRS transactions, where Defendants
acquired both the economic rights as well as the voting rights of the stock. The court thus held
that the Plaintiffs would not be likely to succeed on their 14(a) claim.
In considering the 14(e) violations, the court found only one of the eight factors from
Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y 1979) supported that a tender offer occurred,
thus Plaintiffs failed to show a reasonable likelihood of success in establishing that Defendants
were required to have filed a tender offer statement before undertaking negotiations with
Preferred Shareholders in October and November 2011. Additionally, Plaintiffs fell short in their
attempt to show they would be likely in establishing it was a misrepresentation for Defendants to
have disclosed in the Schedule TO-I and Form 8K filings submitted before March 2012 only that
they “may elect” to make amendments to the Preferred stock. Defendants could have only acted
with Board authorization, and the board had not yet clearly indicated it would actually make
amendments. The court also held that Plaintiffs were not likely to succeed in establishing that the
statements contained in Defendant’s December 2011 and January 2012 Schedule TO-I filing and
amendments regarding the lack of any then-pending plans, proposals, or negotiations were false
or misrepresentations, as Plaintiffs were not likely to be able to prove that the discussions that
occurred between Emmis and Disney Radio Centro were sufficiently advanced to have triggered
a duty to disclose at the time those filings were made.
The court held that Plaintiffs failed to meet any of the threshold requirements for
injunctive relief, as it would not be likely to succeed on the legal merits of their claim, and also
that they were not likely to suffer any irreparable harm, and they could be compensated by an
award of monetary damages. Finding that, the court declined to address the balance of harms or
C.2
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public interest factors, and found that at this preliminary stage of the litigation, Plaintiffs failed to
show Defendants’ actions contravened the relevant federal securities disclosure laws.
Swanson v. Weil, 2012 US. Dist. LEXIS 138182 (D. Colo. Sept. 26, 2012).
The U.S. District Court for the District of Colorado granted nominal Defendant Janus’s
motion (joined by individual Defendants) to dismiss Plaintiff’s complaint on the basis that
Plaintiff did not make a pre-litigation demand on Janus’ Board of Directors and allegedly failed
to meet the stringent requirements for showing demand futility. The court also granted individual
Defendants’ motion to dismiss Plaintiff’s claims, which included a violation of Section 14(a) of
the Securities Exchange Act of 1934.
In considering Defendants’ motions to dismiss, the court found the Plaintiff did not state
with particularity any effort to obtain the desired action from the directors and the reasons for
obtaining the action or not making the effort. As the Plaintiff did not, the court applied the
demand futility exception defined by the law of the State of incorporation, in this case Delaware.
Specifically related to 14(a), the Plaintiff must plead a material misstatement or omission. The
court found that Plaintiff did not plead facts that created a reasonable doubt that the Committee
violated its policies and metrics in awarding performance. Nor did the Plaintiff raise a reasonable
doubt that the Board applied these metrics in bad faith in awarding the 2010 compensation.
Moreover, the court found that the proxy did not represent that the share price was the sole
measure of performance relevant to executive compensation. The court further stated that
demand is not per se excused for a Section 14(a) claim. Thus, Defendant’s motion to dismiss was
granted by the court.
C.2
Deborah G. Mallow IRA Sep Inv. Plan v. Aubrey K. McClendon, 2012 U.S. Dist. LEXIS 78479
(W.D. Okla. June 6, 2012).
The U.S. District Court for the Western District of Kentucky denied Plaintiffs’ motions
for a preliminary injunction based on alleged violations of Section 14(a) of the Securities
Exchange Act of 1934. The Plaintiffs asserted that Defendants failed to disclose material
information necessary to allow Chesapeake shareholders to cast a fully informed vote of
Chesapeake’s annual meeting of shareholders, and sought to enjoin that meeting.
In considering Plaintiffs’ allegations, the court clarified that despite the Supreme Court’s
recognition that the use of a materially misleading solicitation poses the kind of irreparable
injury to stockholders justifying injunctive relief prior to a shareholder’s meeting, a mere
showing of a materially false solicitation did not prove irreparable harm. In the instant action, the
court found that Plaintiffs did not meet their burden of showing irreparable injury if the
injunction were denied, because Plaintiffs do have an alternate adequate remedy. If the court
were to ultimately conclude that Defendants failed to disclose material information in the 2012
proxy, the court could void the shareholders’ vote on the voting items related to that material
information and order that those voting items be resubmitted to the shareholders. The court also
noted that while SEC action was in no way binding on the court, it did find the SEC’s review and
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clearance of the 2012 Proxy persuasive in deciding this matter. Thus, the court denied Plaintiffs’
motions for a preliminary injunction.
Gottlieb v. Willis, 2012 U.S. Dist. LEXIS 159343 (D. Minn. Nov. 7, 2012).
The U.S. District Court for the District of Minnesota denied Plaintiff’s motion for a
preliminary injunction based on allegations that individual members of Defendant Navarre’s
board of directors, along with Defendant Navarre, violated Section 14(a) of the Securities
Exchange Act of 1934. The Plaintiff alleges that the proxy statement failed to disclose material
information necessary for Navarre’s shareholders to make an informed decision about whether to
approve the issuance of shares necessary for the merger. Defendant Navarre filed a Schedule
14A proxy statement with the Securities and Exchange Commission (SEC), in which it sought
the approval of Navarre’s shareholders to issue the shares necessary to acquire SpeedFC in a
merger. Plaintiff alleged the proxy statement was deficient in that it: 1) failed to disclose certain
financial information, including the companies’ financial forecasts, the amount of cost savings
and other synergies expected to be realized from the merger, and details concerning Roth’s
analysis of the transaction; 2) failed to disclose certain details concerning Roth’s conflict of
interest; and 3) failed to disclose the strategic alternatives that Navarre considered.
In considering the Plaintiff’s request for a preliminary injunction, the court found that the
Plaintiff did not cite a single statement in the proxy statement that was false or misleading, but
rather cited various truthful statements made in the proxy statement and argued that the
Defendant should say more about those subjects. The court stated that materiality was distinct
from the element of a false or misleading statement, and because the Plaintiff did not identify
any such statement in the proxy statement, she had not demonstrated a likelihood of success on
her 14(a) claim. The court further found that while she may suffer irreparable harm as a result of
the merger, the court would potentially inflict irreparable harm by enjoining the merger, which
could impose cost on the participants in the form of lost time value of money, as well as even
jeopardize the transaction. The court found that under those circumstances, and the failure to
show a likelihood of success on the merits (applying to the fiduciary claim as well), the public
interest indicated that her motion be denied. Thus, the court denied Plaintiff’s motion for
preliminary injunction.
Smith v. Robbins & Myers, Inc., 2012 U.S. Dist. LEXIS 164868 (S.D. Ohio Nov. 19, 2012).
The United States District Court for the Southern District of Ohio granted Plaintiff’s
motion for leave to file a second amended complaint. In doing so, the court also denied as moot
Defendant’s motion to dismiss. Defendant’s motion to dismiss was based partially on an
argument that Plaintiff’s allegations in its proposed amended complaint are futile under Section
14(a) of the Securities Exchange Act of 1934 because none of the alleged omissions were
material.
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The court noted that a determination of materiality "requires delicate assessments of the
inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of
those inferences to him and these assessments are peculiarly ones for the trier of fact." Thus, the
court declined to engage in a fact-intensive test and found that for purposes of its inquiry at that
stage in the litigation, Defendants had sufficiently alleged material omissions.
For example, the proposed amended complaint alleged that Defendants omitted critical
information about the strategic alternatives pursued and then abandoned by the Board. The
proposed amended complaint explained that this information was material in the context of other
statements made by Defendants in the Proxy regarding the strategic alternatives and "because
shareholders are entitled to be informed of: (i) stand-alone options that may provide greater longterm
value for shareholders than the consideration offered by NOVI, before they are asked to
vote in favor of the Merger; and (ii) the extent of the Board's consideration of the standalone
options in the context of their consideration of the Merger, necessary for the Company's
shareholders to make a meaningful decision on whether they agreed with the Board's
recommendation in favor of the Merger."
Defendants did not provide any authority supporting a finding that the alleged omissions
were immaterial as a matter of law at that stage in the litigation. Accordingly, the court allowed
Plaintiff to amend the complaint to add Section 14(a) allegations. Finally, Defendants argued
that the additional 14(a) allegations in the proposed amended complaint were futile in connection
with the PSLRA requirement that Plaintiff identify statements in the Proxy which are rendered
false or misleading by virtue of the alleged omissions. However, the proposed amended
complaint identified specific statements in the proxy rendered misleading by each alleged
omission and specifically explained how the alleged omissions made these statements
misleading.
Premium of America v. Save POA, 2012 U.S. Dist. LEXIS 139745 (D. Md. Sept. 27, 2012).
Plaintiff sought declaratory and injunctive relief for alleged violations of Section 14 of
the Securities Exchange Act of 1934 on the grounds that Defendant failed to comply with the
SEC’s filing and delivery rules applicable to proxy solicitations. Plaintiff further alleged that
Defendant failed to comply with the SEC rule prohibiting materially false or misleading
statements and omissions in proxy solicitations. Defendant moved to dismiss for lack of
jurisdiction or for failure to state a claim, on the grounds that Plaintiff’s membership interests
were not registered at the time of Defendant’s solicitation.
The District Court of Maryland held that proxy solicitation rules under Section 14 of the
Securities Exchange Act do not apply when the membership interests in question were not
registered with the SEC. The Court found that because the Exchange Act’s proxy solicitation
provisions and implementing rules only apply to securities that are “registered” under the Act,
Section 14 does not apply to securities that “should” or “ought” or “will” be registered. The
Court accordingly granted Defendant’s motion to dismiss.
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In re Wal-Mart Stores, Inc. S'holder Derivative Litig., 2012 U.S. Dist. LEXIS 167923 (W.D.
Ark. Nov. 27, 2012).
The U.S. District Court for the Western District of Arkansas stayed and administratively
terminated a consolidated shareholder derivative action brought by Plaintiffs against current and
former directors and officers of Wal-Mart, pending the resolution of related state court actions in
the Delaware Court of Chancery. Plaintiffs' complaint alleged breaches of fiduciary duty,
violations of Section 14(a) and 29(b) of the Securities Exchange Act of 1934 (“Exchange Act”),
and claims for contribution and indemnification against the Individual Defendants, all related to
the alleged cover-up of bribes involving a Mexican subsidiary.
Plaintiffs' Exchange Act claim stated that Defendants violated section 14(a) by producing
proxies that "materially misrepresented" the effectiveness of the board's supervision and
oversight and its compliance with Wal-Mart's Statement of Ethics.
In staying the Exchange Act claim, the court noted that Plaintiffs' Exchange Act claim
was, in essence, duplicative of the breach of fiduciary duty claims present in the Delaware
action. They recognized that many courts, including one in their circuit, have held that federal
and state actions are parallel under these circumstances due to the likelihood that the state action,
while not exercising jurisdiction over the 14(a) claim, will effectively dispose of the 14(a) claim
by adjudicating duplicative state law claims that have the same elements and carry the same
evidentiary burdens. The court agreed.
The court reasoned that while the Delaware common law claims and the 14(a) claim
"stem from different sources of law, [they] are substantially the same." The court felt that
Plaintiffs were essentially attempting to litigate the same claim under two similar causes of
action and because both the court and the Delaware Chancery Court would be required to
determine whether Wal-Mart officers made material misrepresentations and/or omissions, the
"disposition of the state claims is 'substantially likely' to dispose of the Exchange Act claims" in
this court.
Louisiana Mun. Police Emps. Ret. Sys. v. Cooper Indust. PLC, 2012 U.S. Dist. LEXIS 148542
(N.D. Ohio Oct. 16, 2012).
The court granted Defendants’ motion to dismiss where Plaintiffs, shareholders of
Cooper Industries PLC (“Cooper”), brought a derivative action against Cooper, Eaton
Corporation (“Eaton”), and other officers challenging Eaton’s acquisition of Cooper and ultimate
formation of New Eaton. They claimed the acquisition deprived them of the proper value for
their shares. New Eaton was formed and registered with SEC. Subsequently, Cooper and Eaton
issued a joint proxy statement. This statement was eventually superseded by a second, more
detailed, proxy statement. Plaintiffs alleged that the Defendants failure to include specific factual
valuation information from the companies’ financial advisors was in violation of Section 14(a) of
the Securities Exchange Act of 1934 and amounted to a misleading proxy statement.
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The court was clear that “an omission of information from a proxy statement will violate
Section 14(a) and Rule 14a-9 only if either the SEC regulations specifically require disclosure of
the omitted information in a proxy statement, or the omission makes other statements in the
proxy statement materially false or misleading.” Plaintiffs plead no facts to meet either of the
conditions. In fact, much of the detailed valuation information they sought was included in the
second proxy statement. Without facts to show that detailed valuation information was required
or the omission of that information created materially false or misleading statements, the
Plaintiffs had no claim. Indeed, “even though a Plaintiff ‘might want more information,’ a
Plaintiff is only entitled to the information required by Rule 14a-9.”
In Re Diamond Foods, Inc., 2012 U.S. Dist. LEXIS 74129 (N.D. Cal. May 29, 2012).
The U.S. District Court for the Northern District of California granted nominal
Defendant’s motion to dismiss for lack of subject matter jurisdiction for Plaintiff’s claim under
Section 14(a) of the Securities Exchange Act of 1934. Plaintiffs allege that the company’s
directors disseminated materially false and misleading proxy statements in 2010 and 2011 in
violation of Section 14(a). Nominal Defendant argues that Plaintiff’s Section 14(a) claim fails as
to the 2011 proxy because it is moot given that the proposed transaction was not consummated 2)
Plaintiffs cannot establish that the proxy was an essential link in the accomplishment of the
proposed transaction and 3) Plaintiffs cannot establish materiality.
In considering the Defendant’s motion to dismiss with respect to Plaintiff’s claims about
the 2011 proxy statement, the court found that Plaintiffs could not state a claim under Section
14(a) because the completed transaction would have been beneficial rather than detrimental to
the company. The court stated an omission for the purposes of Section 14(a) was material if there
was a substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote, which was not the case here where the correct financial results would have
made Diamond shareholders more supportive of the deal.. The court further stated the Section
14(a) claim should be allowed to proceed where the underlying transaction did not go forward
because Plaintiff did not incur expenses responding to the misleading proxy, such as resolicitation
of proxies to correct prior misleading statements. Thus, Plaintiffs could not show
materiality and the 14(a) claim to the extent it was based on the 2011 proxy statement failed.
In considering the 2010 proxy statement, the court found there was no specific
transaction subject to this proxy. The court stated a claim that the reelection of directors was an
essential link to loss-generating corporate action because of the directors’ subsequent
mismanagement could not form the basis of liability under Section 14(a). Thus, the court granted
Defendant’s motion to dismiss.
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In re Finisar Corp., 2012 U.S. District LEXIS 97807 (N.D. Cal. July 12, 2012).
The United States District Court for the Northern District of California dismissed
Plaintiff’s claim of Defendants’ violation of Section 14(a) of the Securities Exchange Act of
1934. Plaintiffs alleged that director Defendants used falsified proxy solicitations to maintain
their positions on the board and, by extension, the “continuation of their unlawful stock option
backdating scheme.” Plaintiffs alleged had shareholders known directors were granting
themselves and others backdated options, they would not have voted to keep them on the board.
Plaintiffs also claim that Defendants used the 2005 proxy statement, which promised that stock
options would be granted at fair market value, to gain approval of the 2005 Stock Incentive Plan,
which shareholders would have rejected had they known all the facts.
In considering Plaintiffs’ allegations, the court found that under the statute of repose, the
only proxy statements in play were those between 2004 and 2006. Because Defendants offered
legitimate explanations for the challenged grants issued in 2005, the only questionable grant
issued during that time was the 2004 grant. However, as Plaintiffs made clear, only the 2005 and
2006 proxy solicitations sought the re-election of directors or the approval of stock plans. Thus,
the court dismissed Plaintiffs’ claim under Section 14(a) without prejudice, because it was
possible that Plaintiffs may be able to allege additional facts regarding the 2004 proxy statement
that would sustain a claim.
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Krieger v. Atheros Communs., Inc., 2012 U.S. Dist. LEXIS 74214 (N.D. Cal. May 29, 2012).
The U.S. District Court of the Northern District of California granted Defendant’s motion
to dismiss claims asserted by Plaintiffs in its first amended complaint (“FAC”) for violations of
Section 11 of the Securities Act of 1933 and Section 14(a) and Rule 14a-9 of the Securities
Exchange Act of 1934. The Defendant, Atheros Communications, Inc. (“Atheros”) contended
that the Plaintiff had not stated a claim upon which relief could be granted.
Atheros argued that Plaintiff's FAC failed to sufficiently allege the necessary elements of
a Section 14(a) claim because the FAC did not allege: (1) that any statement in the Proxy was
rendered false or misleading by the alleged omissions; (2) facts that give rise to a strong
inference of negligence; or (3) loss causation.
As the court noted initially, to state a claim that Defendants made material
misrepresentations or omissions in violation of § 14(a) and Rule 14a-9, Plaintiffs must allege
sufficient facts showing: "(1) a proxy statement contained a material misrepresentation or
omission which (2) caused the Plaintiff injury and (3) that the proxy solicitation itself, rather than
the particular defect in the solicitation materials, was an essential link in the accomplishment of
the transaction." Further, a section 14(a) claim must allege "loss causation," which "requires a
showing that the Defendant 'caused the loss for which the Plaintiff seeks to recover damages.'"
"To show loss causation, a Plaintiff must prove both economic loss and proximate causation. In
well-pleaded §14(a) claims, loss causation connects the proxy misstatements with an actual
economic harm." The complaint must "provide the Defendants with notice of what the relevant
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economic loss might be or of what the causal connection might be between that loss and the
misrepresentation."
The court held that Plaintiff's FAC failed to allege loss causation. First, the court found
that the FAC suggested the reasonable inference that other factors and the timing of the merger,
rather than any misstatement or omission in the proxy statement, caused any alleged loss.
Moreover, the FAC did not connect any proxy misstatements or omissions with an actual
economic harm, noting that "conclusory assertions of loss are insufficient."
Thus, Plaintiff's FAC failed to sufficiently allege "loss causation," a necessary element of
a Section 14(a) claim. Accordingly, Plaintiff's Section 14(a) claim was dismissed. However, this
claim was dismissed without prejudice because it was not apparent that "the pleading could not
possibly be cured by the allegation of other facts." Because of the dismissal on this ground, the
court declined to address the other elements of a Section 14(a), though it strongly hinted that
those allegations were similarly deficient.
Anderson v. McGrath, 2012 U.S. Dist. LEXIS 156625 (D. Ariz. Nov. 1, 2012).
The U. S. District Court for the District of Arizona granted Defendants McGrath, Labine
and Ensigns’ motions in full and granted the D&O Defendants’ (a group of Director and Officer
Defendants) motion in part dismissing Plaintiffs’ claims alleging a violation of Section 14(e) of
the Securities Exchange Act of 1934. Plaintiffs claim that Directors, Officers, and others who
sold securities in Domin-8 (a software company in which Plaintiffs invested) misled investors by
failing to disclose material information and by continuing to sell securities after Domin-8 began
contemplating bankruptcy.
The court found that with respect to the 14(e) claim alleged against the 2006 Board and
Defendant McGrath, an adequate pleading required allegations of misstatements or omissions of
material facts in connection with a tender offer. The court found Plaintiffs did not allege facts
showing any misstatements or omissions were made by the Defendant Directors. Because they
pled no misstatements or omissions, the Court dismissed the claim with respect to the 2006
Board.
St. Louis Police Retirement System v. Clinton H. Severson, 2012 U.S. Dist. LEXIS 152392 (N.D.
Cal., Oct. 23, 2012).
The Northern District of California granted, in part, the motion for preliminary injunction
for a derivative action brought by shareholders, St. Louis Police Retirement System, against
Defendants, Abaxis, Inc. and various officers in their individual capacities for violations of
Section 14(a) of the Securities Exchange Act of 1934. The controversy surrounded the
company’s equity incentive plan, approved by the shareholders, that set the full value award limit
at 500,000 shares. Although Abaxis had exceeded the full value award limit, it filed with the
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SEC and issued to its shareholder a proxy statement that, among other things, sought to eliminate
the full value award limit.
The court used a four prong test for determining whether to issue the preliminary
injunction: “(1) likely success on the merits; (2) likely irreparable harm in the absence of
preliminary relief; (3) that the balance of equities tips in the Plaintiffs favor; and (4) that an
injunction is in the public interest.” Under the test, the court found that the current status of the
shares issued was material and the shareholders needed to provide all materials facts that would
shed light on the purposes or effects of the vote. The fact that this information was contained in
the Company’s 8-K was not relevant; the information should have been presented to the
shareholders in the statement. It held that as a general rule, disclosure deficiencies cannot be
retroactively remedied effectively, thus, there was irreparable harm. In regards to the final to
prongs, the court found no concrete evidence of hardships, such as being delisted by the
NASDAQ, and thus felt the balance favored enjoining. Indeed, “[a] fully informed shareholder
vote in compliance with Section 14(a) of the Securities Exchange Act…is in the best interests of
shareholders and the shareholding public generally.”
In re HP Derivative Litig., 2012 U.S. Dist. LEXIS 137640 (N.D. Cal. Sept. 25, 2012).
The United States District Court for the Northern District of California granted the
Defendants’ motion to dismiss where HP’s former CEO, Hurd, and its board members were the
subject of a shareholders derivative suit related to Hurd’s misconduct while in office and
eventual termination. In 2010, Hurd was accused of sexual harassment by an independent
contractor and HP eventually discovered inappropriate expenses intended to conceal the personal
relationship. Prior to this discovery and Hurd’s eventual release, Hurd’s employment contract
had expired yet the HP board falsely represented in proxy statements that his contract was still in
effect and valid. These representations were then used to re-elect Hurd for another term and
make the final decisions on the Stock Incentive Plan for officers, directors and employees. The
Plaintiffs argued that these misrepresentations on the proxy statement, along with the Board
providing unreasonable compensation and benefits to Hurd in his separation agreement, harmed
the company. They brought multiple claims for waste, breach of fiduciary duty, unjust
enrichment, and misleading proxy statements under Section 14(a) of the Securities Exchange Act
of 1934.
Under Section 14(a), the Plaintiffs were not challenging the affirmative board decision.
“Where a Plaintiff does not challenge an affirmative board decision…the analysis is whether
Plaintiff has pleaded ‘particularized fact[s that] create a reasonable doubt that, as of the time the
complaint is filed, the board of directors could have properly exercised its independent and
disinterested business judgment in responding to a demand.” Furthermore, the court defined
three prongs the Plaintiffs had to allege to state a claim: “(1) Defendants made a material
misrepresentation or omission in a proxy statement; (2) with the requisite state of mind; and (3)
that the proxy statement was the transactional cause of harm which Plaintiff complains.”
Plaintiffs failed to meet prongs (1) and (2) of this three part test. Plaintiff’s alleged that
Hurd’s lack of a contract relieved him of certain obligations under that contract and this fact
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could have been material in the shareholders’ reelection vote and in their stock plan approval.
The court held that Plaintiffs did not plead sufficient facts to show that the misrepresentation was
material since they did not identify the specific obligations nor did they allege facts to show that
a shareholder’s vote would have been affected by knowledge of these obligations. Additionally,
the Plaintiffs alleged no facts to illustrate that a reasonable shareholder would have considered
the contract an important factor in his or her vote. In regards to the stock options, the court
rejected Plaintiffs’ argument that the lack of limitation on the amount of stock options Hurd
could receive, normally limited by the contract, constituted a material misrepresentation. The
Plaintiffs needed to show that the stock options difference would have affected the shareholders’
vote on the stock option plan.
Finally, the court held that Plaintiffs failed to provide any link between the
misrepresentation and the harm. The court rejected the Plaintiffs’ argument that the harm was
the reelection of the Board members, finding that in instances like this one, the financial lose was
a result of mismanagement, not the misleading statement. Indeed, but for the reelection caused
by the misleading proxy statement, the Board members would not have been in office and thus
able to agree to the damaging separation agreement.
In re Wells Real Estate Inv. Trust Sec. Litig., 2012 U.S. Dist. LEXIS 156173 (N.D. Ga. Sept. 26,
2012).
The U.S. District Court for the Northern District of Georgia granted Defendants’
summary judgment motion to dismiss claims asserted by Plaintiff for violations of §14(a) and
Rule 14a-9 of the Securities Exchange Act of 1934. Plaintiff claimed that in connection with an
issuance of shares, the Defendants failed to disclose in their proxy and supplemental proxy that
another company, Lexington, sent letters inquiring about purchasing shares of Wells REIT.
The Defendants moved for summary judgment arguing that the undisputed facts established that
the Plaintiff could not show economic loss and therefore, could not establish loss causation, an
essential element of a § 14(a) claim. Additionally, the Defendants argued that the Lexington
inquiry was immaterial and the Plaintiff could not demonstrate the requisite level of culpability.
The Plaintiff contended that the issuance of shares to the Wells Defendants harmed the
shareholders who were entitled to vote prior to the issuance, and that harm may be valued as the
reduction in those shareholders' equity value resulting from the issuance of $175 million in
shares in return for little or no consideration. The Defendants contended that this injury is one to
the REIT, not the shareholders. The court noted that it had dismissed the derivative claims in this
action due to the Plaintiff's failure to make a pre-suit demand on the REIT board. Therefore, if
the court found that the economic loss alleged by the Plaintiff was really harm to the REIT, as
opposed to a direct harm to individual shareholders, the Defendant would be entitled to summary
judgment on the economic loss issue.
The Plaintiff argued that a federal proxy claim was both a direct and a derivative claim.
The court did not disagree. However, the precise inquiry was whether the economic loss alleged
by the Plaintiff—payment of $175 million in REIT stock for an entity worth nothing—is direct
harm to the shareholders or is derivative in nature, which is, harm to the corporate entity.
Applying Maryland law, the court analyzed whether the shareholders' injury is distinct from that
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suffered by the corporation. The court found the economic loss alleged—the difference between
what was paid for the issuance and its value at that time—was suffered by the company itself and
not directly by individual shareholders. Therefore, the Plaintiff had not met its burden of
pointing to evidence of economic loss. Therefore, the Defendants were entitled to summary
judgment as to a claim for monetary damages.
As to materiality, the court held it was undisputed that the two-tiered pricing contained in
the Lexington letters was not the result of a valuation of the issuance. Instead, it was a
mathematical calculation to reflect the dilutive impact of the issuance of 19,546,302 new shares
— a fact that was specifically told to shareholders in the proxy. Therefore, the court concluded
as a matter of law that disclosure of the Lexington offers would not have altered the "total mix"
of information available to shareholders. Accordingly, the Defendants were entitled to summary
judgment as to materiality of the Lexington Letters.
3. Section 15(c)
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SEC v. Goble, 682 F.3d 934 (11th Cir. May 29, 2012).
The Securities and Exchange Commission (the “Commission”) brought a civil
enforcement action against Richard L. Goble alleging that he directed one of his employees to
record a sham purchase of a money market fund on the company books to manipulate the amount
of reserves his company (the “Firm”) was required to set aside to safeguard consumer assets.
The Commission alleged that Goble violated Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 and aided and abetted violations of Sections 15(c)(3) and 17(a) of the
Securities Exchange Act of 1934.
The United States District Court for the Middle District of Florida (the “District Court”)
found Goble liable on all counts of the complaint. This District Court permanently enjoined
Goble from obtaining a securities license or engaging in the securities business and from
violating Sections 10(b), 15(c)(3), 17(a) of the Exchange Act.
On appeal, the United States Court of Appeals for the Eleventh Circuit (“the Eleventh
Circuit”) reversed the District Court’s finding that Goble had violated Section 10(b) of the
Exchange Act, holding that Goble’s misrepresentation was neither material nor made in
connection with the purchase or sale of securities. Accordingly, the Eleventh Circuit vacated the
portion of the injunction prohibiting Goble from acquiring a securities license or engaging in the
securities business, which was based on the finding of a Section 10(b) of the Exchange Act
violation. The Eleventh Circuit remanded to allow the District Court to whether such an
injunction was appropriate for the aiding and abetting violations.
The Eleven Circuit rejected Goble’s argument that he could not be liable for aiding and
abetting violations of Sections 15(c)(3) and 17(a) of the Exchange Act if he was not liable for
violation of Section 10(b) of the Exchange Act. The Eleven Circuit held that, because there was
no question that the Firm committed the underlying primary violations and that Goble knew of
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and assisted those violations, the District Court did not err in finding Goble liable on the aiding
and abetting counts.
In examining the propriety of the portion of the injunction prohibiting Goble from
violating Sections 15(c)(3) and 17(a) of the Exchange Act, the Eleventh Circuit held that an
injunction using language from those sections was appropriate and would meet the requirements
of Fed. R. Civ. P. 65(d). However, because the injunction issued by the District Court only
references Sections 15(c)(3) and 17(a) of the Exchange Act without setting forth the specific
prohibited conduct, the Eleventh Circuit vacated those portions of the injunction. The Eleventh
Circuit remanded to the District Court for it to draft an injunction such that Goble could identify
from the four corners of the injunction what conduct is prohibited.
SEC v. Morgan Keegan & Co., 678 F.3d 1233, 2012 U.S. App. LEXIS 8966 (11th Cir. 2012).
The SEC alleged that defendant committed securities fraud in violation of the Securities
Exchange Act of 1934, including Section 15(c)(1). The lower court granted defendant’s motion
for summary judgment on the basis that the SEC had failed to show that any of the
misrepresentations or omissions were “material,” as required for liability under Section 15(c)(1).
On appeal, the Eleventh Circuit analyzed the proper test for “materiality,” explaining that “a
misstatement or omission is material if there is a ‘substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having significantly altered
the ‘total mix’ of information made available.’” Applying the “total mix” rule to the facts of the
case, the court rejected the defendant’s argument that the materiality of a misrepresentation
should be evaluated in the context of disclosures to the public as a whole – rather, the court
concluded, the materiality standard “analyzes the ‘total mix’ of information available to a
hypothetical reasonable investor, not just to the public at large.” Thus, the defendant could not
show that its misrepresentations were immaterial merely by showing that they were not made
publicly. Similarly, the court set aside defendant’s argument that a threshold number of
investors must be misled for a misrepresentation to be material. Finally, the court concluded that
it was a highly fact-specific inquiry whether written disclosures rendered oral misrepresentations
immaterial – thus, the question was one for the trier of fact. Upon this reasoning, the court
overturned the grant of summary judgment for the defendant.
SEC v. Madoff, Litigation Release No. 22407, 2012 SEC LEXIS 2040 (S.D.N.Y. June 29, 2012).
The Securities and Exchange Commission (the “Commission”) filed a complaint in Civil
Action No. 12-cv-05100 in the United States District Court for the Southern District of New
York against Peter Madoff, the brother of Bernie Madoff. The Commission charges Peter
Madoff with violating and aiding and abetted violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934 and Section 207 of the Investment Advisers Act of 1940. The
Commission also charges Peter Madoff with aiding and abetting violations of Sections 15(b)(1),
15(c) and 17(a) and Rules 10b-3, 15b3-1 and 17a-3 of the Securities Exchange Act of 1934 and
Sections 204, 206(1), 206(2), 206(4) and 207 and Rules 204-2 and 206(4)-7 of the Investment
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Advisers Act of 1940. The U.S. Attorney’s Office has filed parallel criminal charges against
Peter Madoff.
The Commission alleges that Peter Madoff, who served as Chief Compliance Officer and
Senior Managing Director at Bernard L. Madoff Investment Securities LLC (the “Firm”) from
1969 to December 2008, created false compliance manuals, written supervisory procedures,
reports of annual compliance reviews, and compliance certifications. The Commission further
alleges that, after Bernie Madoff realized in late 2008 that his scheme was on the verge of
collapse, Peter Madoff assisted his brother in identifying the family, friends, and employees to
investor money would be distributed, including withdrawing $ 200,000 account for himself. The
Commission’s complaint seeks, inter alia, permanent injunctions, financial penalties, and a court
order requiring Peter Madoff to disgorge his ill-gotten gains.
SEC v. Ehrenkrantz King Nussbaum, Inc., 05 CV 4643 (DRH) (GRB), 2012 U.S. Dist. LEXIS
35228 (E.D.N.Y. Mar. 15, 2012).
The Securities and Exchange Commission (the “Commission”) commenced an
enforcement action against, inter alia, Brendan E. Murray alleging that he violated Section 17(a)
of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act
of 1934. The Commission also charges Murray with aided and abetted violations of Section
15(c)(1) and 15(b)(7) and Rule 15b7-1 of the Securities Exchange Act of 1934. The
Commission moved for summary judgment on it claims.
The United States District Court for the Eastern District of New York (the “District
Court”) granted the Commission summary judgment on most of its claims. The District Court
found that Murray was the chief executive, sole owner, and only employee of a corporation
formed for the purpose of “becom[ing] involved in the mutual fund industry.” Murray intended
that his company would serve as a conduit for investment advisors engaged in market timing.
Murray created a scheme whereby he used multiple accounts and mirror accounts to shield the
investor identities with the intent of subverting protections that mutual fund families put in place
to prevent market timing. The Court held that this conduct violated Section 17(a) of the
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.
The District Court also held that the Commission “overwhelmingly established” that
Murray had actual knowledge that his brokerage client violated Section 15(c)(1) of the Exchange
Act by using “manipulative, deceptive, or other fraudulent device[s] or contrivance[s]” in
connection with securities transactions. The District Court also found that Murray “provided
‘substantial assistance’ in carrying out that violation.” It, therefore, held that Murray aided and
abetted the violation of Section 15(c)(1) of the Exchange Act.
The District Court, however, found that with respect to the allegation that Murray aided
and abetted violation of Section 15(b)(7) and Rule 15b7-1 of the Exchange Act, Murray
proffered sufficient evidence to create a jury question concerning whether he had actual
knowledge of the primary violation. The District Court, therefore, denied the Commission’s
request for summary judgment on that count.
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Bamert v. Pulte Home Corp., Case No. 6:08-cv-2120-Orl-22GJK, 2012 U.S. Dist. LEXIS
112638 (M.D. Fla. Aug. 10, 2012).
Plaintiffs sued Defendants in connection with the purchase of condominium units and
related management agreements for short-term rentals of their units. Plaintiffs assert federal
claims for sale of unregistered securities, sale of securities by unlicensed persons, and securities
fraud. The United States District Court for the Middle District of Florida (the “District Court”)
accepted the Magistrate’s Report and Recommendation, Bamert v. Pulte Home Corp., Case No:
6:08-cv-2120-Orl-22GJK, 2012 U.S. Dist. LEXIS 112688 (M.D. Fla. Jun. 11, 2012), that the
counts for sale of unregistered securities and securities fraud be dismissed with leave to amend.
The District Court also accepted the Magistrate’s recommendation that the count for sale of
securities by unlicensed persons be dismissed with prejudice because there is no private right of
action under Sections 15(a) or 15(c)(1) of the Securities Exchange Act of 1934.
In re Adams, Securities Exchange Act of 1934 Release No. 67019, 2012 SEC LEXIS 1564
(May 18, 2012).
The Commission issued an order barring Respondent Alan Berkun from association with
a broker-dealer and from participating in an offering of penny stock. The Commission also
ordered him to cease and desist from violations of the antifraud and other provisions of the
securities laws. The Commission instituted proceedings against Respondent on October 18,
2001, alleging that Respondent, while associated with a broker deal, used a variety of fraudulent
tactics to artificially inflate the demand for, and market price of, certain securities. Respondent
defaulted, having failed to answer the Commission’s charges, respond to a dispositive motion
within the time provided, or otherwise defend the proceeding. The Commission, therefore, found
the allegation against him to be true. The Commission ordered Respondent to cease and desist
from committing or causing any violations of Sections 5(a), 5(c), and 17(a) of the Securities Act
of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The
Commission also ordered Respondent to cease and desist from aiding and abetting and causing
violations of Section 15(c)(1) and Rules 15c1-2 and 15c1-8 of the Securities Exchange Act of
1934. Respondent will be barred from association with a broker or dealer and from participating
in an offering of penny stock.
In re Bogar, Securities Exchange Act of 1934 Release No. 67769, 2012 SEC LEXIS 2786
(Aug. 31, 2012).
The Securities and Exchange Commission (the “Commission”) instituted administrative
and cease-and-desist proceedings against Respondents Daniel Bogar, Bernerd E. Young, and
Jason T. Green. Bogar was President, Young was Managing Director of Compliance and Chief
Compliance Officer, and Green was an employee of the same registered broker-dealer and
investment advisor (the “Firm.”) The Commission alleges that the Firm recommended
certificates of deposit issued by its parent company (the “Parent”) to investors as safe and secure
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investments. Specifically, the Firm emphasized that investor funds would be pooled and
invested in a well-diversified portfolio of highly marketable and liquid securities; that the Parent
maintained a comprehensive insurance program; and that the Parent would generate returns to
pay promised yields. In fact, these investments were a Ponzi scheme run by the sole shareholder
of the Parent, who was convicted of numerous criminal charges arising out of this securities
fraud. The Commission alleges that Respondents knew that the Firm’s representations were
untrue when they repeated them in oral and written materials.
The Commission charges Respondents with violation of Section 17(a) of the Securities
Act of 1933; violation of and aiding and abetting violation of Section 10(b) and Rule 10b-5 of
the Securities Exchange Act of 1934; violation of Section 15(c)(1) of the Securities Exchange
Act of 1934; and aiding and abetting and causing violations of Sections 206(1) and (2) of the
Investment Advisers Act of 1940.
In re Ferrer, Securities Exchange Act of 1934 Release No. 66892, 2012 SEC LEXIS 1403
(May 1, 2012).
The Securities and Exchange Commission (the “Commission”) instituted administrative
and cease-and-desist proceedings against Respondents Michael A. Ferrer and Carlos J. Ortiz,
alleging that Respondents misled customers of UBS Financial Services Inc. of Puerto Rico (the
“Firm”) into buying and holding hundreds of millions of dollars in affiliated, non-exchangetraded
closed-end funds (“CEFs”) in 2008 and 2009. Ferrer was the Firm’s Chairman and CEO
from 2003 until October 2009. Subsequently, Ferrer became the Firm’s Vice Chairman. Ortiz
was the Firm’s Managing Director of Capital Markets, supervising, among other things, the
Firm’s CEF trading desk.
The Commission alleges that Respondents falsely misrepresented to customers that CEF
prices were based on market forces such as supply and demand. The Commission also alleges
that Respondents misrepresented the CEF’s liquidity, and failed to disclose that the Firm
controlled the CEF secondary market. Additionally, with Ferrer’s knowledge and Ortiz’s
supervision, the Firm orchestrated a scheme in which it dumped about $35 million
(approximately 75%) of the Firm’s CEF shares, undercutting customer sell orders and enriching
the Firm at its customers’ expense.
The Commission charges Respondents with violation of Sections 17(a)(1), (2), and (3) of
the Securities Act of 1933; Section 10(b) and Rule 10b-5(a), (b), and (c)of the Securities
Exchange Act of 1934; and aiding and abetting violations of Section 17(a) of the Securities Act
and Sections 10(b) and 15(c) and Rule 10b-5 of the Exchange Act.
SEC v. ICP Asset Mgmt., LLC, Litigation Release No. 22477, 2012 SEC LEXIS 2848 (S.D.N.Y.
Sept. 10, 2012).
In June 2010, the Securities and Exchange Commission (the “Commission”) filed a
complaint in Civil Action No. 10-cv-04791 in the United States District Court for the Southern
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District of New York against Defendants ICP Asset Management (the “Firm”), its founder and
president Thomas C. Priore, and several related entities. The Commission alleges that
Defendants engaged in fraudulent practices and misrepresentations that caused the collateralized
debt obligations (CDOs) they managed to overpay for securities and lose millions of dollars.
The Commission also alleges that Defendants improperly obtained fees and undisclosed profits
at the expense of the CDOs and their investors.
On September 6, 2012, the court approved a settlement between the Commission and
Defendants. The final judgment orders Priore to pay disgorgement of $97,337, prejudgment
interest of $215,045, and a penalty of $487,618. The Firm and its holding company are ordered,
on a joint and several basis, to pay disgorgement of $13,916,005 and prejudgment interest of
$3,709,028. The Firm also is ordered to pay a penalty of $650,000. An affiliated broker-dealer
is ordered to pay disgorgement of $1,637,581, prejudgment interest of $ 301,893, and a penalty
of $1,939,474.
Priore also agreed to settle an administrative proceeding against him by being barred
from association with a broker-dealer and from participating in an offering of penny stock. He
has a right to reapply for association or participation after five years.
Defendants also consented, without admitting or denying liability, to permanent
injunctions enjoining them from future violations of the securities laws that they are alleged to
have violated, which include Section 17(a) of the Securities Act of 1933, Sections 10(b) and
15(c)(1)(A) and Rules 10b-3 and 10b-5 of the Securities Exchange Act of 1934, and Sections
206(1), (2), (3), and (4) and Rules 204-2, 206(4)-7 and 206(4)-8 of the Investment Advisers Act
of 1940.
In re Luna, Securities Exchange Act of 1934 Release No. 67864, 2012 SEC LEXIS 2948
(Sept. 14, 2012).
The Securities and Exchange Commission (the “Commission”) instituted administrative
proceedings against Respondent Jose Luis Luna, who held a Series 7 license and was an
operations manager at a registered broker-dealer. The Commission alleges that Respondent
knowingly or recklessly assisted in a scheme to defraud customers by excessively marking up or
marking down structured notes and providing term sheets containing altered prices for the notes.
Respondent has submitted an Offer of Settlement, which the Commission has determined to
accept. On September 4, 2012, the United States District Court for the Southern District of
Florida entered a consent judgment against Respondent in the civil action Securities and
Exchange Commission v. Jose Luis Luna, Case No. 1:12-cv-23131-UU (S.D. FL), permanently
enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section
10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aiding and abetting violations
of Section 15(c) of the Securities Exchange Act of 1934. The Commission also barred
Respondent from association with any broker, dealer, investment adviser, municipal securities
dealer, or transfer agent and from participating in any offering of a penny stock. He may reapply
for association.
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SEC v. Neves, Litigation Release No. 22462, 2012 SEC LEXIS 2759 (S.D. Fla. Aug. 29, 2012).
On August 29, 2013, the Securities and Exchange Commission (the “Commission”) filed
a complaint in Civil Action No. 1:12-cv-23131 in the United States District Court for the
Southern District of Florida against former Miami broker Fabrizio Neves for overcharging
customers approximately $36 million by using hidden markup fees on structured note
transactions. The Commission charges Defendant with violating Section 17(a) of the Securities
Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided
and abetted violations of Section 15(c) of the Securities Exchange Act of 1934. The
Commission seeks disgorgement, financial penalties, and injunctive relief enjoining Defendant
from future violations of the federal securities laws.
The Commission alleges that, from 2006 to 2009, Defendant conducted a scheme to
defraud customers by excessively marking up or marking down structured notes. The
Commission further alleges that Defendant directed another broker to alter the structured note
term sheets by either whiting out or electronically cutting and pasting the markup amounts over
the actual price and trade information, and then sending the forged documents to customers.
Defendant has agreed to the entry of a judgment ordering him to pay disgorgement of
$923,704.85, prejudgment interest of $241,643.51, and a penalty amount to be determined. The
judgment permanently enjoins him from violations of the antifraud provisions of the federal
securities laws.
In re UBS Fin. Svcs. Inc. of P.R., Securities Exchange Act of 1934 Release No. 66893, 2012
SEC LEXIS 1394 (May 1, 2012).
The Securities and Exchange Commission (the “Commission”) instituted administrative
and cease-and-desist proceedings against Respondent UBS Financial Services Inc. of Puerto
Rico, alleging that its former CEO and its Head of Capital Markets made misrepresentations and
omissions of material facts to retail customers regarding the secondary market liquidity and
pricing of affiliated non-exchange-traded closed-end funds (“CEFs”). The Commission alleges
that Respondent falsely represented that CEF prices were based on market forces such as supply
and demand. Respondent also failed to disclose adequately that it was the dominant CEF brokerdealer
and controlled the secondary market. The Commission alleges that, between March and
September 2009, Respondent dumped about $35 million (approximately 75%) of its CEF shares,
undercutting customer sell orders.
The Commission charges Respondent with violation of Section 17(a) of the Securities
Act of 1933; Sections 10(b) and 15(c) and Rule 10b-5 of the Securities Exchange Act of 1934.
Respondent has submitted an Offer of Settlement, which the Commission has determined to
accept. Without admitting or denying the Commission’s allegations, Respondent agreed to cease
and desist from committing or causing any violations of Sections 17(a) of the Securities Act,
Sections 10(b) or 15(c) and Rule 10b-5 of the Exchange Act. Respondent also agreed to pay
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disgorgement of $11,500,000.00, prejudgment interest of $1,109,739.94, and a civil money
penalty of $14,000,000.00 to the Commission. Respondent also agreed to an independent review
of its policies, procedures, and practices, and to adopt and implement the recommendations of
the independent reviewer.
In re MidSouth Capital, Inc., Securities Exchange Act of 1934 Release No. 66828, 2012 SEC
LEXIS 1254 (Apr. 18, 2012).
The Securities and Exchange Commission (the “Commission”) instituted administrative
and cease-and-desist proceedings against Respondents MidSouth Capital, Inc. (the “Firm”) and
Mark D. Hill. The Commission alleges that the Firm willfully violated Sections 15(c)(3) and
17(a)(1) and Rules 15c3-1, 17a-11, and 17a-3 of the Securities Exchange Act of 1934. The Firm
is a registered broker-dealer and a registered investment advisor. At all relevant times, Hill was
the Firm’s Chairman, largest shareholder, and CEO. Hill also served as the Firm’s Financial
Operations Principal.
The Commission alleges that, between 2008 and August 2011, the Firm effected
securities transactions on multiple occasions when it did not have the net capital required under
Section 15(c)(3) and Rule 15c3-1 of the Exchange Act. The Firm continued to effect such
transactions even after being notified by both the Financial Industry Regulatory Authority
(“FINRA”) and the Commission that it should cease effecting all such transactions. The Firm
also failed to timely notify the Commission of its net capital deficiencies and failed to create and
maintain accurate books and records as required under Section 17(a)(1) and Rules 17a-11 and
17a-3 of the Exchange Act. The Commission alleges that Hill willfully aided and abetted the
Firm’s violations.
The Firm and Hill have submitted an Offer of Settlement, which the Commission has
determined to accept. The Commission ordered that the Firm be censured, and that Respondents
cease and desist from committing or causing any violation of Section 15(c)(3) and 17(a)(1) and
Rules 15c-1, 17a-11, and 17a-3 of the Exchange Act. The Commission suspended Hill from
associating with any broker, dealer, or investment advisor and from serving or acting as an
employee, officer, or director of a registered investment company for a period of six months.
Hill is also required to pay a civil penalty of $15,000.
C.3
4. Section 16(b)
C.4
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).
The Supreme Court addressed the question of whether the statute of limitations for
Section 16(b) claims is tolled until the insider files a Section 16(a) disclosure statement in a
situation where the plaintiff knew or should have known of the insider trading through other
means. Section 16(a) requires that insider disclose any changes to their ownership interests, thus
conclusively providing information from which investors can seek to recover short-swing profits
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under Section 16(b). The Supreme Court vacated the Ninth Circuit’s opinion that whether the
plaintiff knew or should have known of the insider’s trading is irrelevant, and that the statute of
limitations was tolled until the insider files the required disclosure statement. After first
observing that the Court was equally divided on the question of whether the two-year statute of
limitations period could be extended in the first place, the Court nevertheless held that the test of
Rule 16(b), under which the limitations period begins with "the date such profit was realized," is
inconsistent with a rule that would toll the period until the disclosure statement was filed. Such a
rule, the Court explained, is also not supported by the background rule of equitable tolling for
fraudulent concealment. Moreover, under the Ninth Circuit’s rule, alleged insiders who for
whatever reason fail to file a disclosure statement would face Section 16(b) liability forever,
which Congress did not intend. The Court reaffirmed the application of ordinary rules of
equitable tolling in evaluating the timeliness of Section 16(b) claims.
Chechele v. Scheetz, 466 Fed. Appx 39 (2nd Cir. 2012).
The district court had dismissed Plaintiff’s complaint as conclusory, in that it failed to
adequately allege that Defendant was part of an ownership group to render him an insider liable
for short-swing profits under Section 16(b). On appeal, Plaintiff argued that the district court
erred in not considering SEC filings to establish Defendant’s insider status. The Second Circuit
noted that the SEC filings were not incorporated into the Complaint and that the district court did
not err in failing to consider them for the truth of their contents. Absent the SEC filings, the
court agreed that the complaint’s allegations regarding the Defendant’s status were conclusory
and could not survive a motion to dismiss. The court also held that it was within the district
court’s discretion to deny Plaintiff leave to amend the complaint where Plaintiff failed to amend
or move to amend within 21 days of the filing of the motion to dismiss, but rather made an
informal request in his opposition to the motion.
Huppe v. WCPS Int'l, Inc., 670 F.3d 214 (2nd Cir. 2012).
The Second Circuit held that a beneficial owner's acquisition of securities directly from
an issuer should not be exempt from the definition of a "purchase" under Section 16(b), under
the “borderline transaction” theory, i.e., that the transaction lacks the "potential for speculative
abuse" that Congress intended to cure through Section 16(b), unless such transactions were
involuntary and the owners lacked access to inside information about the issuer. The court also
held that limited partnerships are beneficial owners for the purposes of Section 16(b) liability,
even though they may have delegated voting and investment control over their securities
portfolios to their general partners' agents.
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Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2nd Cir. 2012).
Defendants appealed a judgment against it for short-swing insider trading prohibited by
Section 16(b). Defendants argued that the transactions at issues were not "purchases" of
securities for purposes of Section 16(b), but rather that the transactions fell within the scope of
the "debt" and "borderline transaction" exceptions to Section 16(b). Defendants also argued that
to the extent the transactions were purchases, the limited partnership defendant should not be
subject to disgorgement, but rather any liability should be limited to only the individual
defendant’s pecuniary interest in the profits at issue. The “debt” exception refers to Section
16(b)’s prescription that its prohibition against short-swing profits does not apply to transactions
involving a security that "was acquired in good faith in connection with a debt previously
contracted." The “borderline transaction” exception refers to a limited exception created by the
Supreme Court and applies to transactions that do not "serve as a 'vehicle for the evil which
Congress sought to prevent -- the realization of short-swing profits based upon access to inside
information.'"
The Court rejected reliance on the “debt” exception, agreeing with the district court’s
finding that the previous debt had not matured at the time the security was acquired, and
therefore could not have formed the basis for the subsequent acquisition. The Court also rejected
reliance on the “borderline transaction” exception, explaining that the exception in the Second
Circuit is narrowly applied to involuntary acquisitions of securities by individuals who do not
have access to inside information. Because Defendants had access to inside information, the
exception did not apply. Finally, the court held that both the limited partnership defendant and
the individual defendant, who held a 99.9% ownership interest in the limited partnership, were
beneficial owners subject to disgorgement.
Donoghue v. Bulldog Investors G.P., 696 F.3d 170 (2nd Cir. 2012).
Defendant argued that the judgment against it for liability for short-swing profits under
Section 16(b) should be vacated for lack of standing because plaintiff failed to demonstrate that
the proscribed short-swing trading caused actual injury to the issuer, which Defendant argued
was necessary to satisfy the case-or-controversy requirement of Article III of the Constitution.
Defendant conceded that it was the beneficial owner of more than 10% of the issuer’s common
stock, and thus was prohibited under Section 16(b) from engaging in any short-swing trading, but
it argued that without evidence of further wrongdoing, the Plaintiff cannot claim any cognizable
injury resulting from that trading. The Second Circuit rejected the Defendants’ arguments,
reasoning that through the enactment of Section 16(b) Congress “created legal rights that
clarified the injury that would support standing, specifically, the breach by a statutory insider of
a fiduciary duty owed to the issuer not to engage in and profit from any short-swing trading of its
stock.” As such, given the derivative nature of a Section 16(b) claim, the short-swing trading by
Defendant caused injury to the issuer that the court held was sufficient for constitutional
standing.
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C.4
Chechele v. Elstain, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).
Plaintiff sought disgorgement of alleged short-swing profits from Defendants under
Section 16(b). Defendants moved to dismiss, arguing that their purchase of the issuer’s stock
was exempted from the prohibition on short swing insider profits because it was authorized by
the issuers’ board and thus permissible under Rule 16b-3. The court, however, found that
Defendants' purchase was not covered by the terms of Rule 16b-3, which as applied to these
facts, exempts only "acquisitions from the issuer" and not acquisitions from intermediaries such
as underwriters, and denied the motion. The court justified its ruling with four reasons. First,
although the underwriting agreement may have been based on the assumption that the
underwriters would sell the shares to the defendants, it did not bind the underwriters to do so.
Second, the court equated the transaction to a “market transaction.” Third, the court rejected
defendant’s analogy between the transactions at issue and a “friends and family” allocation, as to
which the SEC has issued guidance indicating that such acquisitions would not be subject to
Section 16(b) disgorgement. Here, however, the court noted that “the reasoning behind the
SEC's interpretation does not apply here, because the issuer dictated the quantity, price, and date
terms to both the underwriter and the defendants.” Fourth, the court found no reason to depart
from the plain language of the statute and the rules.
Chechele v. Sperling, 2012 WL 1038653 (S.D.N.Y. Mar. 29, 2012).
Plaintiff filed an action pursuant Section 16(b) seeking disgorgement of alleged shortswing
profits realized by Defendants in connection with five prepaid forward sale agreements
(“PFSAs”) for stock of a particular issuer. Defendants had not filed reports to disclose their sale
of such stock during the six months after they purchased those securities. Defendants moved to
dismiss, on the grounds their rights "became fixed and irrevocable" at the time they entered into
the PFSAs, the repurchases of the Defendants' retained shares on the settlement date did not
constitute a "purchase" under Section 16(b). The court agreed with Defendants’ analysis and
ruled that Defendants were not liable under Section 16(b) for disgorgement of their alleged shortswing
profits.
Roth v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524 (S.D.N.Y. 2012).
The court granted Defendants’ motions to dismiss Plaintiff’s shareholder derivative
complaint for recovery of short-swing profits under Section 16(b). Although Defendants
generally owned greater than 10% of the shares of a particular class of issuer’s common stock,
and were therefore subjected to the reporting and disgorgement requirements of Section 16, the
motion to dismiss turned on expiration of “short call options” would be considered a purchase of
the security, since Defendants were no longer statutory insiders at the time the options expired.
The court explained that the equivalent of the sale was the writing of the short call options, and
that the equivalent of the purchase (to be matched with the sale for Section 16(b) purposes) was
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the expiration of the options. Because Goldman was no longer a 10% owner on the date of
expiry, the court found they could not be liable under the plain language of the statute.
Mercer v. Gupta, 880 F. Supp. 2d 486 (S.D.N.Y. 2012).
Plaintiff filed a "short-swing" profits action under Section 16(b) against defendant Rajat
Gupta, a former director of Goldman Sachs, on behalf of nominal plaintiff Goldman Sachs.,
seeking to recover the profits Gupta allegedly realized from passing inside information regarding
Goldman Sachs to Raj Rajaratnam, manager of the Galleon family of hedge funds. The court
granted Gupta’s motion to dismiss, concluding that Plaintiff failed to plausibly allege that Gupta
himself realized profits subject to disgorgement from Rajaratnam's short-swing trades of
Goldman Sachs stock. Further, although Gupta had an interest in the Galleon funds that profited
from the Goldman Sachs trades, Rule 16a-1 creates a "safe harbor" defense for an insider whose
profits come from the portfolio securities held by another entity (like Galleon Voyager in this
case), and the court ruled that Gupta can invoke the safe harbor on the face of the pleadings.
Because Plaintiffs had failed to alleged facts sufficient to establish that Gupta had any actionable
pecuniary interest in Galleon's short-swing trading, the court dismissed the case.
Chechele v. Morgan Stanley, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012).
Defendants moved to dismiss Plaintiff’s complaint, arguing that Plaintiff should have
been aware of the facts underlying her Section 16(b) claim more than two years prior to the filing
of the action. Plaintiff argued that the doctrine of equitable tolling rendered the action timely
filed and that the question of equitable tolling could not be resolved in a motion to dismiss
because it involved a factual dispute that was better resolved after discovery. The court,
however, found that the complaint failed to alleged facts making it plausible to believe that
equitable tolling could apply in the case, and therefore dismissed the cause of action on statute of
limitations grounds. The court noted the Second Circuit’s “stringent standard” for equitable
tolling. Plaintiff’s case relied on information contained in a Schedule 13D -- and in the
Stockholders and Registration Rights Agreements attached as exhibits to the Schedule 13D –
which were publicly filed by the issuer more than three and a half years before Plaintiff filed her
complaint. In addition, the last sale that was alleged to have formed the basis for the short-swing
profits occurred more than two years prior to the filing of the complaint. The court considered
the fact that Plaintiff was represented by attorneys “well-versed in the requirements for a Section
16(b) cause of action” and noted that such attorneys had filed at least fifteen Section 16(b) cases
on behalf of the Plaintiff alone.
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5. Section 17
C.5
SEC v. Goble, 682 F.3d 934 (11th Cir. 2012).
The Securities and Exchange Commission (the “Commission”) brought a civil
enforcement action against Richard L. Goble alleging that he directed one of his employees to
record a sham purchase of a money market fund on the company books to manipulate the amount
of reserves his company (the “Firm”) was required to set aside to safeguard consumer assets.
The primary thrust of the Commission’s action was the allegation that the Goble and his firm
violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and aided and
abetted violations of Sections 15(c)(3) of the Securities Exchange Act of 1934. Specifically,
however, the Complaint also alleged that the firm violated the Exchange Act's books and records
requirements at § 17(a) and Rule 17a-3 thereunder, and that Goble and other officials aided and
abetted these violations. The Eleventh Circuit rejected Goble’s argument that he could not be
liable for aiding and abetting violations of Sections 15(c)(3) and 17(a) of the Exchange Act if he
was not liable for violation of Section 10(b) of the Exchange Act. The Eleventh Circuit held
that, because there was no question that the Firm committed the underlying primary violations
and that Goble knew of and assisted those violations, the District Court did not err in finding
Goble liable on the aiding and abetting counts. In examining the propriety of the portion of the
injunction prohibiting Goble from violating Sections 15(c)(3) and 17(a) of the Exchange Act, the
Eleventh Circuit held that an injunction using language from those sections was appropriate and
would meet the requirements of Fed. R. Civ. P. 65(d). However, because the injunction issued
by the District Court only references Sections 15(c)(3) and 17(a) of the Exchange Act without
setting forth the specific prohibited conduct, the Eleventh Circuit vacated those portions of the
injunction. The Eleventh Circuit remanded to the District Court for it to draft an injunction such
that Goble could identify from the four corners of the injunction what conduct is prohibited.
NASDAQ OMX PHLX, Inc. v. Pennmont Securities, 52 A.3d 296 (Pa. 2012).
The NASDAQ OMX PHLX stock exchange filed suit against Pennmont Securities in
state court to collect disciplinary fines that it imposed under its Exchange Rule 651, which is a
rule enacted pursuant to authority granted under Section 17 of the Securities Exchange Act of
1934. The court held that the exchange had no authority to initiate a private right of action and
even if the exchange did have such authority, the court lacked subject matter jurisdiction on the
grounds of conflict preemption.
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6. Section 18
C.6
Gould v. Winstar Communs., Inc., 692 F.3d 148, 2012 U.S. App. LEXIS 18426 (2d Cir. July 19,
2012).
Plaintiffs alleged that defendants violated Sections 10(b) and 18 of the Securities
Exchange Act of 1934 by making misrepresentations in an audit opinion letter and quarterly
financial statements. In reviewing the district court’s grant of summary judgment for defendants,
the Second Circuit considered whether there was proof of actual reliance sufficient to establish a
question of fact on the Section 18 claim. On the issue of reliance, plaintiff offered the testimony
of a stock purchase advisor who stated that she “probably flipped through every single page” of
the critical Form 10-K report, based on her usual practice. The witness had also testified, “ I
can’t imagine any reason why I would not have looked at this, . . . given our position in the stock
and given what I would normally do.” The court determined that, even assuming that “‘eyeball’
evidence is the sort of actual reliance required by our precedents,” a jury reasonably could infer
that the witness actually reviewed the relevant documents. Accordingly, the court concluded
there was sufficient evidence of actual reliance and reversed the grant of summary judgment on
the Section 18 claim.
7. Section 19(b)
Lickiss v. Financial Industry Regulatory Authority, 208 Cal. App. 4th 1125 (2012).
A broker sued FINRA in an equitable action seeking to expunge his record held within
the Central Registration Depository. The trial court sustained a demurrer filed by FINRA,
without leave to amend, and dismissed the case. On appeal, the broker argued that the trial court
had jurisdiction under FINRA Rule 2080(a), as well as the trial court's equitable and inherent
power to effect the remedy of expungement. The broker argued that the material requested to be
expunged was “ancient,” that it had resulted from the failure of one investment security over
which he had no control or influence, and that his regulatory record otherwise had remained
clean. The appellate court held that the trial court erred by ruling on the demurrer without
addressing the broker's equitable claim. It observed that FINRA Rule 2080(b)(1) was a
procedural rule and did not provide any substantive criteria as to when expungement would be
appropriate; thus, equity did not permit the trial court to rely exclusively on the rule. The broker
stated a valid cause of action by calling upon the trial court's inherent equitable powers to weigh
the equities favoring expungement against the detriment to the public should expungement be
granted.
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8. Margin Violations
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Merrill, Lynch, Fenner, Pierce & Smith Inc., FINRA Case No. 2009018601702 (Aug. 29, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Merrill, Lynch,
Fenner, Pierce & Smith Inc. (“ML”), through one of its brokers, made unsuitable investment
recommendations to elderly and unsophisticated customers, including recommending the use of
margin. As a result of these unsuitable recommendations and the resulting transactions and its
failure to supervise its broker, ML violated NASD Rules 2110, 2310, and 3010(a) and FINRA
Rule 2010.
ML, while neither admitting nor denying the findings, submitted a Letter of Acceptance,
Waiver, and Consent. FINRA censured ML, and assessed a fine of $400,000, which included
disgorgement of commissions received from the violating conduct.
Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Case No. 2008014187701 (June 28, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Merrill Lynch,
Pierce, Fenner & Smith, Inc. (“ML”) had failed to send margin risk disclosure statements to
customers who opened certain accounts in which margin trading was permitted. The failure to
send these disclosure statements resulted from a coding issue that stopped the delivery of ML’s
welcome kits to these customers when they opened the accounts. This failure constituted a
violation of NASD Rules 2110, 2341, and 3010 and FINRA Rules 2010 and 2264.
For these and other violations, ML, while neither admitting nor denying the findings,
entered into a Letter of Acceptance, Waiver, and Consent. FINRA censured ML and assessed a
$2,800,000 fine.
Biremis Corp. and Peter Beck, FINRA Case No. 2010021162202 (June 20, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that the Biremis
Corporation (“Biremis”) permitted day trading to occur in cash accounts instead of margin
accounts. Further, Biremis failed to establish a margin system or a supervisory system to
monitor compliance with margin maintenance rules applicable to firms dealing with day trading
activities, resulting in a failure to calculate intraday margin requirements and to issue margin
calls for day trading accounts. This conduct violated NASD Rules 2520(f)(8)(B), 3010, and
2110, and FINRA Rule 2010. Peter Beck (“Beck”), the CEO of Biremis during the relevant time
period, violated NASD Rules 2110 and 3010(a) and FINRA Rule 2010 by his failure to supervise
Biremis and ensure its compliance with margin requirements.
In response to these and other violations, Biremis and Beck, while neither admitting nor
denying the findings, submitted a Letter of Acceptance, Waiver, and Consent. Biremis
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consented to expulsion from FINRA membership, and Beck consented to a bar from association
with any FINRA member firm.
FINRA Dep’t of Enforcement v. Brookstone Secs., Inc., Antony Lee Turbeville, Christopher Dean
Kline, and David William Locy, FINRA Disciplinary Proceeding No. 2007011413501 (May 31,
2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Antony Lee
Turbeville (“Turbeville”), who was the majority owner and CEO of Brookstone Securities, sold
complex collateralized mortgage obligations (“CMOs”) to unsophisticated investors on margin,
without explaining the risks of such an investment strategy. FINRA found that to the contrary,
Turbeville assured his customers that their investments were safe, and would grow regardless of
changes in interest rates, even though the use of margin with these investments would only be
appropriate for a sophisticated investor who wished to speculate. Dean Kline (“Kline”) also
worked at Brookstone Securities, and FINRA found that he too had sold CMOs to
unsophisticated customers on margin, without explaining the risks of doing so.
David Locy (“Locy”) was Brookstone Securities’ compliance manager. FINRA found
that he had failed to properly supervise Turbeville and Kline’s CMO-trading activities.
Based on these and other findings, a FINRA Extended Hearing Panel determined that
Brookstone Securities, Turbeville, and Klein violated Section 10(b) of the Securities Exchange
Act, SEC Rule 10b-5, and NASD Rules 2110, 2120, and 2310(a). The panel also determined
that Brookstone and Locy violated NASD Rules 2510(c) and 2110, based on failure to review
discretionary accounts, and that Brookstone, Turbeville, and Locy violated NASD Rules 3010(b)
and 2110 by failing to supervise customer CMO accounts and transactions.
For these and other violations, Brookstone Securities was censured, fined a total of
$1,000,000, and ordered to pay approximately $1,600,000 in restitution; Turbeville and Klein
were banned from associating with any FINRA-regulated firm in any capacity, and held jointly
and severally liable for Brookstone Securities’ restitution to their respective customers; and Locy
was banned from acting in any supervisory or principal capacity for any FINRA-regulated firm
and from acting in any capacity for such a firm for two years, and fined $25,000.
Citigroup Global Markets, Inc., FINRA Case No. 2008012808101 (May 15, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Citigroup Global
Markets, Inc. (“CGMI”) permitted traders to re-price mortgage-backed securities held in
customer accounts, without establishing any supervisory procedures to oversee the re-pricing or
to ensure that the margin requirements in those accounts were properly changed to reflect the repricing.
While CGMI had guidance for applying margin haircuts to collateral in these accounts,
CGMI did not establish supervisory policies and procedures to implement that guidance, and did
not document any supervision of those margin haircuts. CGMI also failed to show that it had
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issued appropriate margin calls or collected the required margin for customer accounts. This
conduct constituted a violation of SEC Rules 17a-3(a)(8) and 17a-4, and NASD Rules 3010,
3110, and 2110.
For these and other violations, CGMI, while neither admitting nor denying the findings,
submitted a Letter of Acceptance, Waiver, and Consent. CGMI consented to censure and
imposition of a fine of $3,500,000.
FINRA Dep’t of Enforcement v. Genesis Securities, LLC and William C. Yeh, FINRA
Disciplinary Proceeding No. 2009021082501 (May 15, 2012)
The Financial Industry Regulatory Authority (“FINRA”) found that Genesis Securities,
LLC and its CEO and majority owner, William Yeh (“Yeh”), established master account
arrangements to permit customers to act as unregistered broker-dealers. Among the conduct
FINRA found Genesis Securities and Yeh had engaged in was that they had permitted
subaccounts—that is, their unregistered broker-dealer customers’ customers—to trade as pattern
day traders without maintaining minimum equity amounts and while exceeding the accounts’
maintenance margin excess. This conduct constituted violations of NASD Rules 2520 and 2110
and FINRA Rule 2010.
In an Order Accepting Offer of Settlement stemming from the above and many additional
violations, Genesis Securities was expelled from FINRA and Yeh was banned from associating
with a FINRA member in any capacity.
Scottrade, Inc., FINRA Case No. 2010021776501 (May 11, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Scottrade, Inc. had
used a software platform for its customers’ accounts that improperly assessed the price of
securities for the purposes of calculating pattern day traders’ buying power and margin
requirements. Instead of using the execution price of a security in a transaction to calculate the
reduction in a an account’s buying power, Scottrade’s software used the security’s price at the
close of the previous trading day. This conduct constituted a violation of NASD Rules
2520(f)(8)(B)(iv) and 3010.
For these and other violations, Scottrade, while neither admitting nor denying the
findings, submitted a Letter of Acceptance, Waiver, and Consent. FINRA censured Scottrade,
and fined Scottrade $250,000.
Michael Douglas Venable, FINRA Case No. 2010021688101 (Mar. 14, 2012).
The Financial Industry Regulatory Authority (“FINRA”) found that Michael Venable
(“Venable”) had recommended unsuitably speculative investments to unsophisticated customers
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with conservative risk tolerances, and compounded the risk to the customers by investing on
margin without informing them he would do so. This conduct constituted a violation of NASD
Rule 2310, NASD IM-2310-2, and FINRA Rule 2010.
Venable, while neither admitting nor denying the findings, submitted a Letter of
Acceptance, Waiver, and Consent. For these and other violations, Venable was barred from
employment or association with any FINRA-regulated firm, in any capacity.
FINRA Dep’t of Enforcement v. Richard J. Buswell and Herbert S. Fouke, FINRA Disciplinary
Proceeding No. 2009017275301 (Jan. 4, 2012).
A hearing officer for the Financial Industry Regulatory Association (“FINRA”) found, in
a Default Decision, that Richard Buswell (“Buswell”) had made unsuitable investment
recommendations to his customers, using a strategy that employed excessive trading, use of
margin, and concentration of investments. This strategy was inconsistent with the objectives and
financial conditions of Buswell’s customers. This conduct constituted a violation of NASD
Rules 2110 and 2310, and FINRA Rule 2010.
For these and other violations, a FINRA Hearing Officer determined in a Default
Decision that Buswell should be banned from associating with any FINRA member firm.
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D. Liabilities under the Securities Litigation Reform Act of 1995
1. Pleading
In re L & L Energy, Inc. Securities Litigation, 2012 WL 6012787 (W.D.Wash.,2012 December
03, 2012).
Shareholder brought securities-fraud class action against mining corporation and its
officers and directors, alleging defendants intentionally misled the investing public by
overstating the corporation's consolidated revenues and falsely claiming ownership of certain
mining interests. Defendants moved to dismiss. Court held that Shareholder's allegations failed
to raise strong inference of falsity with respect to revenue and income statements in corporation's
federal securities filings, as required under PSLRA. In order to satisfy the PSLRA's scienter
pleading requirement, plaintiff must allege that defendants engaged in knowing or intentional
conduct, but simply alleging that statements were knowingly false or that defendants were
deliberately reckless is not enough, rather, such allegations must be supported with references to
specific facts, events, documents, and/or reports. The court further stated that in order to have a
securities-fraud claim under the PSLRA, plaintiff must allege a causal connection between
defendants' material misrepresentations or omissions and plaintiff's loss, and although no special
pleading standard applies, the allegations of the complaint must give rise to an inference that,
once the truth became known, the value of plaintiff's shares dropped significantly.
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Ouwinga v. Benistar 419 Plan Services, Inc., 694 F.3d 783 (6th Cir., 2012).
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Court held that the district court erred in relying on a document whose validity was in
question in dismissing a claim brought pursuant to PSLRA, alleging that insurance companies,
attorneys, and insurance agents conspired to defraud employers into adopting purported taxdeductible
welfare benefit plan that purchased variable life insurance policies that qualified as
securities. The Court explained that while documents integral to the complaint may be relied
upon on a motion to dismiss for failure to state a claim, even if the documents are not attached or
incorporated by reference, it must be clear that there exist no material disputed issues of fact
regarding the relevance of the documents.
D.1
In re Rigel Pharmaceuticals, Inc. Securities Litigation, 697 F.3d 869 (9th Cir. September 06,
2012).
Affirming the District Court’s dismissal where an investors failed to adequately plead
that drug development company's allegedly false statements regarding efficacy, safety of its new
rheumatoid arthritis drug and company's future partnership prospects were made with scienter
required under PSLRA; the safety information that defendants chose to disclose in their initial,
allegedly fraudulent, reports, was the most severe adverse events, and because none of the
defendants sold stock during the period between the allegedly fraudulent statements and the
subsequent public disclosure of the detailed data, which was the period during which they would
have benefited from any allegedly fraudulent statements, the value of the stock and stock options
did not support an inference of scienter.
Boca Raton Firefighters and Police Pension Fund v. Bahash, 2012 WL 6621391 (9th Cir.
December 20, 2012).
D.1
Following a de novo review of the pleadings, the court affirmed the district court’s
dismissal for failure to state a claim with particularity in accordance with the rules set forth in the
PSLRA. The court held that Plaintiff’s complaint fell far short of this standard, basically leaving
the District Court to search the long quotations in the complaint for particular false statements,
and then determine on its own initiative how and why the statements were false and how other
facts might show a strong inference of scienter. It concluded that asking the Court to assess the
truth of the statements does not comport with its exhortation that plaintiffs “must demonstrate
with specificity why and how” each statement is materially false or misleading.
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In re VeriFone Holdings, Inc. Securities Litigation, 2012 WL 6634351 (9th Cir. December 21,
2012).
The court partially reversed the lower court’s decision to grant defendant’s motion to
dismiss for failure to state claims, finding that under the PSLRA, in determining whether the
pleaded facts give rise to a strong inference of scienter required for a securities fraud claim under
§ 10(b) and Rule 10b–5, the court must take into account plausible opposing inferences; thus, the
strength of an inference cannot be decided in a vacuum, and a court must consider plausible,
nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012).
Investors in a company which bought residential mortgage-backed securities on margin
failed to adequately plead loss causation, as required under the PSLRA to state a claim under §
10(b) and Rule 10b–5 regarding allegedly deficient disclosures in an offering memorandum;
while allegations of the complaint traced the decline in value of the company's stock, they did
not make the necessary connection that it was the disclosure of previously undisclosed
information that caused a price drop, and while other allegations suggested that loss resulted
from the poor performance of the company's business model, including ongoing margin calls,
haircuts, and liquidity issues, all of those were fully disclosed in the offering memorandum. Price
inflation theory of loss causation is no longer a viable means of satisfying the loss causation
requirements of the PSLRA.
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In re Genzyme Corp., 2012 WL 1076124 (D. Mass. March 30, 2012).
D.1
Class of investors brought securities fraud action against company and several individual
executives, alleging that defendants failed to disclose material facts relating to the health of the
company. Defendants moved to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court granted defendants’ motion, finding
that the complaint failed to adequately allege the element of scienter, noting that plaintiffs’
theory, while plausible, and perhaps even reasonable, was not sufficient to support a strong
inference of fraudulent intent.
Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167 (D.Mass.,2012. July 26, 2012)
In an action brought on behalf of two groups of purchasers of common stock against
issuer, officers and directors individually, Defendants moved to dismiss. The court held that
general allusions to unspecified internal corporate information are insufficient to withstand a
motion to dismiss securities fraud claims; further, general inferences that defendants, by virtue of
their position within company, must have known about company's problems inadequate to
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withstand special pleading requirements in securities fraud cases. PSLRA imposes scienter
pleading standards even more rigorous than requirements of federal civil rule imposing
heightened pleading requirements for fraud claims; complaint alleging securities fraud must set
forth each statement alleged to have been misleading, reason or reasons why statement is
misleading, and, if allegation regarding the statement or omission is made on information and
belief, complaint must state with particularity all facts on which that belief is formed. When
making allegations on “information and belief,” PSLRA requires complainant to state with
particularity all facts on which that belief is formed; this requirement holds true even when fraud
relates to matters peculiarly within knowledge of the opposing party. While unusual or
suspicious insider trading can support strong inference of scienter, lead plaintiff in purported
securities class action bears burden of showing that insider sales were in fact unusual or
suspicious in timing or amount.
Acosta-Castillo v. Guzman-Lora, 2012 WL 3963019 (D. Puerto Rico Sept. 11, 2012).
The court denied plaintiff’s request for default judgment based on allegations made upon
“information and belief” which failed to plead sufficiently or with particularity the
misrepresentations or omissions by the defendants. Plaintiff also failed to plead sufficient facts
that defendants acted with requisite scienter regarding company’s offering.
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Warchol v. Green Mountain Coffee Roasters, Inc., 2012 WL 256099 (D.Vt.,2012. January 27,
2012)
Plaintiffs are a putative class of purchasers of GMCR stock who charge Defendants with
making misrepresentations that led them to purchase shares at inflated prices during the Class
Period. Defendant moved to dismiss and the Court granted the motion without prejudice, with
leave to amend, concluding that Plaintiffs did not allege material misstatements attributable to
the individually named CEO, nor do they allege facts that collectively give rise to a “strong
inference” of scienter on the part of any of the other Defendants, as required by PSLRA. As a
result, the complaint does not adequately plead the CEO's role in the alleged securities fraud,
failing to attribute a material misstatement or omission to him. The additional grounds for
scienter offered were also insufficient to demonstrate an inference of scienter under the PSLRA.
In re Wilmington Trust Securities Litigation, 852 F.Supp.2d 477 (D.Del.,2012 March 29, 2012)
In an action brought by institutional investors against a bank and its officers alleging
defendants exaggerated value of their commercial mortgage portfolio, the Court granted
defendants’ motion to dismiss, holding that until plaintiffs specifically identify the statements on
which they would like to proceed and the reasons why these statements are false or misleading,
neither the defendants nor the court can address these allegations with the degree of particularity
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equired by the PSLRA. Specifically, defendants and the court cannot adequately address issues
regarding materiality, scienter and the forward-looking nature of the statements. PSLRA
provides two distinct pleading requirements, both of which must be met in order for a securities
fraud complaint to survive a motion to dismiss: first, under the falsity requirement, the complaint
must specify each allegedly misleading statement, the reason or reasons why the statement is
misleading, and, if an allegation is made on information and belief, all facts supporting that
belief with particularity; and second, under the scienter requirement, with respect to each act or
omission alleged to violate the Securities Exchange Act, a plaintiff is required to state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind. PSLRA's heightened pleading standard requires plaintiffs to address the way in which
each individual statement is false or misleading.
In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litigation, 2012 WL 3779309 (D.N.J.
Aug. 29, 2012).
Drug company defendant’s motion to dismiss was granted based on plaintiffs’ reliance on
three categories of non-actionable statements under Section 10b: (i) actual recitations of past
earnings; (ii) optimism concerning financial growth; and (iii) forward-looking statements. The
court found that: defendant’s statements regarding past earnings amounted to nothing more than
a report on its previous success and confidence in prospects for future growth; defendant’s
optimism regarding financial growth equated to puffery; and defendant’s forward looking
statements qualified for safe harbor immunity because plaintiffs failed to allege the individual
making the statements did so with requisite scienter. The court also granted individual
defendants’ motion to dismiss as to control person liability for culpable participation claims
because plaintiffs failed to plead with particularity facts giving rise to a strong inference that the
individuals deliberately or recklessly acted to deceive investors about the safety profile of their
new drug. Plaintiff’s reliance on the individual’s job titles and general oversight responsibilities
was insufficient to meet PSLRA’s standards.
Security Police and Fire Professionals of America Retirement Fund v. Pfizer, Inc.,2012 WL
6771941 (D.N.J.,2012. December 06, 2012)
Lead Plaintiffs in a class action move to amend their claim to add specific information in
accordance with PSLRA’s pleading requirement. The Court granted the motion, holding that
Plaintiffs now have sufficiently alleged specific affirmative statements of falsity to satisfy the
first element in stating a claim for violation of section 10(b) and Rule 10b–5. Court held that by
referring to specific statement in defendant’s release, plaintiffs have now done more than merely
allude to the misleading nature of the press release based on Defendants' earlier affirmative
statements. The Court further held that this allegedly false statement complies with the PSLRA's
heightened pleading requirement of specifying each statement alleged to be misleading.
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Oklahoma Firefighters Pension and Retirement System v. Capella Educ. Co., 873 F.Supp.2d
1070 (D. Minn., 2012).
Investor brought an action against a college and several of its officers, alleging securities
fraud and control person liability under the Exchange Act. Defendants moved to dismiss for
failure to state a claim. The court granted Defendant’s Motion to Dismiss holding that investor
failed to sufficiently articulate a plausible claim of securities fraud because (1) to survive a
motion to dismiss, under PSLRA a securities fraud complaint must point to contemporaneous
reports, witness statements, or any other information that had actually been provided to
defendants at the time they were alleged to have misrepresented material facts; and (2) to
sufficiently plead falsity under PSLRA, a complaint must not only indicate that false statements
were made, but must indicate why the alleged misstatements were false when made.
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 282 F.R.D. 216 (D.
Ariz. 2012).
Where previous judgment dismissed securities fraud class action with prejudice on the
basis that it did not plead falsity with the requisite degree of particularity, plaintiffs’ motion to
alter or amend judgment was denied on the grounds that there was no intervening controlling
change in law regarding analysis of whether complaint sufficiently alleged backdating of stock
options under PSLRA so as to warrant alteration or amendment of judgment.
Smilovits v. First Solar, Inc., 2012 WL 6574410 (D.Ariz.,2012).
Plaintiff alleges that Defendants violated securities laws by disseminating and approving
false or misleading statements during the class period by manipulating their financial metrics to
artificially inflate the company's stock price. Plaintiff also alleges that Defendants concealed a
known defect in Defendants' design as well as in the manufacturing process and, once the
excursion became known, hid the extent of the problem. The Court found that Plaintiff pled
enough specific facts to create an inference of scienter at least as compelling as any counter
inference, satisfying PSLRA’s pleading requirements, holding that while Defendants dispute the
veracity of many of the allegations, factual disputes about specific, plausible allegations are not
sufficient to dismiss a claim. Factual allegations and their reasonable inferences are accepted as
true at the motion to dismiss stage.
RS-ANB Fund, LP v. KMS SPE LLC, 2012 WL 1288762 (D. Idaho April 16, 2012).
Plaintiff who purchased a 25% interest in a failed bank’s commercial construction loan
portfolio brought federal and state securities fraud claims against seller entities and their
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controlling shareholder, claiming that defendants fraudulently concealed the controlling
shareholder’s insolvency so as to induce plaintiff’s investment. Defendants moved to dismiss
amended complaint for failure to state a claim as required under the heightened pleading
standards of the PSLRA. The court dismissed the federal securities fraud claims with prejudice,
finding that plaintiff failed to remedy the deficiencies in the initial complaint and failed to plead
adequate factual matter to support a strong inference of scienter on the part of any of defendants,
and stating that the court “perceive[d] no means by which a further round of amendments could
salvage the claim.”
DesyaFosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D.Nev. 2012. July 11, 2012).
D.1
Defendant moved to dismiss a class action for securities fraud related to forward looking
statements, alleging that Defendants knew of their impending financial disaster with sufficient
clarity in 2007 that their public statements constituted fraud. The court granted the motion with
leave to amend the claim, stating that Congress drafted the PSLRA to require plaintiffs seeking
redress for security fraud to meet a higher pleading standard than plaintiffs in other types of
actions. The PSLRA requires that “[i]n any private action arising under this chapter in which the
plaintiff may recover money damages only on proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to each act or omission alleged ... state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind.” The court held that Plaintiff’s general allegations of scienter, without documentation
or other detail, are insufficient and that the allegations regarding 2007 statements fail to give rise
to a strong inference that Defendant acted with the requisite scienter. Accordingly, as Plaintiff's
allegations regarding statements from 2007 are insufficiently particularized, they are dismissed
with leave to amend in accordance with the requisite level of particularity, including the
identification of internal sources for the information, reviewing officers, etc.
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., 2012 WL 6645097
(D.Colo. 2012).
D.1
Shareholders brought securities-fraud class action arising from alleged misstatements
regarding corporation's collateralized mortgage obligations and mortgage-backed securities.The
District Court, held that shareholders failed to allege that defendants' opinions regarding the
product were subjectively false, noting that in order to defeat a motion to dismiss, pursuant to
PSLRA pleading requirements, a complaint must “specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding
the statement or omission is made on information and belief, the complaint shall state with
particularity all facts on which that belief is formed.
Touchtone Group, LLC v. Rink, 2012 WL 6652850 (D.Colo. 2012).
Investment group brought putative class action against officers for corporation involved
in Ponzi scheme. The court held that agency allegations are not subject to the heightened
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pleading requirements of PSLRA or rule requiring fraud be pled with particularity, even when
they are used to assert a claim for vicarious liability for violations of the Securities Exchange
Act. Heightened pleading standard under rule requiring fraud be pled with particularity does not
apply where alleged transferor is operating a Ponzi scheme in violation of Colorado Uniform
Fraudulent Transfer Act (CUFTA) or the Pennsylvania Uniform Fraudulent Transfer Act
(PUFTA); a fraudulent transfer claim under CUFTA and PUFTA requires only that the transferor
possess intent to defraud a creditor-plaintiff, and it may be inferred that a transferor operating a
Ponzi scheme possesses such intent by virtue of the transferor's insolvency as a matter of law.
Nova Leasing, LLC v. Sun River Energy, Inc., 2012 WL 3778332 (D. Colo. Aug. 31, 2012).
The court denied defendants’ motion to partially dismiss the complaint based, in part, on
plaintiff sufficiently pleading that defendants engaged in aiding and abetting securities fraud
under Colorado securities law and the PSLRA. In reaching this decision, the court cited to an
earlier court order not fully explained in this decision. In addition, the court found plaintiff’s
allegations of liability based on agency and independent financial motives for each defendant to
be well-pled.
Wolfe v. Aspenbio Pharma, Inc., 2012 WL 4040344 (D. Colo. Sept. 13, 2012).
The court granted defendant’s motion to dismiss due to plaintiff’s failure to allege facts to
plausibly suggest defendant made false or misleading representations of material fact regarding
its medical diagnostic test in which plaintiff invested. Specifically, the court looked at
defendant’s statements regarding its clinical test results, clinical trials and statements regarding
the uniqueness and stand alone capabilities of the medical diagnostic test. The court ruled that
plaintiff’s reliance on pure speculation, fraud-by-hindsight, and puffery was insufficient to meet
the heightened pleading requirements under the PLSRA.
D.1
D.1
Chipman v. Aspenbio Pharma, Inc., 2012 WL 4069353 (D. Colo. Sept. 17, 2012)
D.1
The court granted defendant’s motion to dismiss due to plaintiff’s failure to allege
adequate facts to plausibly assert misrepresentation or omission of material fact and found
allegedly omitted information regarding defendant’s medical diagnostic test, in which plaintiff
invested, was in fact disclosed on defendant’s website, in its prospectus supplement, and other
publicly available documents.
Boulware v. Baldwin, 2012 WL 1412698 (D. Utah April 23, 2012).
Trust brought securities fraud claims against entities and individual manager who
managed company in which trust invested that was formed to purchase loans secured by real
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property, alleging that individual defendant misrepresented that the borrower made a payoff bid
which would result in a fast profit, and that the corporate defendants and individual defendant
concealed the existence or the terms of a certain loan. Defendants moved to dismiss these counts
for failure to state a claim as required under the heightened pleading standards of the PSLRA.
The court found that plaintiff’s contention that the corporate defendants failed to disclose
material information could not support a 10(b) claim because “entities do not make statements”
(or omissions), but rather the plaintiff must identify the party who made or failed to make the
misleading statement. However, as to the individual defendant’s statements and omissions, the
court found that plaintiff’s allegations were sufficient to satisfy the pleading requirements of
PSLRA and denied defendants’ motion to dismiss.
In re American Apparel, Inc. Shareholder Litigation, 855 F.Supp.2d 1043 (C.D.Cal.,2012.
January 13, 2012 ).
Garment manufacturer and its officers and directors moved to dismiss consolidated
putative securities fraud class action based on allegedly false and misleading statements
regarding manufacturer's labor policies, workforce, and its financial health. The Court granted
the motion finding that plaintiffs sufficiently alleged under PSLRA that garment manufacturer
and its executives made materially false statements regarding company's compliance with the
immigration laws, but did not adequately allege that statements concerning the impact of the
work force reduction that followed Bureau of Immigration and Customs Enforcement's
investigation and company's accounting practices and internal controls were false when made.
However, plaintiffs did not sufficiently allege that company's and individual defendants' false
statements were made with requisite scienter.
Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 6644397 (C.D.Cal.,2012).
Conclusory allegations of investors in bank's stock, that bank's outside auditor knew its
opinions for bank's audited year-end financial statements for three calendar years were false and
would deceive the investing public, without any substantive allegation demonstrating that auditor
did not genuinely believe its opinions to be accurate when they were issued, failed to allege
subjective falsity, as required for the misrepresentation element of securities fraud claims under §
10(b) and Rule 10b–5 pursuant to PSLRA. At the pleading stage of a securities fraud action
against an outside auditor, with respect to scienter, allegations of violations of generally accepted
accounting principles (GAAP), coupled with allegations that significant red flags were ignored,
can suffice to withstand a motion to dismiss. However, in this case allegations of investors in
bank's stock did not create a strong inference of scienter, as required to plead securities fraud
against bank's outside auditor; majority of purported red flags were not red flags at all because
they suggested poor decision-making rather than fraud, and the strong inference from the
allegations was that the auditor did not ignore or disregard the purported red flags but rather
examined the bank's financial condition, recognized weaknesses, and provided recommendations
to the bank and its management regarding its concerns. To meet the pleading requirements in the
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PSLRA for a securities fraud action, plaintiffs are required to plead in great detail facts that
constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.
City of Royal Oak Retirement System v. Itron, Inc., 2012 WL 3966310 (E.D. Wash. Sept. 11,
2012).
The court granted defendants’ motion to dismiss based on plaintiff’s failure to satisfy the
PSLRA’ heightened pleading requirements. Specifically, the court found that plaintiff’s
allegations that defendants’ misstatement of the extended warranty revenue for three quarters and
subsequent restatement correcting that misstatement did not rise to the level of extreme departure
from the standards of ordinary care. In addition, the court ruled that the retirement of a corporate
officer, alone, is not enough to raise inference of scienter. Plaintiff’s pleadings regarding what
defendants “must have known” or “should have know” were not sufficient to survive defendants’
motion to dismiss.
Desyatnikov v. Credit Suisse Group, Inc., 2012 WL 1019990 (E.D.N.Y.,2012. March 26, 2012)
In an action against defendants arising out of the purchase of a foreign security, the court held
that plaintiff failed to satisfy the heightened pleading standards for asserting Section 10(b)/Rule
10b–5 claims against defendants. First, the only allegation against Credit Suisse is that it is the
parent corporation to Clariden Leu. The complaint is void of any allegations of fraudulent
statements or material omissions made by Credit Suisse or that it was aware of any such
statements or omissions. Second, with respect to scienter, the lumping of allegations against
“defendants” does not meet the particularity requirements for pleading scienter as set forth under
Rule 9(b) of the Federal Rules of Civil Procedure or the PSLRA.
Hutchins v. NBTY, Inc., 2012 WL 1078823 (E.D.N.Y. March 30, 2012).
Investor brought putative securities fraud class action against company and certain
directors/ and officers, alleging that defendants issued press releases making positive statements
about the company’s business, gross margins, and future operating performance, but never told
investors that its largest customer was soliciting competing bids for products that company had
been supplying and that, as a result, company’s gross margins would be decreasing. Defendants
moved to dismiss for failure to state a claim as required under the heightened pleading standards
of the PSLRA. The court denied defendants’ motion, finding that plaintiff sufficiently pled with
particularity material misstatements or omissions by defendants because the information relating
to the bidding initiative of the company’s largest customer was not “so obviously unimportant to
a reasonable investor that reasonable minds could not differ on the question of their importance,”
and finding that plaintiff pled sufficient facts to give rise to a strong inference that defendants
acted with the required state of mind to satisfy the scienter requirement.
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Carlucci v. Han, 2012 WL 3242618 (E.D.Va.,2012. August 07, 2012)
Investor sued technology corporation and its owner for securities fraud, in violation of §
10(b) and Rule 10b–5 and Virginia Securities Act, by alleged misrepresentations and omissions.
Defendants moved to dismiss for failure to state claim and pursuant to heightened pleading rule
and PSLRA. The court dismissed the case, holding that under the PSLRA, a securities fraud
complaint will survive only if a reasonable person would deem the inference of scienter cogent
and at least as compelling as any opposing inference one could draw from the facts alleged.
Investor's allegations failed to raise strong inference of scienter, as required under PSLRA's
heightened pleading requirements for investor's securities fraud claims since investor did not
sufficiently allege misleading statement or omission, so technology company's owner could not
have made misrepresentations or omissions intentionally or with sufficient recklessness, and
allegation that owner misappropriated investor's $20 million investment by buying $3.5 million
house in Florida did not raise inference that money spent on house was money received from
investor. Under the PSLRA, a plaintiff cannot merely plead facts from which a reasonable person
could infer that the defendant acted with scienter; rather, the plaintiff must plead with
particularity facts that give rise to a strong, in other words, a powerful or cogent, inference.
In re Computer Sciences Corporation Securities Litigation, 2012 WL 3779349 (E.D.Va. Aug.
29, 2012).
The court granted in part and denied in part motion to dismiss brought by technology
services company and its officers. The court dismissed claims against certain defendants based
on plaintiffs’ failure to plead facts warranting a strong inference that these defendants acted with
the requisite scienter regarding public statements as to the company’s earnings, internal controls,
and ability to satisfy performance obligations under a major contract.
Grant v. Houser, 2012 WL 519120 (E.D.La.,2012. February 15, 2012).
In a dispute arising from an investment in a Louisiana film studio, the court held that
based on the specific allegations in the Complaint, plaintiff has made out a proper claim for
detrimental reliance and unjust enrichment under the heightened pleading standard of Rule 9(b)
and the PSLRA. The court found that Plaintiff has has pled with a sufficient level of particularity
with respect to the $250,000 investment to allow the Defendants to adequately respond to
Berger's claims. Plaintiff also sufficiently plead with respect to the time, place, and contents of
the false representations and who made those representations with sufficient particularity to
allow the Defendants to adequately respond to Plaintiff's claims.
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In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Sec. Act ,
2012 WL 6644623 (S.D.N.Y. 2012).
Plaintiffs are investors in hedge funds controlled by an asset management firm; a portion
of the funds' assets was invested in another fund which, in turn, paid its assets over to Madoff
and his investment firm. The court held that PLSRA’s pleading requirement is not satisfied by a
few conclusory statements and the use of the devices described in the complaint. The court
further noted that Securities Litigation Uniform Standards (“SLUSA”) ensures that plaintiffs
cannot avoid the heightened pleading standards of the PSLRA by finding state law vehicles for
their securities fraud claims.
Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean, Ltd., 866 F.
Supp. 2d 223 (S.D.N.Y. 2012).
Acquired company’s shareholders brought putative securities fraud class action against
acquiring company and both companies’ CEO’s, alleging that joint proxy statement distributed
in connection with merger between offshore oil contractors contained false and misleading
statements. Defendants moved to dismiss for failure to state a claim as required under the
heightened pleading standards of the PSLRA. The court denied defendants’ motion, finding that
plaintiffs sufficiently pled material misrepresentations concerning acquiring company’s
compliance with environmental laws, its training and safety programs, and the fairness of its
exchange price, and that plaintiff sufficiently pled loss causation, which element is governed by
notice pleading standards even under the PSLRA.
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CAMOFI Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y., 2012).
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In determining whether to grant Plaintiffs’ motion for default judgement, the court
considered the PSLRA’s pleading requirements noting that (1) the PSLRA codified the Rule 9(b)
standard previously adopted by the Second Circuit, and requires that a private securities fraud
plaintiff state with particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind; (2) the Supreme Court has interpreted “strong inference” of
fraudulent intent to mean an inference of scienter that is more than merely plausible or
reasonable, but that is cogent and at least as compelling as any opposing inference of
nonfraudulent intent; and (3) the PSLRA also requires that to allege control person liability under
§ 20(a), Plaintiffs must allege some level of culpable participation at least approximating
recklessness in the section 10(b) context.
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In re ITT Educational Services, Inc. and Securities and Shareholder Derivatives Litig., 859 F.
Supp. 2d 572 (S.D.N.Y. 2012).
Investors brought putative securities fraud class action against private for-profit college
and its officers alleging defendants had misled investors through a series of calculated statements
attributing college’s positive financial performance to legitimate business practices when,
instead, success was a result of school’s predatory business model. Plaintiffs alleged that the
individual defendants were aware of the college’s fraudulent scheme by virtue of their positions
as officers at the college and that, therefore, they were also aware that the public documents and
statements they issued on behalf of the college were materially false and misleading. Defendants
moved to dismiss for failure to state a claim as required under the heightened pleading standards
of the PSLRA. The court granted defendants’ motion to dismiss, finding that the complaint’s 76
pages of block quotes of nearly every public statement made by the college during the period at
issue, with vague and disorganized allegations as to how and why those statements were
misleading, did not contain any well-plead actionable misstatements under PSLRA’s pleading
requirements. The court noted that plaintiffs did not challenge the college’s reported revenue or
enrollment numbers during the class period, and that, despite the plaintiffs’ allegation that the
college “stretched” its reported graduate employment placement rates, plaintiffs failed to allege
how this stretch actually impacted the college’s reported overall placement rate. The court also
noted that the college’s statements relating to its business focus amounted to typical corporate
puffery and were not actionable under the securities laws.
In re JP Morgan Auction Rate Securities (ARS) Marketing Litigation, 867 F. Supp. 407
(S.D.N.Y. 2012).
Purchaser of auction rate securities (ARS) brought putative class action against auction
dealer and others, asserting Exchange Act claims for market manipulation, misrepresentations
and omissions, and control person liability, alleging that defendants sought to conceal the risks of
ARS from investors. Defendants moved to dismiss for failure to state a claim as required under
the heightened pleading standards of the PSLRA. The court granted defendants’ motion as to all
claims, finding that plaintiff failed to plead scienter, as plaintiff failed to plead facts
demonstrating that auction dealer reached a decision to dispose of its ARS inventory in order to
reduce exposure to rising liquidity risks. Further, with regard to plaintiff’s claims of
misrepresentations and omissions, the court found that plaintiff failed to plead with particularity
the misrepresentations that formed the basis of his claims, nor did plaintiff establish that auction
dealer had a duty to disclose such that its omissions could give rise to a claim for fraud.
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In re Lehman Bros. Securities and ERISA Litigation, 2012 WL 6603321 (S.D.N.Y.,2012).
In an action brought against Lehman Bros. in the wake of its collapse, the court dismissed
plaintiff’s claim on the grounds that they were precluded from being brought in state court
pursuant to SLUSA. The court held that the overriding purpose of SLUSA was to prevent
plaintiffs in securities cases from sidestepping the PSLRA's heightened pleading requirements by
filing in state rather than federal court by foreclosing state law claims with respect to covered
securities where, as here, those claims find themselves in groups of lawsuits that seek damages
on behalf of substantial numbers of persons.
Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. March 30, 2012).
Investors brought securities fraud class action against company and its executives,
alleging that defendants made false or misleading statements, and failed to disclose material
adverse information, about the company’s business, operations, and prospects with respect to
sales to certain customers, returns of certain goods made after the end of the quarter, that certain
goods failed to satisfy quality control standards and therefore were not certified for sale, that
financial results were overstated, and that internal and financial controls were inadequate.
Defendants moved to dismiss for failure to state a claim as required under the heightened
pleading standards of the PSLRA. The court granted defendants’ motion, finding that plaintiffs
failed to plead specific facts explaining why each alleged misstatement was false at the time it
was made and failed to plead scienter adequately.
In re Bank of America Corp. Securities, Derivative, and Employment Retirement Income Security
Act (ERISA) Litigation, 2012 WL 1353523 (S.D.N.Y. April 12, 2012).
Shareholder brought securities fraud claims against Bank of America and certain officers
alleging that defendants omitted or misstated material facts concerning Bank of America’s
acquisition of two financial services companies. Defendants moved to dismiss second amended
complaint for failure to state a claim as required under the heightened pleading standards of the
PSLRA. The court granted defendants’ motion, and denied plaintiff’s request for leave to
amend, finding that plaintiff’s claim cited broad, opinion-based statements, including several that
were made in light of then-contingent litigation risks, which were insufficient to state an
actionable claim under PSLRA’s pleading requirements.
In re General Electric Co. Securities Litigation, 856 F. Supp. 645 (S.D.N.Y. April 18, 2012).
Investors brought putative securities fraud class action against issuer and various
executives, alleging that issuer failed to disclose information regarding its health and the health
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of its wholly-owned subsidiary. Defendants moved to dismiss for failure to state a claim as
required under the heightened pleading standards of the PSLRA. The court granted defendants’
motion in part, and denied it in part, finding that plaintiffs had stated plausible securities fraud
cases against the company and its chief financial officer based on the CFO’s statements about the
quality of the company’s loan portfolio.
Ho v. Duoyuan Global Water, Inc. 2012 WL 3627043 (S.D.N.Y. Aug. 24, 2012)
Stockholders’ claims based on statements from defendant corporate officers regarding
compliance with audit satisfied PSLRA heightened pleading requirements, including giving
strong inferences that corporate officers acted with requisite scienter. However, court granted
other defendants’ motions to dismiss on basis that those entities were not the parties that actually
made or had ultimate authority over the alleged misstatements of material fact.
In re Advanced Battery Technologies, Inc. Securities Litigation, 2012 WL 3758085 (S.D.N.Y.
Aug. 29, 2012).
The court found that plaintiffs satisfied the PSLRA heightened requirements and denied
defendants’ motion to dismiss. The court ruled that plaintiffs’ citations to public records and
filings with China’s Administration of Industry and Commerce provided plaintiffs’ accusations
of falsity with plausibility and weight. The court ruled that plaintiff properly plead a strong
inference of scienter by arguing defendants overstated the company’s revenue and profits in
order to raise money from shareholders and then divert that money to its insiders through
undisclosed related party transactions. Finally, plaintiffs’ satisfied the pleading requirement for
loss causation by arguing that the publication of a report concluding that defendants’ earnings
reports were inflated was immediately followed by a steep decrease in defendants’ stock prices.
In re Fannie Mae 2008 Securities Litigation, 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012).
Plaintiff stock purchasers brought putative class action and several individual actions
(transferred and consolidated for multidistrict litigation) against Fannie Mae, its officers, and
certain underwriters, alleging defendants made material misstatements in Fannie Mae’s filings
with the SEC and various securities offerings. The court ruled plaintiffs’ section 10b claims
regarding mortgage lender’s subprime and Alt-A exposure disclosures and risk management
disclosures satisfied the heightened PSLRA pleading requirements, but granted defendants’
motion to dismiss claims premised on Fannie Mae’s core capital financials.
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Lewy v. SkyPeople Fruit Juice, Inc., 2012 WL 3957916 (S.D.N.Y. Sept. 10, 2012)
The court granted in part and denied in part defendants’ motion to dismiss in a putative
class action case based on allegations involving the filing of false financial statements by
corporate officers. The court also provided analysis of plaintiff’s loss causation allegations
under the PSLRA.
In Re China Valves Technology Securities Litigation, 2012 WL 4039852 (S.D.N.Y. Sept. 12,
2012).
The court granted defendant’s motion to dismiss due to plaintiff’s failure to adequately
allege falsity under the PSLRA. The court ruled that when a securities fraud claim is based on
discrepancies between AIC and SEC filings, the plaintiff must allege at least some facts to
support that: (i) the SEC figures, and not the AIC filings, are false, and (ii) any variation is not
attributable to variations in reporting rules and accounting standards. Plaintiff failed to make
any allegations regarding what accounting standards, if any, were required for AIC filings, the
similarities or differences between those standards and U.S. GAAP, and any basis for concluding
that the SEC filings -- an not the AIC filings were inaccurate.
Meridian Horizon Fund, L.P. v. Tremont Group Holdings, Inc., 2012 WL 4049953 (S.D.N.Y
Sept. 14, 2012).
The court denied defendants’ motion to dismiss finding that, considering both the
inferences urged by plaintiffs and competing inferences rationally drawn from all the facts, the
complaint contained sufficient allegations to satisfy the PSLRA heightened scienter pleading
requirements. While the complaint lacked specific claims regarding defendants’ actions,
plaintiffs did allege that defendants represented they had a close relationship with Bernie Madoff
and that they delved into details of Madoff’s operation to assure plaintiffs of the safety of their
investments.
In Re MELA Sciences, Inc. Securities Litigation, 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012).
Investor group plaintiff failed to plead the required scienter by not alleging direct, or in
the alternative circumstantial, evidence of defendants’ conscious misbehavior or recklessness.
Plaintiff’s claims related to defendants’ public statements were also dismissed based on PSLRA
safe harbor provisions and plaintiff’s failure to sufficiently allege statements were materially
misleading.
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In re BP p.l.c. Securities Litigation, 843 F.Supp.2d 712 (S.D.Tex.,2012. February 13, 2012).
Investors filed seven putative class action lawsuits in different districts against oil
company, its affiliates, and a number of its present and former officers and directors, alleging
various claims arising from oil spill in Gulf of Mexico. Court found that Plaintiffs have
adequately plead section 10(b) violations and demonstrated requisite scienter for some
defendants and failed to do so against others. The court held that what constitutes particularity,
for purposes of pleading fraud claim under Federal Rule of Civil Procedure and PSLRA, will
necessarily differ with the facts of each case, outlining a three step approach to reviewing
scienter allegations in a motion to dismiss a federal securities fraud case pursuant to the PSLRA:
(1) the allegations must, as in federal pleadings generally, be taken as true; (2) courts may
consider documents incorporated in the complaint by reference and matters subject to judicial
notice, and facts must be evaluated collectively, not in isolation, to determine whether a strong
inference of scienter has been pleaded; and (3) a court must take into account plausible
inferences opposing as well as supporting a strong inference of scienter.
Wade v. WellPoint, Inc., 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012)
The court denied plaintiff’s leave to file a second amended complaint due to her failure to
cure the deficiencies previously criticized in her earlier pleadings. In particular, plaintiff still did
not meet the heightened PSLRA pleading standards. The court noted plaintiff needed to
distinguish her situation from that of many others who have been negatively impacted by
business reversals. Plaintiff’s general allegations and insistence on group pleading provided
boiler plate allegations none of which could support the required strong inference of scienter. In
addition, plaintiff’s vague pronouncements regarding CWs and alleged violations of GAAP and
MD & A disclosures lacked the required materiality to sustain a private securities fraud claim.
In re Jiangbo Pharmaceuticals, Inc., Securities Litigation, 2012 WL 3150085 (S.D.Fla. 2012.).
Investors brought action against holding company, its former Chief Financial Officer
(CFO), and its external auditor, alleging securities fraud and control person liability under
Securities Exchange Act. The court granted Defendant’s Motion to Dismiss without prejudice,
holding that PSLRA imposes two extra requirements on plaintiffs pleading securities fraud. First,
a plaintiff must specify each statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding the statement or omission is
made on information and belief, the complaint shall state with particularity all facts on which
that belief is formed. Second, the PSLRA raises the standard for pleading scienter by requiring
that, for each alleged act or omission, the plaintiff state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind and the complaint must
allege facts supporting a strong inference of scienter for each defendant with respect to each
violation.” The “strong inference” of scienter required under the PSLRA is an inference that is
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“cogent and at least as compelling as any opposing inference one could draw from the facts
alleged.” In making this determination, a court must consider the complaint in its entirety, not
any particular allegation in isolation.
City of Pontiac General Employees’ Retirement System v. Stryker Corp., 865 Fl. Supp. 2d 811
(W.D. Mich. 2012).
Investors brought securities fraud action against medical equipment manufacturer, who
moved to dismiss for failure to state a claim as required under the heightened pleading standards
of the PSLRA. The court granted defendant’s motion to dismiss, finding that defendant’s failure
to inform investors of its regulatory noncompliance did not render its financial results
misleading, that investors failed to allege that defendant knew that its statement that it believed it
was in compliance with applicable laws and regulations was false when made, that PSLRA’s
safe-harbor provision applied to defendant’s forward-looking statements, and that investors
failed to sufficiently allege scienter.
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. April 19, 2012).
Investors of common stock in energy company brought putative securities fraud class
action against company, its officers and directors, and its primary shareholder, alleging that
defendants failed to adequately disclose existing events, uncertainties and trends (specifically,
the extent and impact of demand cuts by two of the company’s largest customers), which
rendered certain statements made to investors false or misleading, and that defendants materially
overstated the value of the company’s goodwill and intangible assets or materially understated
net losses through fraudulent delay of impairment testing. Defendants moved to dismiss for
failure to state a claim as required under the heightened pleading standards of the PSLRA. The
court granted defendants’ motion in part, finding that the plaintiffs improperly attempted to
proceed under the group pleading doctrine as to several defendants, and that plaintiffs failed to
adequately plead scienter as to their claims that defendants failed to disclose existing events,
uncertainties and trends. However, the court found that plaintiffs cleared the first PSLRA hurdle
by pleading with particularity misleading statements and deceptive practices in connection with
the timing of impairment testing and write-downs of goodwill and other intangible assets.
Kyung Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D.Cal. Aug. 29, 2012).
The court granted certain defendants’ motion to dismiss based on plaintiff’s failure to
satisfy the heightened pleading requirements requiring a strong inference of scienter under the
PSLRA. Specifically, plaintiff failed to identify these defendants as engaging in the concealment
of a bank’s deteriorating financial condition. In addition, the court ruled that: (i) allegations
from other complaints or documents that were unproved and contested; (ii) consented entries of
final judgment that did not contain admissions or denials; and (iii) invocations of the 5 th
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Amendment during an SEC investigation could not be used to establish facts to demonstrate
scienter.
Washtenaw County Employees Retirement System v. Celera Corporation, 2012 WL 3835078
(N.D. Cal. Sept. 4, 2012).
The court denied defendants’ motion to dismiss relying on allegations in the complaint,
attributed to confidential witnesses, regarding defendants’ reimbursement issues and related
target-based executive compensation. The court found plaintiff’s allegations regarding
defendants’ statement on earnings calls, the magnitude of the problem, and the narrow margin by
which earnings exceeded amount necessary to trigger executive bonuses, were sufficient to
create inference of scienter required under the PSLRA. The court found that collectively each
plead component gave rise to a cogent and compelling inference that defendants knowingly
misled the public.
In Re Carter’s Inc. Securities Litigation, 2012 WL 3715241 (N.D. Ga. Aug. 28, 2012).
The court denied accounting firm defendant’s motion to dismiss plaintiff’s second
amended complaint finding that defendant’s alleged pattern of willful blindness to GAAP and
GAAS violations, disregard of red flags sufficient to alert a reasonable auditor to fraud, and
manifest failure to undertake the active independent examination role required of an independent
public accountant supported a strong inference of scienter satisfying the PSLRA requirement.
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Purser v. Coralli, 2012 WL 5875600 (N.D.Tex.,2012. November 21, 2012).
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Defendant moved to dismiss Plaintiff's claims pursuant to Rule 12(b)(6), contending that
the complaint failed to allege facts as required by the PSLRA and the Federal Rules of Civil
Procedure. The court concluded that Plaintiff's allegations are insufficient to support a federal
securities claim. Specifically, Plaintiff's conclusory allegations regarding Defendants' conduct
and motives, based on “irresistible inferences” and “subterfuge,” are not sufficient to support a
federal securities claim and withstand dismissal under Rule 12(b)(6). Further, it is not clear from
Plaintiff's pleadings, who made the representations, guarantees, and promises at issue, and to
whom they were made. The court, taking a liberal view of Plaintiff's allegations in the Amended
Complaint, determines that, at best, Plaintiff raises the mere possibility of wrongdoing by
Defendants; however, when the allegations of the pleadings do not permit the court to infer more
than the mere possibility of wrongdoing, they fall short of showing that he is entitled to relief.
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City of St. Clair Shores General Employees’ Retirement System v. Lender Processing Services,
Inc., 2012 WL 1080953 (M.D. Fla. March 30, 2012).
Granting defendants’ motion to dismiss securities fraud claims brought by putative class
of company’s shareholders against company and certain directors and officers on the grounds
that the complaint, which lumped together the actions of the defendants, failed to allege scienter
with respect to each individual defendant and with respect to each alleged violation.
Hemenway v. Bartoletta, 2012 WL 1252691 (M.D. Fla. April 13, 2012).
Denying defendants’ motion to dismiss on the grounds that defendants could not rely on a
non-reliance clause, such as the one in the subscription agreements, to dismiss the plaintiffs’
securities fraud claims, and thus, plaintiff’s complaint passed muster under the PSLRA pleading
requirements.
In re Boston Scientific Corp. Securities Litigation, 686 F.3d 21 (C.A.1 Mass., 2012).
Shareholders brought a putative securities fraud class action against corporation alleging
that defendants made several misrepresentations or omitted to disclose information regarding
unlawful sales practices and subsequent dismissals, thereby leading to artificial inflation of the
corporation's stock. Defendants moved to dismiss the complaint. The Court affirmed the distict
court’s decision to grant Defendant’s motion to dismiss finding that shareholders failed to
adequately allege strong inference of scienter required under PSLRA to state securities fraud
claim. In affirming the decision, the court noted that inherent in the PLSRA is the risk that
dismissal on the complaint will leave without remedy some wrongs that discovery or trial might
have disclosed, albeit a risk Congress thought necessary.
Automotive Industries Pension Trust Fund v. Textron Inc., 682 F.3d 34 (C.A.1 R.I., 2012).
Investors filed a securities fraud class action alleging that company and senior officers
made a series of statements about its financial condition that were actionably misleading because
they omitted important qualifying information. Defendants motion to dismiss was granted and
plaintiff appealed. The court affirmed, holding that section 10(b)'s anti-fraud language, together
with the PSLRA, requires that for each misstatement or omission the complaint state with
particularity facts creating a strong inference that defendant acted with scienter, an intent to
deceive, manipulate, or defraud, or a high degree of recklessness suggesting an indifference to
deceit; nothing in the complaint supported such positions. The court also noted that Congress—
concerned about the cost and disruption—deliberately raised the entry bar to discovery both
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through the PSLRA's heightened pleading standards and by other measures, stating that such
trade offs based on real-world experience are what legislative judgment is all about.
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (C.A.2 N.Y., 2012).
In an action brought by shareholders for offerings of auction rate securities, and against
agencies that assigned credit ratings to the ARS, the court affirmed the district court’s dismissal
for failure to state a claim with particularity in accordance with the Federal Rule of Civil
Procedure 9(b) and the PSLRA. To satisfy Rule 9(b) the plaintiff must (1) specify the statements
that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent. The PSLRA
expanded on the Rule 9(b) standard, requiring that securities fraud complaints specify each
misleading statement; that they set forth the facts on which a belief that a statement is misleading
was formed; and that they state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.
Frederick v. Mechel OAO, 475 Fed.Appx. 353 (C.A.2 N.Y.,2012).
Retirement system brought putative securities class action against Russian mining and
metals company and three of its officers, alleging that company's American Depository Receipts
(ADRs) were artificially inflated as a result of misrepresentations regarding the reasons for a
recent period of extremely high profits. The district court dismissed the complaint. The Court of
Appeals affirmed, holding that plaintiff failed to allege strong inference of scienter as required
by PSLRA and further stating that the risk of investment loss common to all shareholders is
insufficient to create a legally cognizable motive to commit fraud.
Ipcon Collections LLC v. Costco Wholesale Corp., 698 F.3d 58 (C.A.2 N.Y., 2012).
In an action brought by Plaintiff seeking sanctions against Plaintiff for violation of Rule
11, the court held that such sanctions are discretionary, not mandatory. The court noted that
while the PSLRA mandates that mandates the imposition of sanctions if the court determines that
Rule 11 has been violated, securities cases not brought under PSLRA are not governed by such a
mandate.
Meridian Horizon Fund, LP v. KPMG, 487 Fed.Appx. 636 (C.A.2 N.Y., 2012).
Hedge funds brought securities fraud action against auditors, seeking to recover assets
they lost in a Ponzi scheme, and alleging that auditors failed to conduct their audits in
accordance with Generally Accepted Auditing Standards. Auditors moved to dismiss. The
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United States District Court for the Southern District of New York, Thomas P. Griesa, J., 747
F.Supp.2d 406, granted motions. Funds appealed. The Court of Appeals held that the funds
failed to allege strong inference of scienter, as required under PSLRA to state securities fraud
claims. The hedge funds' allegations that auditors ignored “red flags” of fraud and conducted
inadequate audits were insufficient to support strong inference of scienter, as required under
PSLRA to state securities fraud claims seeking recovery for assets lost in a Ponzi scheme.
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (C.A.2 N.Y.,
2012).
The court reversed the district court’s decision to dismiss a putative class action brought
by holders of mortgage-backed certificates alleging that registration statement for the certificates
contained false or misleading information. The court found that the district court erred in
requiring plaintiff to plead an out-of-pocket loss in order to allege a cognizable diminution in the
value of an illiquid security under § 11, explaining that the heightened pleading standards of the
PSLRA do not apply to non-fraud Securities Act claims to impose liability for material
misstatements or omissions in a registration statement or prospectus for a registered securities
offering.
Saltz v. First Frontier, L.P. 485 Fed.Appx. 46 (C.A.2 N.Y., 2012).
Investors in sub-feeder fund that indirectly invested in annb investment company
engaged in multi-billion dollar Ponzi scheme failed to state with particularity facts giving rise to
strong inference of scienter, as required under the PSLRA to state securities. The only relevant
allegation as to motive and opportunity, that defendants collected an annual management fee of
0.125%, was insufficiently concrete and personal, and investor made no allegation supporting
conclusion that defendants were aware of purported red flags. The district court’s decision to
dismiss the case was affirmed by court on the grounds that investors failed to state with
particularity facts giving rise to strong inference of scienter, and investors failed to state a
securities fraud claim.
Pipefitters Local No. 636 Defined Ben. Plan v. Zale Corp., 2012 WL 5985075 (C.A.5 Tex.,
2012).
Investors alleged that defendants knew the statements made in their SEC filings, press
releases, and investor calls were materially false, or acted in severely reckless disregard of their
falsity. The district court concluded that plaintiff’s theory under the was “plausible” but failed to
satisfy the heightened pleading standard for fraud claims pursuant to PSLRA. Where plaintiff did
not raise a strong inference that any of the three individual defendants, or any other official
responsible for the allegedly fraudulent financial statements, acted with scienter, the court
affirmed the lower court’s decision to grant defendant’s motion to dismiss.
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Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (C.A.6 Ky., 2012).
The court affirmed the district court’s decision to dismiss Plaintiff’s claims that broker
made false representations that certificates were reasonably safe investment products, holding
that Plaintiff’s claims were not sufficiently particular and therefore failed to adequately plead
actionable misrepresentations or omissions of fact. The court noted that the heightened pleading
standard that Congress imposed on securities-fraud actions in the PSLRA applies to claims
brought pursuant to Kentucky's Blue Sky Law § 292.320.
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 679 F.3d 952
(C.A.7 Ind., 2012).
Shareholders brought putative securities fraud class action against medical device
manufacturer and its officers, alleging that defendants omitted from public statements material
information relating to two of manufacturer's revenue sources which led to stock-price decline.
Manufacturer moved to dismiss and district court granted the motion, and denied shareholder's
motion to amend their complaint. The Court of Appeals held that allegations that defendants
downplayed the significance of high failure rate one surgeon reported for one of manufacturers's
devices failed to raise strong inference of scienter required to state securities fraud claim under
PSLRA.
Fulton County Employees Retirement System v. MGIC Inv. Corp., 675 F.3d 1047 (C.A.7 (Wis.,
2012).
Investors brought securities fraud class actions against a mortgage loan insurer. After
actions were consolidated by the district court, which then dismissed the complaintand denied
investors' motion for leave to amend complaint. Investor appealed. The Court of Appeals Tellabs
held that the complaint flunked the PSLRA's requirement for pleading scienter. The court further
explained that a complaint must contain facts rendering an inference of scienter at least as likely
as any plausible opposing inference.
McCrary v. Stifel, Nicolaus & Co., Inc., 687 F.3d 1052 (C.A.8 Mo., 2012).
Investors brought suit in state court alleging that brokerage and investment banking firm
and two of its employees violated federal securities law. Defendants removed action and moved
to dismiss. The district court granted motion and investors appealed. Plaintiffs point out that the
district court only analyzed the complaint under Rule 23 and expressly declined to address the
sufficiency of the allegations under the PSLRA. Plaintiffs contend that the district court could
not dismiss their individual claims without first reviewing the substance of those claims under
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the PSLRA. The Court of Appeals held that the district court was required to either stay
individual securities fraud claims pending arbitration or undertake analysis of claims under
PSLRA.
Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972 (C.A.8 Mo., 2012).
Allegations in complaint that pharmaceutical company made ten specific statements in
10-Ks it filed with SEC about its compliance with FDA regulations which were false or
misleading, that there was lengthy history of company manufacturing adulterated, unapproved,
and misbranded drugs in violation of FDA regulations due to manufacturing irregularities, that
company failed to address or correct serious manufacturing problems during class period, and
that company's operations were ultimately shut down as result of its failure to comply with
regulations, and stock market reacted to news of shutdown with significant drop in price of
company's stock, pled fraud with sufficient particularity, as required by PSLRA. Based on these
specific pleadings, the court concluded that the investors satisfied the PSLRA's pleading standard
with respect to the time, place, and contents of the allegedly false or misleading representations
and remanded the matter to the district court.
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Karpov v. Insight Enterprises, Inc., 471 Fed.Appx. 607 (C.A.9 Ariz., 2012).
D.1
Plaintiff-appellant, a union pension fund, appealed the district court's dismissal of its
securities fraud class action complaint with prejudice, for failing to adequately plead scienter. In
particular, the district court found, and the Court of Appeals affirmed, that none of the
allegations from confidential witnesses could support an inference of scienter because the
reliability and personal knowledge of the witnesses themselves were not properly pleaded.
Further, the court concluded that the other allegations could not, standing alone or taken
together, satisfy the more stringent pleading requirements for scienter contained in the PSLRA.
In re American Funds Securities Litigation, 479 Fed.Appx. 782 (C.A.9 Cal., 2012).
Investors in the American Funds, appeal the dismissal with prejudice of their claims that
defendants committed securities fraud in violation of §§ 10(b) and 20(a) of the Securities
Exchange Act of 1934. The district court held that plaintiffs' action was untimely because it was
filed more than two years after a reasonably diligent plaintiff could have discovered the facts
constituting the violation. Plaintiffs appealed and the court held that the district court erred in
dismissing the action as time-barred; however, because plaintiffs' complaint failed to allege
scienter with the requisite particularity, affirmed the dismissal and remanded for the limited
purpose of granting plaintiffs leave to amend, holding that because there was the possibility that
an amendment could cure this defect, plaintiffs must be given the chance to amend their
complaint to satisfy the heightened pleading standards established by Congress in the PSLRA.
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Gammel v. Hewlett-Packard Company, 2012 WL 5945089 (C.D.Cal. Aug. 29, 2012)
Motions to dismiss brought by computer company and its officers were granted based on
the court’s findings that plaintiffs failed to meet the PSLRA pleading standards for the
allegations of falsity and scienter. In addition, the court ruled that some of defendants’ public
statements were protected by the PSLRA’s safe harbor provisions and constituted in-actionable
puffery. The court summarily dismissed plaintiffs’ section 20(a) claim based on its dismissal of
the section 10(b) and Rule 10b-5 claims.
In re Level 3 Communications, Inc. Securities Litigation, 667 F.3d 1331 (C.A.10 Colo. 2012).
Investors failed to establish strong inference that telecommunications company officials'
made materially false statements about company's progress in integrating acquired entities with
scienter required to plead securities fraud claims under § 10(b), where critical terms at issue were
open to multiple interpretations. Pursuant to PSLRA, Inference of scienter required to plead
securities fraud claim need not be irrefutable, but court will draw strong inference of
recklessness only if, based on plaintiff's allegations, where a reasonable person would deem an
inference of scienter to be cogent and at least as compelling as any opposing inference one could
draw from the facts alleged.
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2. Appointment of Lead Plaintiff/Class Counsel
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City of Bristol Pension Fund v. Vertex Pharm., 2012 WL 6681907 (D. Mass. Dec. 21, 2012).
In a putative securities fraud class action, a pension plan moved for appointment as lead
plaintiff and defendant challenged the appointment contending that the pension plan lacked
standing. The district court found that the pension plan had the largest financial interest and met
the typicality and adequacy requirements of Fed. R. Civ. P. 23. The court further held that it was
not an appropriate stage in the hearing to consider defendant’s argument of lack of standing,
noting that numerous courts have interpreted the language of the Reform Act to mean that only a
member of the putative class may challenge a petition for lead plaintiff status. Accordingly, the
court appointed the pension plan as lead plaintiff and approved its selection of lead counsel.
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 332 (S.D.N.Y.
2012).
In a mortgage-backed securities class action, the court granted the previously-appointed
lead plaintiff’s motion to withdraw and considered its motion to appoint a substitute lead
plaintiff. Defendants argued that it was procedurally improper to allow the substitution without
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e-opening the lead plaintiff appointment process as set forth in the Reform Act. The court
approved a modified version of the lead plaintiff appointment process and determined that any
motion for appointment as lead plaintiff would be considered timely if the movant either:
(a) filed the complaint; (b) moved to be appointed lead plaintiff in response to the initial notice
of pendency; or (c) moved to be appointed lead plaintiff within thirty days of the withdrawal of
the previous lead plaintiff. As guidance for potential new movants, the court responded to
defendants’ argument that the original lead plaintiff’s proposed substitute lacked standing
because they purchased certificates from different tranches of the same offering. The court
concluded that because it was possible to trace the injury of the purchasers to the same
underlying conduct on the part of defendants, the certificates did not constitute different
securities. The court denied the original plaintiff’s motion to appoint its choice of substitute lead
plaintiff at this point in time, but noted that this decision did not preclude potential lead plaintiffs
relying on similar claims from ultimately being selected.
City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 844 F. Supp. 2d 498 (S.D.N.Y.
2012).
In a securities fraud class action, the district court reaffirmed a prior order granting an
unopposed motion for appointment as lead plaintiff filed by a retirement system. Because no
other plaintiff in the class moved to be appointed as lead plaintiff, the retirement system was
presumed to be the most adequate plaintiff. However, defendants filed post-hearing papers
opposing the appointment of the retirement system as lead plaintiff based on the disclosure of a
“monitoring agreement” between the retirement system and its counsel. Specifically, counsel
had agreed to monitor investments made by the retirement system and alert them to potential
lawsuits on the condition that the law firm would be the presumptive choice of counsel if the
retirement system chose to take action. The court noted that “lawyer driven litigation creates the
potential for abusive lawsuits” and found that the monitoring arrangement “may further foster
such tendencies.” However, despite these reservations, the court was satisfied that the
representative and trustees of the retirement system had the ability to properly exercise their role
as lead plaintiff and, after instruction by the court, recognized their duty to do so. The court also
noted that plaintiff asserted highly specific and detailed allegations, was not subject to any
unique defenses that would make it atypical or inadequate, and only a preliminary showing of
adequacy was required at that point. Therefore, the court reaffirmed its order appointing the
retirement system as lead plaintiff and approving lead counsel.
In re Gentiva Sec. Litig., 281 F.R.D. 108 (E.D.N.Y. 2012).
In a securities fraud class action, the district court reopened the lead plaintiff selection
process and considered four competing motions following the withdrawal of the originally
appointed lead plaintiff and consolidation of the case with four other federal class actions. The
court initially determined that two of the movants could immediately be excluded as clearly not
having the largest losses. However, one of these movants argued that it held the largest number
of shares through the end of the class period due to the fact that the two remaining movants sold
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most of their shares prior to the final corrective disclosure. The court dismissed this “in-and-out”
argument as inapplicable in this case because there were several plausible and legitimate partial
disclosures prior to the final disclosure. Therefore, it was not clear that the other movants had
improperly included trading losses from earlier stock sales. Of the two remaining movants, the
court dismissed one because there was no pre-existing relationship between the two institutional
investors that comprised the group and, taken individually, their losses were minimal in
comparison with the remaining movant, a retirement system. After determining that the
retirement system met the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court
appointed it as lead plaintiff and approved its choice of counsel.
Stone v. Agnico-Eagle Mines Ltd., 280 F.R.D. 142 (S.D.N.Y. 2012).
Following consolidation of two related securities fraud class actions, the district court
considered competing motions for appointment as lead plaintiff filed by a Swedish pension fund
and an individual investor. The pension fund alleged the largest loss and was presumptively the
most adequate plaintiff. However, the individual sought to rebut the presumption on several
grounds. First, the individual argued that the pension fund lacked standing on the basis that its
asserted losses might be losses of the fund’s clients rather than losses of the fund itself. The
court rejected this argument on the basis of a declaration submitted by the fund that it owned its
investments, it maintained exclusive control of the investments, and the fund had authority to sue
on behalf of its clients. The individual also argued that the fund’s purchases of the securities at
issue on the Toronto Stock Exchange in addition to its U.S. purchases might make the fund
vulnerable to unique defenses. However, the court accepted the fund’s response that it did not
intend to pursue claims based on its losses from the Toronto Stock Exchange and that movants
who purchase the securities of a company on multiple exchanges are suitable as lead plaintiffs.
Finally, the individual argued that Swedish courts might not enforce the ruling, which would
make the fund atypical of the purported class. The fund noted that courts have rejected res
judicata concerns when foreign lead plaintiff movants are suing as a result of purchases made on
a domestic securities exchange. The court agreed that the risk of Swedish courts denying res
judicata effect to a ruling did not make the fund inadequate to serve as lead plaintiff. The court
denied the individual’s request to serve as co-lead plaintiff, appointed the pension fund as lead
plaintiff, and approved its selection of lead counsel.
In re Facebook, Inc., IPO Sec. & Deriv. Litig., 2012 WL 6061862 (S.D.N.Y. Dec. 6, 2012).
Faced with numerous class actions arising from the IPO of Facebook, the district court
evaluated motions for consolidation and lead plaintiff status. With respect to securities fraud
class actions against Facebook and certain of its officers and directors, the court consolidated
these actions, appointed an institutional investor group as lead plaintiff, and approved its
selection of co-lead counsel. The court determined that the investor group had the largest
financial interest utilizing a four-factor test which considers: (1) the number of shares purchased
during the class period; (2) the number of net shares purchased during the class period (i.e., the
number of shares retained during the period); (3) the total net funds expended during the class
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period; and (4) the approximate loss suffered during the class period. The court rejected a
competing movant’s argument that the investor group was atypical due to the timing of its
purchases, noting that “[c]ourts have consistently rejected the argument that post-disclosure
purchases preclude a proposed class representative from meeting Rule 23(a) requirements.” The
court also rejected contentions that the investor group was atypical due to potential conflicts of
interest arising from business relationships by persons within the group with some of the
companies connected to the allegations. The court held that “[r]elationships, between movants
and individual defendants, even when close, do not necessarily raise a conflict of interest
sufficient to rebut the lead plaintiff presumption.” The court further held that securities fraud
and negligence actions against NASDAQ-related entities would be consolidated separately, and a
group with the largest financial interest which “easily satisfie[d] Rule 23’s adequacy and
typicality requirements” was appointed as lead plaintiff. In addition, the court appointed a colead
plaintiff “whose losses focus on the alleged negligent failure of NASDAQ to maintain a
properly functioning trading platform for the Facebook IPO,” along with co-lead counsel on an
interim basis.
Casper v. Jinan, 2012 WL 3865267 (S.D.N.Y. Sept. 6, 2012).
In a shareholder class action, the court considered two competing motions for
appointment as lead plaintiff filed by an individual investor and a group of investors. The court
noted that although the individual acquired more shares during the class period, the group’s net
shares and net expenditures exceeded those of the individual and, therefore, the group had a
larger financial interest. The court further held that the investor group satisfied the typicality and
adequacy requirements of Fed. R. Civ. P. 23 and rejected a challenge to the adequacy of the
group’s selection of counsel. The court noted that the individual failed to offer specific evidence
that the firm lacked the necessary experience and resources to protect the interests of the class
and simply resorted to speculation. Accordingly, the court appointed the investor group as lead
plaintiff and approved its selection of lead counsel.
George v. China Auto. Sys., Inc., 2012 WL 3205062 (S.D.N.Y. Aug. 8, 2012).
Following the appointment of an investor group as lead plaintiff and selection of lead
counsel, the lead plaintiff sought appointment of co-lead counsel. The court rejected defendants’
opposition to the motion, noting that “courts typically do not credit objections to appointment of
(co-)lead counsel by a defendant.” The court conditionally granted the request for co-lead
counsel pending submission and review of an affidavit setting forth how the two firms
implemented procedures to limit legal fees and costs, required approval for significant expenses,
and negotiated a competitive fee arrangement with plaintiffs.
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Bo Young Cha v. Kinross Gold Corp., 2012 WL 2025850 (S.D.N.Y. May 31, 2012).
In a putative securities fraud class action, the district court considered four competing
motions for appointment as lead plaintiff filed by: (i) pension, retirement, and annuity funds of a
union (“Union Funds”); (ii) a city’s retirement system (“Retirement System”); (iii) a city’s
pension plan investment trust (“Investment Trust”); and (iv) two individual investors. The
Investment Trust and individual investors conceded that they lacked the largest financial interest
in the case. The court used the Last-In-First-Out (“LIFO”) methodology to determine that the
Retirement System had the largest losses and was presumptively the most adequate plaintiff.
The Union Funds attempted to rebut the presumption by arguing that other loss calculation
methods were more appropriate. The court rejected the Union Funds’ attempt to use the First-In-
First-Out (“FIFO”) methodology on the basis that “the overwhelming trend both in this district
and nationwide has been to use LIFO to calculate such losses.” The Union Funds also proposed
the “Economic Reality” method, in which losses are evaluated by excising pre-class-period
shares from the tabulation of plaintiff’s total losses by pairing pre-class period purchases with
shares sold during the class period. The court rejected this methodology, noting that the Union
Funds’ purchases and sales were made at a variety of times at different prices, making the
pairing process “subjective and judgmental.” After determining that the Retirement System
satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court appointed it as
lead plaintiff and approved its choice of lead counsel.
Gordon v. Sonar Capital Mgmt. LLC, 2012 WL 1193844 (S.D.N.Y. Apr. 9, 2012).
In a securities fraud class action, the court appointed two individuals as co-lead plaintiffs.
Initially, each had filed separate motions for appointment as lead plaintiff and then amended
their motions to seek appointment as co-lead plaintiffs. The court initially determined that one of
the individuals, a retired judge, had the greatest financial stake and significant legal credentials.
However, the court also found that both movants had limited experience with overseeing
securities litigation and the combined business and legal experience of the two individuals would
be advantageous. Moreover, a potential challenge relating to the typicality requirement under
Fed. R. Civ. P. 23 would be mooted by the appointment of both individuals as co-lead plaintiffs.
Accordingly, the court appointed the two individuals as co-lead plaintiffs and approved their
request for two firms to serve as co-lead counsel.
Wallace v. IntraLinks Holdings, Inc., 2012 WL 1108572 (S.D.N.Y. Apr. 3, 2012).
Following consolidation of two related securities fraud class actions, the court considered
four competing motions for appointment as lead plaintiff. The court appointed a pension fund as
lead plaintiff, noting that its loss was exponentially larger than any other plaintiff that had come
forward and its losses exceeded the combined losses of all three other movants. The court
further held that the pension fund satisfied the typicality and adequacy requirements of Fed. R.
Civ. P. 23 and no party had set forth any evidence or arguments rebutting the argument that the
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pension fund was the most appropriate lead plaintiff. The court also approved the pension fund’s
selection of lead counsel, noting that the firm was highly experienced in complex securities class
actions.
In re CMED Sec. Litig., 2012 WL 1118302 (S.D.N.Y. Apr. 2, 2012).
The district court considered three competing motions for appointment as lead plaintiff
filed by two individuals and a group consisting of a company and two individuals, one of whom
was the company’s sole shareholder and managing director. One of the individual movants was
eliminated from consideration as he had the smallest financial interest and did not oppose the
motions by the other two movants. The three-member group had the largest financial interest in
the case, but the remaining individual movant argued that the group was a lawyer-driven creation
with only two of three members having a pre-litigation relationship. The court agreed that the
group was lawyer-driven, but rejected the individual movant’s contention that seeking lead
plaintiff appointment as a group foreclosed the group’s ability to be considered individually or in
some combination for lead plaintiff status. The court then compared the losses of each member
of the group with the individual movant and found that by aggregating the losses of two
members of the group on the basis of their pre-litigation relationship, their collective losses were
greater than those of the individual movant. The individual movant then claimed that the group’s
use of “the retained shares methodology” as an alternative method for calculation of losses
indicated that the group would not seek relief on behalf of investors who suffered losses in
connection with partial corrective disclosures. The court rejected this argument, finding that
there was no indication that the any of the group members abandoned the partial corrective
disclosures merely by showing an alternative method of calculating losses. Accordingly, the
court disaggregated the original group and appointed the related pair as lead plaintiff and
approved their choice of lead counsel.
Peters v. JinkoSolar Holding Co., 2012 WL 946875 (S.D.N.Y. Mar. 19, 2012).
In a securities class action, the court considered five competing motions for appointment
as lead plaintiff, as well as an amended motion for appointment as lead plaintiff filed by a group
comprised of two of the original movants. Based on financial interest alone, the combined group
was the presumptive lead plaintiff. However, another movant argued that: (1) the combined
group provided no explanation for the formation of the group or how it would act cohesively;
and (2) the group’s motion for appointment as lead plaintiff was untimely under the Reform Act.
In dealing with lead plaintiff groups of unrelated investors, the court stated that three basic
factors are relevant to the inquiry: “(1) the size of the group; (2) the relationship between the
parties; and (3) any evidence that the group was formed in bad faith.” With respect to the first
factor, the court noted that it is generally agreed that a group comprised of five or fewer
members is appropriate. The court also found that the combined group’s explanation for its
formation and declaration concerning cohesiveness met the standards outlined by case law.
Because the combined group was comprised of the class members with “far and away the largest
financial interest,” the court determined that policy was not disserved by allowing the individuals
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to join together. With respect to the timeliness argument, the court noted that courts have
allowed amended motions by groups after the sixty-day deadline where each member of the
newly-formed group had previously filed a timely motion. After finding that the combined
group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the court
appointed the group as lead plaintiff and approved its choice of co-lead counsel. Finally, the
court denied a competing movant’s motion for reconsideration and request for certification for
interlocutory appeal under § 1292(b).
Beckman v. Ener1, Inc., 2012 WL 512651 (S.D.N.Y. Feb. 15, 2012).
Following consolidation of three securities fraud class actions, the district court
considered three competing motions for appointment as lead plaintiff. Each motion was filed by
a group, one of which consisted of a husband and wife, a second consisting of three unrelated
individuals, and the third consisting of two brothers and three additional unrelated individuals.
Although the court found that the third group had the largest collective financial loss, it
concluded that there was “a real threat of lawyer-driven litigation.” Specifically, the court noted
that the group had requested three different firms as lead-counsel, which demonstrated a lack of
cohesion. Accordingly, the court disaggregated the group, and considered the two brothers as a
group and the remaining three as individual contenders. Since the husband and wife group had
larger losses than the other groups or individuals, the husband and wife group was the
presumptive lead plaintiff. After finding that the husband and wife met the typicality and
adequacy requirements of Fed. R. Civ. P. 23, the court appointed them as lead plaintiff and
approved their selection of lead counsel.
Prefontaine v. Research In Motion Ltd., 2012 WL 104770 (S.D.N.Y. Jan. 5, 2012).
After consolidating three related putative securities fraud class actions, the district court
considered three competing motions for appointment as lead plaintiff filed by an investor group,
a pension trust, and an individual investor. The individual investor had the largest losses and,
thus, was presumptively the most adequate plaintiff. Other movants attempted to rebut the
presumption by arguing that: (i) the individual investor would not adequately represent the
plaintiff class because he profited from options transactions that took place during the class
period; (ii) he lacked standing to bring claims on behalf of the class because the losses were not
his, but rather were losses of his clients; and (iii) as a day trader, he was subject to a unique
defense because he may not have relied on the integrity of the market in making trades. The
court noted that the accuracy of the first claim was disputed and, furthermore, conclusory
statements are not adequate to demonstrate a conflict of interest sufficient to overcome a
preliminary showing of adequacy. The second claim was supported only by speculative
statements and was contradicted by the individual investor in a sworn declaration. Finally, the
court rejected the argument that the individual should be prohibited from serving as lead plaintiff
because he engaged in day-trading. The court noted that “the prevailing view in this Circuit is
that ‘day and momentum traders have the same incentives to prove defendants’ liability as all
other class members, and their presence in a securities class does not create intra-class
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conflicts.’” Accordingly, the court found that the individual investor satisfied the adequacy and
typicality requirements of Fed. R. Civ. P. 23, appointed him as lead plaintiff, and approved his
selection of lead counsel.
Grodko v. Central European Dist. Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012).
Following de-consolidation of two shareholder class actions, the district court appointed a
pension system as lead plaintiff. Although another institutional investor group alleged the
greatest loss, the court found that it was subject to unique defenses concerning loss causation
which arose from the timing of stock sales. The pension system had the next largest loss, but had
not submitted a timely application for appointment as lead plaintiff. Nevertheless, the court held
that the filing of a complaint by the pension fund was adequate for it to be considered as lead
plaintiff under the Reform Act. The court also rejected the competing movant’s argument that
counsel for the pension system had engaged in unethical gamesmanship and forum shopping
arising from representation of multiple plaintiffs. The court determined that counsel’s actions
were not necessarily unethical and were not grounds for denying lead plaintiff status to the
pension fund, noting that the proper remedy would be the selection of other counsel. After
finding that the firm selected by the pension system had extensive experience with complex
litigation and a successful track record, the court appointed the pension system as lead plaintiff
and approved its choice of lead counsel.
In re Central European Dist. Corp. Sec. Litig., 2012 WL 5511711 (D.N.J. Nov. 14, 2012).
Where a lead plaintiff had been appointed in a securities class action, a rejected movant
for lead plaintiff filed a motion for interlocutory appeal concerning the determination. The
district court denied the motion, restating that the moving party was subject to unique defenses
regarding standing that could prejudice the class. Specifically, several members of the group had
an investment advisor bring their claims, even though the advisor had no ownership interest in
the claims. Moreover, the court held that none of the questions proposed for certification would
have materially advanced the termination of the litigation, but rather would likely cause delay.
Finally, several of the questions were not previously opined on by the court and, thus, could not
be certified for review. Accordingly, the court denied the motion for interlocutory appeal.
Steamfitters Local 449 Pension Fund v. Cent. European Dist. Corp., 2012 WL 3638629 (D.N.J.
Aug. 22, 2012).
In a securities fraud class action, the district court addressed the Report and
Recommendation filed by the Magistrate Judge regarding consolidation and appointment of the
lead plaintiff. The court considered two competing motions for appointment of lead plaintiff
filed by a group of foreign investment entities and a group of retirement systems. First, the court
identified the group of foreign entities as the presumptive lead plaintiff due to the fact that it
suffered ten times the losses of the group of retirement systems. However, the court found that
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the foreign entities group was subject to unique defenses regarding standing. Specifically, the
group had neither the authority to bring lawsuits, nor title to the claims because the injury was
suffered by subsidiaries of the group, and not by the group itself. Further, the court held that the
subsidiaries were subject to unique defenses regarding timely filing. After finding that the group
of retirement systems satisfied the requirements of Fed. R. Civ. P. 23, the court appointed it as
lead plaintiff and approved its selection of counsel. In addition, consolidation was unopposed
and granted.
Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 2012 WL 3597179 (M.D. Pa. Aug. 20, 2012).
In a securities fraud class action, the district court granted an unopposed motion for
appointment as lead plaintiff filed by Southeastern Pennsylvania Transportation Authority
(“SEPTA”). The court noted that SEPTA was the only investor to have filed a complaint arising
from the allegations and no party questioned that SEPTA had the largest financial interest in the
relief sought by the class. Since there were no other movants, SEPTA was presumptively the
most adequate plaintiff. After finding that SEPTA satisfied the typicality and adequacy
requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved its
selection of lead counsel.
Shah v. GenVec, Inc., 2012 WL 1478792 (D. Md. Apr. 26, 2012).
In a shareholder class action, the district court granted an unopposed motion for
appointment as lead plaintiff filed by a group of five investors. The court held that the group had
the largest known financial interest, their claims were typical of the class, and the adequacy
requirement was satisfied based upon their declarations that they are a “small cohesive,
manageable group that all will work together and direct the activities of … counsel.”
Accordingly, the court appointed the group as lead plaintiff and approved its selection of lead
counsel.
Miraglia v. Human Genome Science Inc., 2012 WL 987502 (D. Md. Mar. 22, 2012).
Following consolidation of two substantially similar class actions, the district court
granted an unopposed motion for appointment as lead plaintiff filed by an individual. The
individual was the only putative class member that timely sought appointment as lead plaintiff,
he had the largest financial interest in the relief sought, and otherwise met the requirements of
Fed. R. Civ. P. 23. Accordingly, the court appointed the individual as lead plaintiff, approved
his selection of lead counsel, and also appointed liaison counsel.
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McIntyre v. Chelsea Therapeutics Int’l, Ltd., 2012 WL 3962522 (W.D.N.C. Aug. 16, 2012).
On five competing motions for appointment as lead plaintiff, the district court appointed
an individual as lead plaintiff and approved his selection of lead counsel. The court held that the
individual had the largest financial interest “by far” and satisfied the typicality and adequacy
requirements of Fed. R. Civ. P. 23. Specifically, the individual purchased the defendant’s
common stock, suffered damages purportedly due to defendant’s actions, and possessed claims
against the defendant and its officers and/or directors. The court rejected a competing movant’s
argument that the individual was subject to a unique defense because of the timing of his
purchases. The competing movant, a group of two individuals, was also challenged because of
the lack of a previous relationship prior to the class action. Accordingly, the court appointed the
individual as lead plaintiff and approved his selection of lead counsel.
Hohenstein v. Behringer Harvard REIT I, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20, 2012).
In a shareholder class action, the district court granted an unopposed for motion for
appointment as lead plaintiff filed by a group of investors. The group purchased the securities at
issue during the relevant time period, asserted the largest financial interest, and alleged that it
was subjected to false and misleading statements by defendants in regulatory filings. After
finding that the group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23,
the court appointed the investor group as lead plaintiff and approved its selection of lead counsel
and liaison counsel.
Blitz v. AgFeed Indus., Inc., 2012 WL 1192814 (M.D. Tenn. Apr. 10, 2012).
In a securities fraud class action formed from the consolidation of five cases, the court
considered four competing motions for appointment as lead plaintiff. The court determined that
a group comprised of five investors alleged the largest losses, rejecting arguments relating to the
method of calculating loss and the assertion that some of the losses should not be considered
because they were losses from shares that were sold prior to any corrective disclosure. The court
also disagreed that the investor group was “cobbled together” by lawyers and would not
adequately represent the interests of the class. After determining that the investor group alleged
the largest loss and satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23, the
court appointed the group as lead plaintiff and approved its choice of co-lead and liaison counsel.
Bristol County Ret. Sys. v. Allscripts Healthcare Solutions, Inc., 2012 WL 5471110 (N.D. Ill.
Nov. 9, 2012).
In a securities fraud class action, two institutional groups filed competing motions for
appointment as lead plaintiff. One group advocated using a “last-in-first-out” method of
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determining losses, whereas the other group proffered “first-in-first-out” calculations. The court
held that under either method, a group of pension plans suffered the largest losses, in addition to
having purchased the largest amount of shares during the class period. Accordingly, the group of
pension plans was presumptively the most adequate plaintiff. The court further held that the
pension fund group satisfied the typicality and adequacy requirements of Fed. R. Civ. P. 23 and
rejected the other movant’s rebuttal argument that the group was merely a “convenient grouping
of plaintiffs.” Accordingly, the court appointed the pension plan group as lead plaintiff and
approved its selection of lead counsel.
In re Groupon, Inc. Sec. Litig., 2012 WL 3779311 (N.D. Ill. Aug. 28, 2012).
On three competing motions for appointment as lead plaintiff, the district court appointed
an individual as lead plaintiff and rejected challenges based upon his personal background.
Specifically, the court initially determined that it was undisputed that the individual had the
largest financial interest in the relief sought. However, a competing movant argued that the
individual was an inadequate lead plaintiff because he had “a history of poor decision-making”
as evidenced by DUI convictions and a personal bankruptcy. The court found it significant that
the DUI convictions had occurred over twenty-five years ago when the individual was struggling
with an alcohol addiction and the individual had affirmed that he had not consumed alcohol in
twenty-five years. In addition, the bankruptcy had occurred twelve years ago and the individual
affirmed that in the years that followed, his financial condition had materially improved. The
court concluded that the combination of a “two-decade-old DUI convictions and a personal
bankruptcy filing does not call into question [the individual’s] adequacy to serve as lead
plaintiff.” The court also rejected a pension trust’s argument that it should be appointed as lead
plaintiff based upon its status as the lone institutional investor. The court held that status as an
institutional investor “does not trump the explicit language of the PSLRA.” Since the individual
had significantly larger losses and satisfied the requirements of Fed. R. Civ. P. 23, the court
appointed him as lead plaintiff and approved his choice of lead counsel.
Chester County Emps.’ Ret. Fund v. White, 2012 WL 1245724 (N.D. Ill. Apr. 13, 2012).
In a shareholder derivative suit, the court considered two competing motions for
appointment as lead plaintiff filed by a retirement fund and a pension fund. A second pension
fund argued that the decision to appoint a lead plaintiff was improperly premised on the Reform
Act and was premature and, in the alternative, moved for appointment itself. The court agreed
that the Act did not apply and that the standard for appointment of lead plaintiff in a shareholder
derivative suit is that the plaintiff must “fairly and adequately represent the interests of the
shareholders.” In some cases, courts have appointed solely lead counsel, and the second pension
fund urged the court to adopt this course of action. However, the court declined to do so, noting
that courts within the Northern District of Illinois have chosen to appoint a lead plaintiff
simultaneously with lead counsel. The court applied five factors to determine the most adequate
plaintiff: (1) preference for institutional investors; (2) financial stake; (3) capabilities of counsel;
(4) vigorousness of prosecution; and (5) quality of pleadings. All movants were institutional
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investors with equally capable counsel. The court found that the first pension fund had the
greatest financial stake and held a slight advantage in terms of the vigorousness of prosecution
and quality of pleading. In particular, the court noted that the fund filed FOIA requests which
yielded substantial document productions, demonstrated a commitment to cooperation and
streamlining the consolidation process, and had gained support from three other cases that had
been consolidated in this action. Accordingly, the court appointed the first pension fund lead as
plaintiff and approved its choice of counsel.
City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Hospira, Inc., 2012 WL 1339678 (N.D. Ill. Apr.
18, 2012).
In a securities class action, the court considered four competing motions for appointment
of lead plaintiff filed by four groups of institutional investors. After the conclusion of the sixtyday
filing period, two of the original groups combined their proposals and moved for joint
appointment as lead plaintiff. The court found the amended proposal timely, noting that courts
have permitted amended motions by groups that were combined after the deadline as long as
each member of the amended group previously filed a timely motion for appointment. This
“combined group” suffered the greatest losses using either a FIFO or LIFO methodology. Of the
remaining two movants, the court eliminated one as clearly having the smallest financial losses.
The court disagreed with allegations that the combined group was improperly cobbled together,
nothing that the combined group had submitted sworn declarations expressing their request to
work jointly and outlining their initial plans for cooperation. Furthermore, they were a small and
presumptively cohesive group of sophisticated and knowledgeable investors with aligned
interests. Therefore, the court found that the combined group was presumptively the most
adequate plaintiff because they had the largest financial interest and were small enough to
adequately control and monitor the litigation. The court further noted that the combined group
was the most diverse. After determining that the combined group satisfied the typicality and
adequacy requirements of Fed. R. Civ. P. 23, the court appointed them as lead plaintiff and
approved their choice of lead counsel.
In re K-V Pharm. Co. Sec. Litig., 2012 WL 1570118 (E.D.Mo. May 3, 2012).
In a consolidated securities fraud putative class action, the court considered two
competing motions for appointment as lead plaintiff. One movant, a group consisting of two
family members, alleged the largest losses. The other movant, an individual, argued that the
family was a “net gainer” because it profited by selling artificially inflated shares during the
class period. In addition, the individual contended that the family purchased shares after a
partially corrective disclosure, subjecting them to unique defenses that would undermine their
ability to rely on the fraud-on-the-market doctrine. The family contended that the calculations
showing a net gain on their part were wrong because the calculation failed to adequately match
purchases and sales. The court agreed, and was not persuaded by the argument that trading
activity after the partial first disclosure rendered the family incapable of adequately representing
the class, noting that “[c]ourts have consistently rejected the argument that post-disclosure
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purchases preclude a proposed class representative from meeting the requirements of Rule 23(a)
requirements in a fraud-on-the-market suit.” The competing movant further argued that one
member of the family was inadequate to represent the class because of his young age and
questionable trading history. The court found that he traded under the direction and control of
another member of the group and that she was better suited to represent the class. After
determining that this family member alone had the largest losses and satisfied the typicality and
adequacy requirements of Fed. R. Civ. P. 23, the court appointed her as lead plaintiff and
approved her choice of lead and liaison counsel.
Smilovits v. First Solar, Inc., 2012 WL 3002513 (D. Ariz. July 23, 2012).
In a securities fraud class action, the district court considered seven competing motions to
be appointed as lead plaintiff. Five of the proposed lead plaintiffs conceded that they did not
have the largest financial interest in the case, leaving a group comprised of two pension funds
(the “Pension Group”) and a domestic teachers’ retirement system (the “Retirement System”).
The Retirement System argued that the Pension Group’s losses should not be aggregated, that
loss should be calculated by net shares purchased, and that the members of the Pension Group
would not be able to work together effectively. The court noted that the Reform Act makes clear
that the losses of a group may be considered in determining the largest financial interest, and
further noted that the two funds comprising the group were closely coordinated and managed by
the same entity, making it impossible for the court to conclude that the two funds would be
incapable of working together. The court disputed the factual basis of several of the Retirement
System’s allegations, including claims regarding the Pension Group’s fee agreement and an
allegation that the United Kingdom’s Department of Energy and Climate Change controlled the
Pension Group’s investment strategy and had certified the reliability of the product in question in
the lawsuit. The court dismissed the Retirement System’s other arguments as not amounting to
the required level of proof, including the Retirement System’s claims about the Pension Group’s
reliance on non-market information that challenged their typicality, and a claim of divergent
interests based on a trustee’s remark concerning the ethical basis for securities class action
lawsuits. Finally, the court rejected a series of comparative arguments that focused on the
Retirement System’s superior ability to serve as lead plaintiff. The court noted that once the
“most adequate” presumption is triggered, the question is not whether another movant might do a
better job of protecting the interest of the class, but rather whether anyone can prove that the
presumptive lead plaintiff will not do a fair and adequate job. Concluding that the Retirement
System did not present proof adequate to overcome this presumption, the court found that the
Pension Group met the requirements of Fed. R. Civ. P. 23 and, accordingly, appointed it as lead
plaintiff and approved its choice of counsel.
In re Diamond Foods, Inc., Sec. Litig., 281 F.R.D. 405 (N.D Cal. 2012).
After consolidating six related putative securities fraud class actions, the district court
considered competing motions for appointment as lead plaintiff. All but two movants withdrew
their motions or did not oppose the motions by other candidates. The two remaining candidates
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were a retirement system and a pension fund. The retirement system undisputedly had the
greatest losses and was therefore presumptively the most adequate plaintiff. However, the
pension fund contended that the retirement system should be barred from serving as lead plaintiff
under the “professional plaintiff” provision of the Reform Act because it had already been
appointed as lead plaintiff in more than five securities class actions in the last three years. The
retirement system argued that the professional plaintiff bar does not apply to institutional
investors. The court noted that the majority of judges in the district that have addressed the issue
have concluded that the “professional plaintiff” bar was not intended to apply to institutional
investors. In addition, the statute clearly provides courts with the authority to lift the bar. The
court chose to do so in this case because the retirement system’s losses were seven times greater
than those of the pension fund. The pension fund further argued that: (1) the retirement system
did not disclose a seventh case in which it had been appointed lead plaintiff in the last three
years; (2) no special circumstances existed which required lifting the bar; and (3) the retirement
system was involved in too many cases and wouldn’t be able to manage the litigation. The court
found persuasive the retirement system’s explanation that the seventh case was not disclosed
since it had been consolidated with an earlier filed case, moving it outside the relevant time
period. The court also noted that no special circumstances were necessary to justify raising the
professional plaintiff bar. Finally, the court found the concern about the retirement system’s
ability to manage the case unwarranted since the Mississippi Attorney General’s Office had
primary responsibility for the case and had sufficient resources and experience to effectively
manage the litigation. After finding that the retirement system met the requirements of Fed. R.
Civ. P. 23, the court appointed it as lead plaintiff and instructed it to select class counsel and
submit its choice to the court for approval.
Bruce v. Suntech Power Holdings Co., 2012 WL 5927985 (N.D. Cal. Nov. 13, 2012).
The district court considered two competing motions for appointment as lead plaintiff
after two other movants withdrew their motions. A group comprised of three investors had the
largest financial interest, but the competing movant argued that the group had been “‘cobble[d]
together’ to ‘artificially construct the largest losses.’” The court rejected this argument, noting
that a single member of the group had the largest stake on his own and the group was small and
cohesive. The court further held that the group satisfied the typicality and adequacy
requirements of Fed. R. Civ. P. 23. Accordingly, the court appointed the investor group as lead
plaintiff and approved its selection of two law firms as co-lead counsel.
Puente v. ChinaCast Educ. Corp., 2012 WL 3731822 (C.D. Cal. Aug. 22, 2012).
After consolidating two related putative securities fraud class actions, the district court
considered two motions for appointment as lead plaintiff filed by a group of funds and an
individual investor. The individual investor acknowledged that the group of funds had a larger
financial interest in the outcome of the case and, therefore, was presumptively the most adequate
plaintiff. After finding that the group of funds satisfied the typicality and adequacy requirements
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of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved its selection of lead
counsel.
In re Diamond Foods, Inc., Sec. Litig., 2012 WL 2146315 (N.D. Cal. June 13, 2012).
Following the appointment of a retirement system as lead plaintiff, the district court
addressed the selection of lead counsel. Based on the recommendation of lead plaintiff and the
court’s review of declarations explaining the due diligence undertaken in the selection of
counsel, the court appointed two firms as class counsel and specified an individual attorney to
serve as lead counsel. The court declined to appoint three law firms “due to the risk of wasteful
duplicative effort.”
In re Netflix, Inc., Sec. Litig., 2012 WL 1496171 (N.D. Cal. Apr. 27, 2012).
After consolidating related putative securities class actions, the court considered six
competing motions for appointment as lead plaintiff. Three movants filed statements of nonopposition
to the appointment of another movant, and one movant failed to make any filings after
his initial motion and did not appear at oral argument. The remaining two movants were: (1) a
group consisting of two institutional investors who had a pre-existing relationship based on
serving together as lead plaintiffs in another case; and (2) a group of three individual investors
with no relationship to each other pre-dating the litigation. The group of institutional investors
had the largest financial losses. Moreover, the court found that it was appropriate to aggregate
their losses, as the group had shown a pre-existing relationship indicating their cohesion and
ability to adequately control and oversee the litigation. By contrast, the court noted that courts in
the Ninth Circuit “uniformly refuse to aggregate the losses of individual investors with no
apparent connection to each other aside from their counsel.” Furthermore, one member of the
group of individuals was subject to unique defenses in that she was not the legal entity who held
the account on which her loss calculation was based. The court also rejected the argument that
losses should be calculated as a percentage relative to the investor’s overall portfolio, as this
would result in individual investors nearly always having the largest financial stake and “defeat
the [Reform Act’s] aim of putting institutional investors at the helm of more private securities
class actions.” Finally, the court found that the group of institutional investors was not barred by
the professional plaintiff bar, as this bar is discretionary and the PSLRA was intended in part to
encourage institutional investors to take the lead in private securities class actions. After finding
that the group of institutional investors satisfied the requirements of Fed. R. Civ. P. 23, the court
appointed the institutional group as lead plaintiff and approved its choice of lead counsel.
Feyko v. Yuhe Int’l Inc., 2012 WL 682882 (C.D. Cal. Mar. 2, 2012).
In a shareholder class action, the district court appointed a hedge fund as lead plaintiff. A
competing movant conceded that the hedge fund had the greatest losses, but argued that a hedge
fund is not a typical or ideal plaintiff. The court noted that hedge funds are routinely appointed
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as lead plaintiffs and “[a]rguments that hedge funds are per se inappropriate candidates for
appointment as lead plaintiff are unsupported by statute or case law.” The court further held that
the typicality and adequacy requirements of Fed. R. Civ. P. 23 had been satisfied. Accordingly,
the court appointed the hedge fund as lead plaintiff and approved its selection of class counsel.
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 WL 78780 (N.D. Cal. Jan. 9, 2012).
In a shareholder securities fraud class action, the district court appointed a group
comprised of two public retirement systems as lead plaintiff and approved its selection of lead
counsel. Although two competing motions were filed by pension funds, neither opposed the
motion filed by the public retirement systems. Utilizing the “last-in, first-out” method for
calculation of losses, the district court found that the retirement system group suffered the
greatest loss and neither of the competing movants argued that they suffered a larger loss under a
different calculation method. The court further held that the claims asserted by the retirement
system group alleging the purchase of stock at prices artificially inflated by defendants’ alleged
misrepresentations during the class period satisfied the typicality requirement of Fed. R. Civ. P.
23. Finally, the court found that the retirement system group had demonstrated that it would
vigorously prosecute the action on behalf of the class and, thus, satisfied the adequacy
requirement of Fed. R. Civ. P. 23. Accordingly, the court appointed the group of public
retirement systems as lead plaintiff and approved its selection of lead counsel.
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D. Id. Jul. 12,
2012).
After consolidating two related securities fraud class actions, the district court considered
competing motions for appointment as lead plaintiff filed by five groups of investors. The court
narrowed the field to the two groups with the highest financial interests: a retirement system and
a group of institutional investors. The issue at stake in determining losses was the valuation of
call options versus shares of common stock. The retirement system placed the value of a call
option at the entire price of the option, whereas the institutional investors used the Black-Scholes
Option Pricing Model (“BSOPM”), a model intended for calculation of damages for option
holders. Noting that it did not adopt either party’s valuation as establishing damages, the court
was persuaded that the retirement system’s loss estimate was likely too high and “not
realistically related to what the movant is likely to be able to recover.” Therefore, the court
concluded that the group of institutional investors had the most to gain from the lawsuit and was
presumptively the most adequate plaintiff. The retirement system attempted to rebut the
presumption by challenging the institutional investor group’s typicality on the basis that the
losses reported by one member were those of clients, and not of the organization itself.
However, because this member was the only interested party legally able to seek damages, the
court rejected this challenge. Additionally, the court rejected the argument that because the
institutional investors substituted a lower valuation for call options, they would harm the
proposed class by getting a lower recovery for option holders. The court found that this
reasoning would disqualify any movant that argued that a competing movant had overstated its
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potential recovery. Next, the court found that although counsel for the institutional investors also
represented one of the other original five movants, this fact did not overcome the institutional
investor group’s preliminary showing of typicality and adequacy. Finally, the court concluded
that the institutional investors could be a proper, cohesive group despite having no preexisting
relationship. Accordingly, the court appointed the institutional investor group as lead plaintiff
and approved its choice of lead counsel.
Darwin v. Taylor, 2012 WL 5250400 (D. Colo. Oct. 23, 2012).
In a consolidated putative securities fraud class action, the district court considered three
competing motions for appointment as lead plaintiff. After one movant conceded that it did not
have the largest financial interest, the court considered whether to accept a revised loss
calculation by one of the other movants. Noting that his previous calculations suffered from
various errors, the court also observed that the corrected filing incorporated additional
transactions that were not previously disclosed. Observing that it was unaware of “any cases in
which a lead plaintiff has been appointed based on trading information and corresponding losses
introduced for the first time after the PSLRA’s 60-day deadline expired,” the court rejected the
corrected damages figure and concluded that the remaining movant had the largest financial
interest. After determining that this individual satisfied the typicality and adequacy of Fed. R.
Civ. P. 23, the court appointed him as lead plaintiff and approved his selection of counsel.
Weinstein v. McClendon, 2012 WL 2994291 (W.D. Okla. July 20, 2012).
The district court denied as moot motions to consolidate this case with a second action
after the second action was voluntarily dismissed. The court then considered four competing
motions for appointment as lead plaintiff filed by: (1) a pension plan; (2) a group of institutional
investors; (3) a retirement system; and (4) an individual investor. The individual investor and the
group of institutional investors withdrew their motions and/or did not oppose the appointment of
the pension plan as lead plaintiff. Additionally, the retirement system conceded that the pension
plan had suffered the greatest losses. After confirming that the pension plan had the largest
financial interest in the outcome of the case and that the group satisfied the typicality and
adequacy requirements of Fed. R. Civ. P. 23, the court appointed it as lead plaintiff and approved
its selection of lead and local counsel.
Deborah G. Mallow IRA Sep Inv. Plan v. McClendon, 2012 WL 2886677 (W.D. Okla. July 13,
2012).
In a consolidated shareholder derivative action, the district court considered a motion for
appointment as lead plaintiff and four competing motions for appointment of lead counsel. The
district court declined to appoint a lead plaintiff, noting that there is no statutory authority that
requires a lead plaintiff in a derivative action and the court found it to be unnecessary in this
case. The court then considered the four competing motions for appointment of lead counsel and
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determined that the proposed appointment of three law firms to serve as co-lead counsel was
“ripe for wasteful, duplicative work-product, excessive billing and internal conflicts.” The court
also noted the apparent inability of certain proposed counsel to work together in an efficient way.
As such, the court appointed one firm as lead counsel and another as local counsel.
3. Safe Harbor/Bespeaks Caution Defense
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In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012).
The First Circuit affirmed the district court’s order granting summary judgment for
defendants on the basis that plaintiffs failed to establish actionable misrepresentations with
respect to defendants’ statements about product demand. In what the First Circuit described as a
“thorough and thoughtful” decision on a motion to dismiss, the district court differentiated
between forward-looking statements that made up the majority of plaintiffs’ complaint and
which qualified for protection under the Reform Act’s safe harbor, and the “sufficient, albeit
thin, allegations” of intentionally false statements of present or historical fact. Specifically, the
defendant company’s projections regarding future earnings were accompanied by clearly labeled
“safe harbor statements” identifying the statements as forward-looking and listing factors that
could cause actual results to differ materially from those reflected in the statements. The case
proceeded to discovery with respect to the allegedly false statements of present or historical fact,
and the district court granted summary judgment for defendants on the basis that plaintiffs failed
to show misrepresentation or scienter with respect to those statements. On appeal, the court
reaffirmed the district court’s separation of forward-looking statements and statements of present
or historical fact, and concluded that plaintiffs failed to establish “anything close to fraud.”
Accordingly, the First Circuit held that dismissal was appropriate.
Sawant v. Ramsey, 2012 WL 3265020 (D. Conn. Aug. 9, 2012).
Following adverse verdicts at trial, defendants filed renewed motions for judgment as a
matter of law and motions for a new trial. The district court upheld the jury’s verdict in favor of
plaintiff’s Rule 10b-5 claims arising from defendants’ issuance of a false and misleading press
release. To support their motions, defendants claimed that the jury’s verdict was against the
weight of the evidence and that the lower court improperly instructed the jury. Of the five
allegedly improper instructions, the court agreed with defendants that the lower court improperly
instructed the jury regarding the standard under the Reform Act’s safe harbor for forwardlooking
statements. However, the court held that a new trial was not warranted based on this
error because the statements at issue in the press release were not forward-looking statements
and the safe harbor did not apply.
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City of Pontiac Gen. Emps. Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359 (S.D.N.Y.
2012).
An institutional investor brought a securities fraud class action alleging that defendants
made misrepresentations and omissions regarding the performance and growth of a division of
the defendant corporation. The district court granted in part and denied in part defendants’
motion to dismiss. In response to defendants’ argument that alleged misstatements were not
actionable because they fell within the Reform Act’s safe harbor provision and the judiciallycreated
bespeaks caution doctrine, the court held that there was no such protection. The court
found that the alleged misstatements concerning the division’s backlog were not forwardlooking,
defendants “went well beyond mere ‘rosy predictions,’” and disclaimers in press
releases containing boilerplate cautionary language were not sufficiently meaningful. Moreover,
the court also rejected defendants’ arguments concerning the materiality of the statements at
issue and the existence of scienter, finding that the allegations were sufficient to find that named
individuals possessed the requisite state of mind. Consequently, the motion to dismiss was
denied on these grounds, but granted as to control person liability.
Fed. Housing Fin. Agency v. JP Morgan Chase & Co., 2012 WL 5395646 (S.D.N.Y. Nov. 5,
2012).
The district court granted in part and denied in part defendants’ motion to dismiss claims
brought by the conservator of Fannie Mae and Freddie Mac against financial institutions
involved in the packaging, marketing, and sale of residential mortgage-backed securities
(“RMBS”) between 2005 and 2007. The conservator alleged that defendants marketed the
RMBS using offering documents that contained false and misleading statements regarding the
loans underlying the securities, including the loans’ compliance with underwriting standards, the
borrowers’ ability to repay the loans, and inflated owner-occupancy and loan-to-value rates.
Defendants moved to dismiss on several grounds, including that the conservator could not
establish justifiable reliance because Fannie Mae and Freddie Mac were highly-sophisticated
players in the mortgage-backed securities market and the offering documents contained
extensive cautionary language regarding the risks associated with RMBS. The court rejected
defendants’ argument because defendants could not establish as a matter of law that Fannie Mae
and Freddie Mac should have discovered defendants’ alleged misstatements through reasonable
diligence. The court further held that defendants could not rely upon the protection of the
bespeaks caution doctrine because the doctrine only applies to forward-looking statements, not
statements regarding ascertainable facts like those at issue. Accordingly, the court denied
defendants’ motion to the extent they sought to rely upon the bespeaks caution doctrine to shield
them from liability.
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Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.
Sept. 27, 2012).
The district court granted defendants’ motion to dismiss plaintiffs’ complaint against a
casino gaming technology company and individual officers and directors. With respect to many
of the alleged misstatements, the court held that they were sheltered by the Reform Act’s safe
harbor provision for forward-looking statements. Specifically, the statements at issue were
related to: (1) the average net-win rate for defendants’ gaming machines; (2) projected
EBITDA; and (3) the number of machines defendants had placed in casinos. Plaintiffs argued
that defendants’ statements regarding the net-win rate of their machines were not protected by
the safe harbor because defendants knew the statements were false when made, based on weekly
reports from two underperforming casinos. The court determined that plaintiffs could not use
knowledge of these limited, specific cases to argue that defendants knew an average would be
inaccurate. Similarly, the court determined that defendants’ statements regarding projected
EBITDA were clearly forward-looking and sheltered by the safe harbor because plaintiffs did not
allege that the particular defendants making the statements knew they were false when made.
Finally, the court found that plaintiffs failed to adequately plead falsity with regard to the
statements about the number of machines placed in casinos. Plaintiffs cited a difference in
number between placed machines and operational machines, but the court found this method of
reasoning to be “fraud by hindsight.” The court further held that plaintiffs did not adequately
plead loss causation and dismissed plaintiffs’ claims for fraud and control person liability. After
determining that plaintiffs also failed to sufficiently plead the requisite elements of the common
law claims, the court dismissed plaintiffs’ complaint in its entirety.
Kuriakose v. Fed. Home Loan Mortg. Corp., 2012 WL 4364344 (S.D.N.Y. Sept. 24, 2012).
The district court granted defendants’ motion to dismiss a putative securities fraud class
action against Freddie Mac and former executives related to misrepresentations concerning
exposure to risky “subprime” mortgage products, the sufficiency of capital, and accuracy of
financial reporting. The court previously dismissed plaintiffs’ first amended complaint for
failure to plead materiality, scienter, and loss causation. In their second and third amended
complaints, plaintiffs argued that statements about Freddie Mac’s capital base and liquidity did
not warrant safe harbor protection under the Reform Act. The court disagreed with plaintiffs and
found that Freddie Mac adequately disclosed relevant information as to potential risks in its
widely distributed 2007 Annual Report. Additionally, to the extent that plaintiffs pointed to
vague and indefinite statements of general optimism, the court found that these statements were
inactionable puffery. The court rejected plaintiffs’ arguments that such puffery should be
actionable by virtue of the fact that Freddie Mac’s mission was to facilitate liquidity in the home
mortgage market and, therefore, they should have been uniquely equipped to deal with a housing
crisis. Furthermore, the court found that plaintiffs failed to plead any specific facts to support an
inference that defendants knew the statements were false when made. Accordingly, the court
determined that defendants’ statements were protected by the safe harbor and granted
defendants’ motion to dismiss.
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In re MELA Sciences, Inc. Sec. Litig., 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012).
In a securities fraud class action, the district court denied plaintiffs’ motion to amend the
complaint for a second time, finding that plaintiffs’ claims were barred by the Reform Act’s safe
harbor for forward-looking statements. Plaintiffs alleged that defendants made a series of
materially false and misleading statements regarding the safety and efficacy of a proposed
medical device and the status of ongoing clinical studies. Specifically, plaintiffs alleged three
types of misrepresentations or omissions: (1) misrepresentations regarding the device’s potential
user market; (2) misrepresentations regarding the timing of FDA approval; and
(3) misrepresentations and omissions regarding the results of the clinical trial. Defendants
argued that the safe harbor sheltered statements in the first two categories. The court found that
statements about the device’s potential user market were inactionable expressions of corporate
optimism. Additionally, because the complaint alleged no facts indicating that defendants knew
the statements about the potential user market were false when made, these statements
constituted forward-looking statements that were protected by the safe harbor. Plaintiffs further
argued that defendants had a duty to update previous representations about the user market upon
receipt of an FDA letter indicating that FDA approval would be far more limited in scope than
previously described by defendants to the market. The court explained that there is no duty to
update expressions of opinion, nor is there a duty to update forward-looking statements “merely
because changing circumstances have proved them wrong.” The court found that plaintiffs’
claims based on defendants’ statements regarding the timeliness of FDA approval failed on
similar grounds. Accordingly, the plaintiffs’ motion to amend for a second time was denied as
futile.
Ho v. Duoyuan Global Water, 2012 WL 3647043 (S.D.N.Y. Aug. 24, 2012).
In connection with public offerings, plaintiffs brought a securities fraud class action
against the defendant corporation, individual officers and directors, underwriters, and auditors.
Faced with various motions to dismiss, the court granted certain motions and denied others.
Specifically, plaintiffs alleged that defendants made various material misrepresentations or
omissions in conference calls, press releases and SEC filings, including a statement by the CFO
regarding expected cash flows for the next two quarters. The court held that this statement was
protected by the Reform Act’s safe harbor as it was forward-looking and accompanied by the
cautionary statement that forward-looking statements would be made in the call and were subject
to change without being updated. The court further held that plaintiffs did not sufficiently allege
that the statement was made with actual knowledge of its falsity. Although this statement was
not actionable, the court held that other allegations supported plaintiffs’ fraud claims and denied
defendants’ motion to dismiss with respect to such claims.
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Pa. Public School Emps.’ Ret. Sys. v. Bank of Am. Corp., 2012 WL 2847732 (S.D.N.Y. July 11,
2012).
In a putative securities fraud class action against a bank, individual officers and directors,
underwriters, and an accounting firm, the district court granted in part and denied in part
defendants’ motion to dismiss. Plaintiffs alleged that defendants purposefully concealed the
bank’s reliance on a mortgage electronic registration system that exposed it to billions of dollars
of loan repurchase claims arising from the sale of mortgage-backed securities. Defendants
argued that statements regarding the bank’s vulnerability to repurchase claims were protected by
the Reform Act’s safe harbor for forward-looking statements based upon a bank executive’s
disclosure to analysts that future predictions could change depending on a variety of factors.
However, the court held that this did not constitute adequate cautionary language because
defendants failed to identify important factors that could realistically cause results to materially
differ. As a result, the court found that the cautionary language was not meaningful and the safe
harbor did not apply. Since plaintiffs adequately pled that defendants made material
misstatements and omissions, the court then considered the issue of scienter. The court found
that plaintiffs’ allegations failed to raise strong circumstantial evidence of conscious misbehavior
or recklessness as to the individual executive defendants, but did raise a strong inference of
scienter as to the defendant bank. Therefore, the court granted the individual defendants’ motion
to dismiss, but denied the motion to dismiss with respect to § 10(b) and Rule 10b-5 claims
against the defendant bank.
Hutchins v. NBTY, Inc., 2012 WL 1078823 (E.D.N.Y. Mar. 30, 2012).
The district court denied defendants’ motion to dismiss securities fraud claims based on
allegedly false and misleading statements regarding the defendant company’s business, gross
margins and future operating performance. Specifically, plaintiffs alleged that defendants made
overly optimistic statements about the defendant company’s prospects without disclosing a new
competitive bidding practice adopted by its largest customer, Wal-Mart. Defendants asserted
that certain allegedly misleading statements were shielded from liability by the bespeaks caution
doctrine and the Reform Act’s safe harbor for forward-looking statements. The court disagreed
because although the company’s 10-K included cautionary language warning that the loss of
Wal-Mart or any other major customer would have a material adverse impact, the company did
not mention Wal-Mart’s new competitive bidding initiative. Thus, the court determined that the
forward-looking statements at issue were not accompanied by meaningful cautionary language.
After determining that plaintiffs had adequately pled facts establishing a strong inference of
scienter, the court denied defendants’ motion to dismiss with respect to the challenged forwardlooking
statements.
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Stichting Pensioenfonds ABP v. Merck & Co., 2012 WL 3235783 (D.N.J. Aug. 1, 2012).
In one of eight individual securities fraud actions arising from alleged misrepresentations
and omissions concerning the safety profile of the drug Vioxx, the court granted in part and
denied in part defendants’ motion to dismiss. Relying in part on various facts and rulings set
forth in an order in a related case, the court held that various statements were inactionable
puffery or forward-looking statements that were protected under the Reform Act’s safe harbor.
Specifically, the court held that plaintiffs failed to show that the statements at issue were made
with actual knowledge of their falsity and, thus, they were protected by the safe harbor. As a
result, Rule 10b-5(b) claims based upon these statements were dismissed. In addition, plaintiff
failed to adequately plead scheme liability under 10b-5(a) and (c), since in essence these claims
were premised upon the same misrepresentations comprising the Rule 10b-5(b) claim, and
specific control person claims were dismissed as well. Addressing state law claims, the court
held that they must be dismissed pursuant to the Standards Act.
Bonomo v. NOVA Fin. Holdings, Inc., 2012 WL 2196305 (E.D. Pa. June 15, 2012).
The district court dismissed without prejudice plaintiffs’ securities and common law
fraud claims relating to a private stock offering in NOVA. Plaintiffs alleged that a June 2009
Private Placement Memorandum (“PPM”) for NOVA contained statements that were misleading
in light of representations made by their broker – the former Chairman of NOVA, who plaintiffs
alleged still controlled the company. Specifically, plaintiffs alleged that the former Chairman of
NOVA told them that the company’s undercapitalization problem would soon be addressed, that
the company would be making two imminent acquisitions, and that another investor would soon
make a substantial investment in the company. The investment never happened, allegedly due to
the discovery that NOVA’s Chairman was running a Ponzi scheme. Defendants moved to
dismiss asserting that, among other things, plaintiffs failed to allege that defendants had any duty
to update forward-looking statements made in the June 2009 PPM. The court agreed, and found
that plaintiffs’ complaint was premised almost entirely upon an alleged failure to update
forward-looking statements after subsequent adverse developments. The court further found that
the allegedly false and misleading forward-looking statements at issue were accompanied by
adequate cautionary language and, thus, shielded from liability by the Reform Act’s safe harbor.
In that regard, the court found that the June 2009 PPM specifically warned that the anticipated
acquisitions might not happen. The PPM also advised potential investors that they may the only
investors participating in the offering, thus specifically disclaiming other potential investors.
Accordingly, the court granted defendants’ motion to dismiss.
In re Computer Sciences Corp. Sec. Litig., 2012 WL 3779349 (E.D. Va. Aug. 29, 2012).
In a securities fraud class action, defendants’ motion to dismiss was granted in part and
denied in part, with leave to amend. Plaintiffs brought § 10(b) and Rule 10b-5 claims alleging
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that defendants made false or misleading statements of material fact in connection with revenue
figures, the soundness of internal accounting controls, and one of the corporation’s most
substantial contracts. Certain statements were found to be non-actionable puffing and others
were found to be protected under the Reform Act’s safe harbor due to their predictive nature.
Specifically, the statement that “the company expects to recover its investment” on a particular
contract and projections regarding the timetable for deployment of a software program were
protected as predictions of future events rather than declarations of present expectations.
Although other statements contained a forward-looking component, the court determined that
they were statements of present fact and therefore actionable, as “a mixed present/future
statement is not entitled to the safe harbor with respect to the part of the statement that refers to
the present.” As such, defendants’ motion to dismiss was granted in part and denied in part.
In re BP P.L.C. Sec. Litig., 852 F. Supp. 2d 767 (S.D. Tex. 2012).
Following the Deepwater Horizon explosion and oil spill, plaintiffs brought a
consolidated securities fraud class action alleging that BP made material misrepresentations and
omissions calculated to conceal the true state of BP’s safety programs and the company’s risk
exposure. Plaintiffs argued that these misstatements resulted in artificially inflated stock prices
until the true state of BP’s safety management was revealed in the explosion. Defendants argued
that seven of the thirty-five alleged misstatements identified by plaintiffs were forward-looking
statements protected by the Reform Act’s safe harbor. The court found that of the seven
statements at issue, six were not actionable for failure to plead falsity. The remaining statement,
found in BP’s 2008 Annual Report, indicated that eight of the company’s oil production sites had
already completed the transition to BP’s new and much-advertised safety plan. The court
determined that these statements were not forward-looking, because they served as
representations of BP’s past achievements. Therefore, the statements at issue were not shielded
by the Reform Act’s safe harbor provision. Nevertheless, because plaintiffs failed to adequately
plead scienter with respect to any defendant named in this action, the court granted defendants’
motion to dismiss, with leave to amend.
City of Pontiac Gen. Emps.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).
In a securities fraud class action against a medical technology company, the district court
granted defendants’ motion to dismiss claims related to allegedly false and misleading financial
projections made during three investor conference calls. Plaintiffs alleged that the defendant
company fraudulently maintained a scheme of achieving 20% earnings per share growth by
cutting corners on quality control and thereby exposing the company to unnecessary risks due to
product recalls. Plaintiffs argued that cautionary statements accompanying the financial
projections at issue were merely “boilerplate” and insufficient to invoke the protection of the
Reform Act’s safe harbor for forward-looking statements. The court, however, found that
several of the risk factors mentioned in the company’s cautionary language were the precise
factors that caused the company to miss its 2008 earnings projection, including the risk
associated with increased FDA scrutiny. Thus, the court found that the cautionary language was
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sufficiently meaningful and substantive to warrant safe harbor protection and granted
defendants’ motion to dismiss with respect to the challenged forward-looking statements.
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. Apr. 19, 2012).
The district court granted defendants’ motion to dismiss securities fraud claims relating to
allegedly false statements and non-disclosures regarding the extent and impact of reduced
demand by customers of the defendant company. The court found that forward-looking
statements made by defendants in SEC filings and press releases about the expected recovery of
demand were protected from liability by the Reform Act’s safe harbor. Although challenged
statements in press releases were not accompanied by specific factors that could cause results to
differ, the court found that plaintiffs had failed to plead adequate facts suggesting that defendants
believed their forward-looking statements regarding demand to be false at the time the
statements were made. The court noted that the statements at issue were made “during the
biggest global economic recession in 75 years” and “[n]obody in late 2008 or 2009 knew how
deep markets would plunge or how long it would take them to recover.” Accordingly, the court
granted defendants’ motion to dismiss with respect to the challenged forward-looking statements.
Rabbani v. DryShips Inc., 2012 WL 5395787 (E.D. Mo. Nov. 6, 2012).
In a securities fraud class action, plaintiffs alleged that defendants made false or
misleading statements about: (1) a planned spin-off of a subsidiary; (2) the ability of the
company to comply with existing loan covenants: and (3) the company’s general financial
condition. Defendants moved to dismiss, in part, on the grounds that the challenged statements
fell within the Reform Act’s safe harbor for forward-looking statements. With regard to
plaintiffs’ Securities Act claims, the court analyzed defendants’ alleged statements regarding the
spin-off and planned distribution ratio. Plaintiffs alleged that accompanying cautionary
statements were insufficient because they did not directly address changes in the distribution
ratio. The court found that the total mix of information indicated that the spin-off was
speculative at best, and no reasonable investor could have been misled into believing that the
spin-off was anything but a risky prospect. Therefore, the court found that the statements were
immaterial and were appropriate for dismissal under the bespeaks caution doctrine.
Alternatively, the court found that the statements were accompanied by sufficient cautionary
language that identified risks specific to the company’s business and, thus, were sheltered by the
statutory safe harbor. With regard to plaintiffs’ Exchange Act claims, the court similarly found
that statements about the proposed spin-off were forward-looking statements protected by the
safe harbor. The court rejected plaintiffs’ argument that the statements were not protected
because they indicated present determinations by the company, noting that all forward-looking
statements implicitly reflect current decisions by management, and that plaintiffs’ reasoning
would eviscerate the safe harbor. The court found that other allegedly false and misleading
statements were immaterial puffery, omitted facts that were not required to be disclosed, or were
not adequately pled to be false. Accordingly, after finding that the inference of scienter was not
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adequately compelling, the court granted defendants’ motion to dismiss plaintiffs’ Securities Act
and Exchange Act claims.
Rochester Laborers Pension Fund v. Monsanto Co., 2012 WL 3143914 (E.D. Mo. Aug. 1,
2012).
The district court granted defendants’ motion to dismiss plaintiff’s securities fraud class
action premised upon defendants’ alleged misstatements concerning the state of the defendant
company’s glyphosate business, new seed products, and earnings outlooks and projections. The
court found that alleged misstatements concerning profits, earnings, and performance were
“quintessential” forward-looking statements and were accompanied by meaningful cautionary
language which set forth specific, detailed risks. The court further noted that statements
regarding generating sustainable profits were not inconsistent with decreasing sales and, thus,
were not actionable misstatements. The court further held that various statements at issue were
not false or misleading, and that scienter had not been adequately alleged. Accordingly,
plaintiff’s class action complaint was dismissed with prejudice.
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).
The district court granted defendants’ motion to dismiss a putative securities class action
against a publicly traded spinal implant company. Plaintiff-shareholders alleged that defendants
made material misstatements or omissions concerning the defendant company’s projected
revenues and integration of a newly acquired rival company. Defendants argued that the
statements at issue were not actionable because they were protected by the Reform Act’s safe
harbor for forward-looking statements. However, the court disagreed and found that the
statements in question were either not forward-looking statements or also contained implications
about historical and current fact which were not protected by the safe harbor. Specifically, the
court found that safe harbor did not apply to the statement “we anticipate that revenues will
continue to grow” because it assumed that revenues were already growing and, thus, could be
viewed as a misrepresentation of the company’s current business conditions. To the extent that
plaintiffs challenged defendants’ alleged omission of present facts, the court found that the safe
harbor did not apply. Other statements such as being “pleased with the company’s progress” or
“in a unique position” were determined to be inactionable statements of corporate optimism.
The court further explained that a failure to disclose delays while stating that the “company
remained on track” was not inherently inconsistent and, therefore, plaintiffs failed to allege
sufficient facts to show that such statements amounted to material misrepresentations or
omissions. Furthermore, the court found that plaintiffs failed to adequately plead scienter.
Accordingly, the court granted defendants’ motion to dismiss with leave to amend.
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Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).
In a putative securities fraud class action, the court granted defendants’ motion to dismiss
plaintiff’s second amended complaint, finding that defendants’ statements were sheltered by the
Reform Act’s safe harbor for forward-looking statements. Plaintiff alleged that defendants made
false and misleading statements and omissions regarding the company’s growth prospects,
business, and new software product. Specifically, plaintiff argued that defendants should have
disclosed the significant backlog of cases that arose out of a settlement agreement requiring the
company to make treatment available to certain patients free of charge. The court previously
found that defendants’ statements about projected revenues fell under the safe harbor. In defense
of the second amended complaint, plaintiff argued that the court failed to consider whether the
cautionary statements were misleading. The court disagreed, noting that it considered all aspects
of the cautionary statements in its prior order and found that defendants identified the risk that
ultimately materialized – namely, a backlog created by the settlement. Plaintiff further argued
that the company should have disclosed the fact that their new software product was not
improving revenue or meeting projected sales. The court found that forward-looking statements
describing the new software’s expected benefits were at all times accompanied by meaningful
cautionary language identifying the risks that plaintiff alleged to have ultimately materialized.
Furthermore, plaintiff failed to allege facts showing that the statements at issue were made with
actual knowledge of falsity. Accordingly, the court found that defendants’ statements fell within
the ambit of the safe harbor.
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL 6044787 (N.D. Cal.
Dec. 5, 2012).
In a putative securities class action, the court granted defendants’ motion to dismiss
plaintiffs’ second amended complaint against a public corporation that provides data centers and
internet exchanges. Plaintiffs asserted that the defendant company’s stock price was artificially
inflated due to false and misleading statements made by defendants concerning pricing strategy
and the integration of the sales force of a recently acquired company. Defendants argued that
statements regarding integration and pricing strategy were insulated by the Reform Act’s safe
harbor because they constituted assumptions underlying or relating to financial projections.
Plaintiffs argued that descriptions of the present are not forward-looking and, therefore, are
ineligible for safe harbor protection. The court agreed with plaintiffs and found that descriptions
of the present such as “the sales force have been completely integrated” or “we’re maintaining
the discipline on the floors and ceilings we have on our pricing” were not simply assumptions
underlying or relating to financial projections. Accordingly, they were not protected by the safe
harbor. Nevertheless, the court further determined that plaintiffs failed to adequately allege the
falsity and scienter of statements regarding sales force integration and pricing strategy and,
therefore, granted defendants’ motion to dismiss.
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Kovtun v. Vivus, Inc., 2012 WL 4477647 (N.D. Cal. Sept. 27, 2012).
The district court granted defendants’ motion to dismiss claims based on allegedly false
and misleading statements regarding the safety and FDA approval of a developmental obesity
drug. Specifically, plaintiffs alleged that defendants “heralded” the drug but failed to disclose
serious risks revealed by study data and the inadequacy of clinical data until after the drug failed
to be approved by the FDA. Defendants argued that their statements about the obesity drug’s
prospects were forward-looking statements shielded from liability by the Reform Act’s safe
harbor and/or the bespeaks caution doctrine. The court rejected plaintiffs’ argument that
cautionary language accompanying the statements at issue was “generic” and therefore
insufficient to invoke the protections of the safe harbor. Rather, the court found that defendants
had specifically warned that the drug might not be approved by the FDA and that problems could
arise during clinical trials, and plaintiffs’ entire theory of the case was premised on alleged
misrepresentations about the likelihood of FDA approval. The court concluded that defendants’
projections about FDA approval could best be characterized as a “bad guess” and were protected
by the safe harbor. The court further held that defendants’ statements relating to the expected
success of the drug, the drug’s “excellent” or “compelling” risk/benefit profile, and statements
that trials had shown “remarkable” safety and efficacy were vague assertions of corporate
optimism. Since plaintiff could not establish actionable fraud, the court dismissed plaintiffs’
claim with prejudice.
Westley v. Oclaro, Inc., 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012).
In a putative securities fraud class action against a supplier to telecom equipment
manufacturers, the district court granted defendants’ motion to dismiss with leave to amend on
the basis that plaintiffs failed to sufficiently allege a strong inference of scienter. Plaintiffs
charged defendants with making false and misleading statements about the defendant company’s
customer demand and projected revenues and earnings. The statements in question included
representations that customer demand was returning and increasing, that financial forecasts were
“accelerated and increasing,” and that financial forecasts would be met because 90% of the
orders needed to do so were already secured. Defendants argued that the Reform Act’s safe
harbor provision was applicable to statements of current or present demand, since that present
demand was being used to make predictions about the future. The court disagreed, noting that
“observed facts are not assumptions.” The court therefore rejected defendants’ contention that
the statements were protected by either the safe harbor provision or the bespeaks caution
doctrine. The court next examined the issue of whether there was sufficient cautionary language
accompanying defendants’ financial projections in their press release. The court found that
reasonable minds could differ on the question of whether the cautionary language was sufficient,
since the warnings were arguably not enough to counter the company’s professed visibility into
customer demand resulting from its close relationships with customers. Although dismissal is
not warranted when there exists a legitimate factual dispute about sufficient cautionary language,
the court additionally found that plaintiffs failed to adequately plead a strong inference of
scienter. Accordingly, the court granted defendants’ motion to dismiss with leave to amend.
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Washtenaw Cnty. Emps. Ret. Sys. v. Celera Corp., 2012 WL 3835078 (N.D. Cal. Sept. 4, 2012).
In a securities fraud class action, the district court denied defendants’ motion to dismiss,
finding that defendants’ forward-looking statements were not protected by the Reform Act safe
harbor. Plaintiffs alleged that defendants made misleading statements concerning problems with
reimbursement and debt collection. Defendants did not contest falsity, connection with the
purchase or sale of a security, or economic loss, but disputed scienter and loss causation. The
court found that the magnitude of declining collections supported a strong inference that
defendants knew about the collections problems. Therefore, the court determined that the
statutory safe harbor did not apply because plaintiffs adequately alleged that defendants knew of
problems which they represented to be merely risks or uncertainties. The court further noted that
the safe harbor “cannot protect cautionary statements made with superior knowledge that some
of the potential perils identified have in fact been realized.” Therefore, after finding that the
inference of scienter was at least as compelling as opposing inferences and that defendants’
eventual disclosures were plausibly partially responsible for plaintiffs’ losses, the court denied
defendants’ motion to dismiss.
Gammel v. Hewlett-Packard Co., 2012 WL 5945089 (C.D. Cal. Aug. 29, 2012).
Where a shareholder class action alleged violations of the federal securities laws in
connection with the defendant company’s strategy to develop an integrated system of mobile
computing devices running on an operating system known as “webOS,” the court granted
defendants’ motion to dismiss. The court evaluated two broad categories of misrepresentations:
(1) statements involving the timing and function of webOS devices; and (2) statements
concerning the defendant company’s commitment to the system and the market-readiness of the
flagship product. The court found that the majority of the statements at issue were forwardlooking
statements accompanied by meaningful cautionary language and, thus, were protected
from liability under the Reform Act’s safe harbor. The court noted that because the cautionary
language was adequate, the state of mind of defendants was not relevant. In addition, the
remaining statements were determined to be inactionable puffery, insufficiently pled as to falsity,
or both. Finally, plaintiffs failed to adequately allege any basis for scienter. Accordingly, the
court dismissed plaintiffs’ complaint with leave to amend.
Curry v. Hansen Med., Inc., 2012 WL 3242447 (N.D. Cal. Aug. 10, 2012).
In a consolidated securities fraud class action, the district court granted defendants’
motion to dismiss in part, with leave to amend. Plaintiff-shareholders alleged that they were
fraudulently induced to acquire stock at artificially inflated prices based upon defendants’
misrepresentations regarding revenue recognition and sales performance. Defendants argued
that certain forward-looking statements were protected under the Reform Act’s safe harbor and
the court agreed. Specifically, the court held that plaintiffs could not assert actionable claims
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ased on: (1) the failure to predict the extent to which the 2008 economic recession would affect
sales; (2) an optimistic statement regarding enthusiasm for products despite the declining
economy; (3) and vague predictions of “stair-step” growth. However, the safe harbor did not
protect statements of historical or present facts and plaintiffs sufficiently alleged scienter and
loss causation. Accordingly, the court declined to dismiss the action in its entirety.
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 WL 3010992 (N.D. Cal. July 23,
2012).
In a securities fraud class action arising from the defendant company’s allegedly
misleading statements concerning future growth prospects and insufficient disclosures regarding
the adoption of new accounting practices, the court granted defendants’ motions to dismiss. The
court held that the company’s “revenue guidance and sales forecast[s] are prototypical examples
of ‘forward-looking statements.’” In addition, the statements were accompanied by meaningful
cautionary language, and even assuming the language was insufficient, plaintiffs had not shown
that the statements were made with actual knowledge of falsity. Hence the statements were
protected under the Reform Act’s safe harbor. The court found additional alleged misstatements
to be inactionable puffery or lacking in falsity. Moreover, scienter was not sufficiently alleged.
As a result, the court granted defendants’ motions to dismiss.
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 2012 WL 1868874 (N.D. Cal. May 22,
2012).
In a securities class action, the court granted defendants’ motion to dismiss plaintiffs’
second amended complaint, finding that defendants’ statements were shielded by the Reform
Act’s safe harbor. Plaintiffs filed suit against a medical device manufacturer and several officers
and directors, alleging that defendants made false and misleading statements in connection with
the strength and source of demand for the defendant company’s products. The court previously
held that ten of the plaintiffs’ challenged statements were not actionable because they were
“prototypical examples of ‘forward-looking’ statements” accompanied by meaningful cautionary
statements. Plaintiffs argued that the statements were not protected by the safe harbor because:
(1) the statement was not believed by the speaker; (2) there was no reasonable basis for the
belief; or (3) the speaker was aware of undisclosed facts tending to seriously undermine the
statement’s accuracy. Plaintiffs further argued that the cautionary language was not meaningful
because defendants knew that the economic crisis was already impacting the company. Plaintiffs
relied on Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 2011 (2011) for the proposition that
statements made with actual knowledge of falsity are not shielded, even if they are forwardlooking
and accompanied by cautionary language. The court noted that the relevant passage of
Matrixx Initiatives cites 15 U.S.C. §78u-5(c)(1)(B), which provides that proof of “actual
knowledge” removes a forward-looking statement from the safe harbor’s provision. However,
the court noted that the passage does not discuss §78u-5(c)(1)(A), which immunizes forwardlooking
statements identified as such and accompanied by adequate cautionary language.
Accordingly, in the absence of specific Supreme Court guidance, the court followed In re Cutera
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Sec. Litig., 610 F.3d 1103 (9th Cir. 2010), as the most recent Ninth Circuit decision discussing
the absence of a scienter requirement under § 78u-5(c)(1)(A). The court noted that the
defendants’ cautionary warnings were virtually identical to those held sufficient by the Ninth
Circuit in In re Cutera. Therefore, the court concluded that the cautionary language was
sufficient to insulate defendants’ forward-looking statements from liability under the Reform Act
regardless of defendants’ state of mind. After finding that other statements were not false or
were inactionable expression of optimism and that plaintiffs failed to sufficiently plead scienter,
the court granted defendants’ motion to dismiss with prejudice.
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL 685344 (N.D. Cal.
Mar. 2, 2012).
The district court granted defendants’ motion to dismiss securities fraud claims based on
allegedly false and misleading statements concerning: (1) the defendant company’s financial
forecasts; (2) pricing strategy; (3) integration of a new acquisition; and (4) ability to provide
accurate financial forecasts. Defendants asserted that allegedly false and misleading financial
forecasts were forward-looking statements, shielded from liability by the Reform Act’s safe
harbor. The court found that cautionary language accompanying the financial forecasts was
adequate because, taken together, defendants had made a variety of statements warning investors
of risks similar to those that had actually been realized. The court noted that the defendant
company was not required to warn of the exact risk that caused it to miss its forecast.
Furthermore, plaintiffs failed to adequately establish that defendants had knowledge that the
company’s forecasts could not be achieved at the time they were made. The court rejected
plaintiffs’ argument that defendants were under a duty to update their prior financial forecasts
and violated that duty by waiting to provide new financial guidance. The court noted that the
PSLRA does not impose a duty to update forward-looking statements and, even if it did, it would
be unreasonable to find a violation of that duty where the financial forecasts at issue differed
from reality by only a few percentage points. Accordingly, the court dismissed plaintiffs’
complaint with leave to amend.
Fosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D. Nev. Jul. 11, 2012).
The district court reaffirmed and clarified a prior order granting in part and denying in
part defendants’ motion to dismiss. The court first noted a split in authority with respect to
whether forward-looking statements combined with elements of current or historical fact are
shielded from liability under the Reform Act’s safe harbor. The court declined to find that such
statements, as a matter of law, were entitled to safe harbor protection and held that such
statements would survive defendants’ motion to dismiss. The court reiterated its prior finding
that defendants had provided investors with meaningful cautionary language, adequately warning
of “what kind of misfortune could befall the company and what the effect could be,” in various
press releases and regulatory filings. The court further held that if forward-looking statements
are identified as such and accompanied by meaningful cautionary statements, then the state of
mind of the individual making the statement is irrelevant. The court then conducted a line-by-
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line analysis of plaintiffs’ complaint, granting defendants’ motion to dismiss with respect to
particular statements.
Boulware v. Baldwin, 2012 WL 1412698 (D. Utah Apr. 23, 2012).
The district court denied defendants’ motion to dismiss securities fraud claims related to
investments in entities formed to purchase loans secured by real estate. Plaintiffs asserted that
defendants made false and misleading statements regarding the prospects for generating a quick
profit on the resale of a particular loan, and failed to disclose distributions made to other
participants and entities without plaintiffs’ knowledge. Defendants argued that the bespeaks
caution doctrine shielded them from liability because they had advised plaintiffs of the risks of
the investments. The court found that defendants’ alleged misrepresentations related to thenexisting
facts, non-disclosures, or implied background factual assumptions that a reasonable
investor would regard the speaker as believing to be true and, therefore, the bespeaks caution
doctrine did not apply. Accordingly, the court denied defendants’ motion to dismiss.
SEC v. Bankatlantic Bancorp, Inc., 2012 WL 1936112 (S.D. Fla. May 29, 2012).
In an SEC enforcement action arising from the collapse of the Florida residential real
estate market, the district court granted in part and denied in part defendants’ motion to dismiss.
The SEC alleged that the defendant bank and individual executives made material
misrepresentations and omissions about the defendant bank’s assets, liabilities and financial
position in earnings calls and SEC filings. Defendants argued that the statements at issue were
rendered immaterial as a matter of law under the bespeaks caution doctrine. However, the court
held that the bespeaks caution doctrine did not apply because the alleged misrepresentations and
omissions related to “allegedly known and existing fact,” and not forward-looking projections.
Accordingly, the court denied defendants’ motion to dismiss as to all counts except the SEC’s
claims under § 13(b)(2)(B) of the Exchange Act.
D.3
D.3
E. Liabilities under the Securities Litigation Uniform Standards Act of 1999
E.
Brockway v. Evergreen Int’l Trust, 2012 WL 5458464 (4th Cir. Nov. 9, 2012).
The Fourth Circuit affirmed an order by the district court overseeing a multi-district
litigation (“MDL”), which granted defendants’ motion to administratively close and terminate an
action originally brought in Illinois state court on behalf of investors who claimed that their
mutual fund advisors had charged excessive fees. The underlying case, Kircher v. Putnam
Funds Trust, had been the subject of numerous removal and remand proceedings in Illinois, as
plaintiffs attempted to avoid removal and preclusion under the Standards Act. Most recently, the
Illinois Appellate Court found that plaintiffs’ action was covered by SLUSA and mandated that
the Illinois Circuit Court dismiss the case. After the Illinois Circuit Court dismissed plaintiffs’
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action with prejudice, plaintiffs moved to modify the order so that dismissal would be without
prejudice and for leave to file an amended complaint. In the meantime, defendants removed the
action to federal court in Illinois and plaintiffs again moved to remand. While those motions
were pending, the MDL panel transferred the case to the federal court in Maryland to be
considered as part of the ongoing Mutual Funds MDL. The Fourth Circuit determined that the
original complaint remained the operative complaint, the case was removable, the claims were
precluded by SLUSA, and the district court possessed subject matter jurisdiction at the time of
final judgment. Accordingly, the Fourth Circuit affirmed the district court’s denial of remand
and granted defendants’ motion to close the action.
Roland v. Green, 675 F.3d 503 (5th Cir. 2012).
In a consolidated appeal arising out of an alleged multi-billion dollar Ponzi scheme, the
Fifth Circuit reversed the district court’s decision and held that the Standards Act did not
preclude appellants’ claims. The case originated when investors brought two class actions in
Louisiana court against an investment company, asserting contract and other claims arising from
sales of certificates of deposit (“CDs”) that were purportedly backed by a portfolio of “highly
marketable securities.” The district court found that the CDs themselves were not “covered
securities” under SLUSA, but because plaintiffs’ purchases of the CDs were induced by the
misrepresentation that the bank invested in a portfolio containing covered securities, the
fraudulent scheme was sufficiently tied to a transaction in covered securities to mandate removal.
The Fifth Circuit disagreed, noting that almost every bank or company owns some covered
securities in its portfolio, and every debt instrument issued by such banks and companies is
backed by such a portfolio in some sense. The court found that precluding any group claim
against any such debt issue merely because the issuer advertises that it owns covered securities in
its portfolio would be a major change in the scope of SLUSA. The Fifth Circuit used the Ninth
Circuit’s test in which fraudulent schemes must be “more than tangentially related to real or
purported transactions in covered securities.” In this case, misrepresentations about covered
securities were only one of a host of misrepresentations made to lure defendants into buying the
CDs, and were therefore merely tangential. The CDs were not “ghost entities” or “cursory passthrough
vehicles” to invest in covered securities, and plaintiffs could not claim that they
deposited money in the bank for the purpose of purchasing covered securities. Accordingly, the
court reversed the district court decision and remanded to state court.
Daniels v. Morgan Asset Mgmt., Inc., 2012 WL 3799150 (6th Cir. Aug. 31, 2012).
The Sixth Circuit affirmed the dismissal of plaintiffs’ amended complaint pursuant to the
Standards Act. Plaintiffs, a group of trust funds and trustee ad litum, brought a state law class
action alleging breach of contract and negligence. Following removal, the district court
dismissed plaintiffs’ amended complaint, concluding that plaintiffs’ claims were precluded by
SLUSA because they amounted to allegations that defendants misrepresented how investments
would be determined and failed to disclose a material conflict of interest. Plaintiffs appealed,
arguing that the fourth element of SLUSA preclusion – requiring “allegation of an untrue
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statement or omission of material fact” – had not been satisfied. The Sixth Circuit noted that
there is a circuit split on the role an untrue statement or omission of material fact must play in the
complaint in order to find SLUSA preclusion. The court further stated that it follows the
“literalist approach” to SLUSA preclusion which allows the court to read the Act expansively
and requires an analysis of the substance of the complaint. Moreover, “removing covered words
from the complaint or disclaiming their presence is ineffective to elude SLUSA’s prohibitions.”
Here, the court found that the substance of plaintiffs’ claim was that the defendant asset
management company had made an untrue statement at the time it contracted with plaintiffs and
failed to disclose a material conflict of interest during the contractual period. Thus, the Sixth
Circuit concluded that all of plaintiffs’ claims were grounded in fraud and dismissal pursuant to
SLUSA was appropriate.
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012).
Plaintiff brought a putative class action asserting breach of contract and unjust
enrichment against a brokerage firm arising from fees charged for handling, postage and
insurance related to the delivery of trade confirmations. Plaintiff sought reimbursement of the
fees, claiming that the fees were grossly disproportionate to the actual transaction costs and were
in breach of a client agreement. Defendant removed the action to federal court and the district
court granted defendant’s motion to dismiss pursuant to the Standards Act. On appeal, the
Seventh Circuit held that the action was not properly removed because defendant could not show
that the claim involved a misstatement or omission of a material fact. The Seventh Circuit
agreed with a Second Circuit holding that alleged misrepresentations or omissions regarding
these types of fees do not constitute the type of misrepresentations or omissions categorized as
“material” under SLUSA. Nevertheless, the Seventh Circuit found that there was federal
jurisdiction under the Class Action Fairness Act and affirmed the district court’s dismissal of
plaintiff’s amended complaint. The court found that the customers had notice of the fees before
doing business with defendant, were apprised of increases in the fees, and the fees need not
reflect actual costs. Accordingly, the defendant firm did not breach the client agreement and
dismissal was appropriate.
Hidalgo-Velez v. San Juan Asset Mgmt., Inc., 2012 WL 4427077 (D.P.R. Sept. 24, 2012).
Following removal of a shareholder class action, the district court denied plaintiffs’
motion to remand pursuant to the Standards Act. Plaintiffs conceded that their case was a
“covered class action” that alleged misrepresentations and omissions about the investment
objectives, level of diversification, and anticipated investments of the fund at issue. However,
plaintiffs argued that the fund was not a “covered security” and, therefore, removal was
improper. The court noted that a majority of courts have held that SLUSA applies to cases
“brought by investors of a fund that invests, or represents that it will invest, in a covered security,
even when the shares of the fund in which the class invested are not covered securities.” The
court further held that the prospectus of the fund indicated that the fund’s anticipated investments
included various “covered securities” and the fund had actually invested in securities that were
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publicly traded on NASDAQ. Accordingly, since plaintiffs’ complaint alleged
misrepresentations and omissions in connection with anticipated and actual investments in
publicly traded securities, removal was proper.
In re Refco Inc. Sec. Litig., 859 F. Supp. 2d 644 (S.D.N.Y. 2012).
The district court adopted the report and recommendation of the special master and
denied defendants’ motion to dismiss plaintiffs’ claims as precluded by the Standards Act. As
liquidators of a family of hedge funds and trustees of a trust formed for purposes of litigation,
plaintiffs sought to recover cash that the hedge funds had diverted from customer accounts to
unprotected offshore accounts, where the assets were ultimately lost. The court held that
plaintiffs’ action did not qualify as a “covered class action” and, thus, was not precluded by
SLUSA. The court agreed with the special master’s reasoning in holding that plaintiffs were
entitled to entity treatment under SLUSA because their positions as Joint Official Liquidators
(“JOLs”) were roughly equivalent to bankruptcy trustees, which receive entity treatment under
SLUSA. The court rejected defendants’ argument that the special master should have counted
the ultimate beneficiaries of any recovery by the trust (i.e., the creditors) rather than the stated
beneficiaries, the JOLs. The court then considered the question of whether this action could be
grouped with other similar suits in a multidistrict litigation. The court agreed with the special
master’s recommendation that the number of plaintiffs could not be aggregated with plaintiffs in
related actions because the claims were not sufficiently related to warrant grouping under the
“common question of law or fact” standard. The court cited the Supreme Court’s opinion in
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), explaining that “common questions of
fact or law” means “the capacity to generate common answers apt to drive the resolution of the
litigation.” Finally, the court rejected defendants’ efforts to consolidate this action with cases
filed in different courts or settled or dismissed cases, noting that SLUSA’s grouping provision
allows the court to group only cases that are “filed in or pending in the same court.”
Accordingly, the court found that this action did not qualify as a “covered class action” and
denied defendants’ motion to dismiss under SLUSA.
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).
A putative class of investors brought state and federal law claims against ten corporate
and individual defendants in connection with a merger, and defendants moved to dismiss. With
respect to plaintiffs’ claim for aiding and abetting breach of fiduciary duty, plaintiffs conceded
that the elements of Standards Act preclusion were met, but argued that the “Delaware carveout”
exception applied to preserve the claim. The court disagreed, finding that the corporation at
issue was not incorporated under the laws of any U.S. state, and the “Delaware carve-out”
applies only to claims “based upon the law of the State in which the issuer is incorporated.” The
court further held that: (1) service was adequately made on the objecting individual defendants;
(2) the two corporate defendants were foreign private issuers and, therefore, not subject to
§ 14(a) liability; (3) plaintiffs’ §§ 10(b) and 20(a) claims survived defendants’ motion to dismiss;
(4) plaintiffs lacked standing to bring a direct breach of fiduciary duty claim against one of the
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corporations and its principals; and (5) plaintiffs’ claims for the breach of duty of loyalty and
breach of duty of candor survived defendants’ motion to dismiss. Accordingly, the district court
granted in part and denied in part defendants’ motion to dismiss.
In re Stillwater Capital Partners Inc. Litig., 851 F. Supp. 2d 556 (S.D.N.Y. 2012).
The district court granted in part and denied in part defendants’ motion to dismiss state
law claims brought by a putative class of investors arising from a merger. In their amended
complaint, plaintiffs included a statement that they “expressly exclude and disclaim any
allegation that could be construed as alleging or sounding in fraud.” Notwithstanding this
disclaimer, the court held that fraud was a “necessary component” of plaintiffs’ breach of
fiduciary duty claim and, thus, the claim was precluded by SLUSA. The court further held that
plaintiffs’ attempt to hold individual defendants liable through an aiding and abetting claim was
similarly precluded by SLUSA. However, the court found that plaintiffs’ breach of contract
claim regarding a post merger share allocation agreement was not precluded. The court noted
that contract claims are generally outside the scope of securities laws and although certain
contract claims may allege misrepresentations or omissions that would support SLUSA
preclusion, the present case did not. Accordingly, the court concluded that plaintiffs’ breach of
fiduciary and aiding and abetting fiduciary duty claims were precluded by SLUSA, but the
breach of contract claim was not precluded.
Liberty Media Corp., LMC v. Vivendi Universal, S.A., 842 F. Supp. 2d 587 (S.D.N.Y. 2012).
In a securities fraud action, the district court denied defendants’ motion to dismiss state
law claims pursuant to the Standards Act. Plaintiffs’ state law claims had been consolidated with
a pending securities fraud class action in 2002. Six years later, defendants moved to dismiss
plaintiffs’ state law claims as precluded by SLUSA. Plaintiffs argued that their claims were not
part of any “covered class action” because their claims did not share common questions of law or
fact with the class claims. Plaintiffs also argued that defendants were precluded by waiver or
estoppel from raising SLUSA preemption. The court ruled in favor of plaintiffs, but did not
adopt either of plaintiffs’ arguments. Rather, the court found that consolidation of plaintiffs’
claims with the class was “improvidently granted” because the issue of SLUSA preclusion was
never considered in connection with defendants’ motion for consolidation. Given the prejudice
caused to plaintiffs by the consolidation, the court de-consolidated plaintiffs’ claims from the
class action. The court then held that because plaintiffs’ claims were not part of a “covered class
action,” defendants’ SLUSA preclusion argument necessarily failed. The court flatly rejected
defendants’ argument that it was creating an “exception” to SLUSA preclusion not found in the
statute. Rather, the court reasoned that its ruling was based on the limited and uncontested fact
that plaintiffs’ suit – severed from the class action – no longer qualified as a “covered class
action” under SLUSA. Accordingly, the court denied defendants’ motion to dismiss.
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E.
In re Austin Capital Mgmt., Ltd., Sec. & ERISA Litig., 2012 WL 6644623 (S.D.N.Y. Dec. 21,
2012).
In a putative class action arising out of the Madoff Ponzi scheme, the district court
granted defendants’ motion to dismiss with regard to plaintiffs’ state law claims on the basis that
they were precluded by the Standards Act. Plaintiffs were investors in hedge funds managed by
the defendant asset management company and asserted federal and state law claims alleging that
defendants knowingly invested with Madoff, but failed to conduct meaningful due diligence.
Defendants contended that plaintiffs’ state law claims were precluded by the Standards Act and
plaintiffs disputed the applicability of each of SLUSA’s requirements. Specifically, plaintiffs
argued that because the named plaintiffs in the state law class actions were state pension plans,
the action should be allowed under the “state action” exception that permits otherwise precluded
class actions if brought by a state pension plan as a member of a class comprised solely of other
states, political subdivisions or state pension plans. The court noted that plaintiffs’ action did not
meet this requirement, as only some, and not all, of the named plaintiffs were state pension plans.
Plaintiffs also claimed that misrepresentation was not a necessary element of their state law
causes of action. The court noted that preclusion under SLUSA requires only that the action
allege misrepresentation, not that misrepresentation be a necessary component of each claim.
Finally, plaintiffs claimed that the alleged misrepresentations were not “in connection with” the
sale of covered securities. However, the court found that plaintiffs’ allegation that defendants
caused them to invest through a fraudulent scheme to misrepresent the due diligence being
conducted was sufficient to meet the “in connection with” standard. Therefore, the court found
that plaintiffs’ state law claims were barred by SLUSA and granted defendants’ motion to
dismiss with respect to these claims.
In re Lehman Bros. Sec. and ERISA Litig., 2012 WL 6603321 (S.D.N.Y. Dec. 17, 2012).
In a securities case commenced on behalf of a single plaintiff and subsequently
transferred to the district by the Multidistrict Panel pursuant to 28 U.S.C. § 1407, the district
court found that plaintiff’s state law claims were barred by the Standards Act because the case
constituted a “covered class action” within the meaning of the Act. Plaintiff did not dispute that
the claims were based on state law and alleged misrepresentations or omissions of material fact
involving covered securities. Rather, plaintiff argued that an individual action does not become
part of a “covered class action” by virtue of a § 1407 consolidation or coordination by the
Multidistrict Panel. The court disagreed, finding that because plaintiff’s case was pending in the
same court as a large number of others, all of which related to Lehman Brothers and all of which
involved common questions of law or fact, and because the other cases sought damages on
behalf of thousands of persons, plaintiff’s case was a “covered class action” within the plain
terms of the statutory definition. The court further noted that even if a § 1407 transfer was
insufficient to trigger SLUSA, the Lehman Brothers equity/debt actions were also consolidated
for pre-trial purposes, clearly satisfying the SLUSA requirement that an action be “consolidated
… for any purpose” with another action or group of actions. Accordingly, the court found that
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plaintiff’s state law claims were precluded by SLUSA and granted defendants’ motion to dismiss
with respect to these claims.
Lakeview Inv., LP v. Schulman, 2012 WL 4461762 (S.D.N.Y. Sept. 27, 2012)..
The district court granted defendants’ motion to dismiss on the basis that plaintiffs’
securities fraud class action was precluded by the Standards Act. Plaintiffs alleged that
defendants violated state securities laws by making untrue statements in connection with the sale
of limited partnership interests in two hedge funds that were then invested in Madoff’s Ponzi
scheme. Although plaintiffs argued that neither of the hedge funds traded in “covered
securities,” the court determined that Madoff’s purported trading in “covered securities” was
central to the complaint and, therefore, the “in connection with” requirement was satisfied. The
court further held that the entire action should be dismissed because there were no “individual”
claims that could be severed from “class” claims.
In re Fannie Mae 2008 Sec. Litig., 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012).
Independently from an ongoing securities fraud class action, three plaintiffs pursued
individual actions against the Federal National Mortgage Association, various executives, and
certain underwriters. The district court granted a motion to dismiss brought by certain
defendants in two of the individual actions with respect to state law claims, finding that the
claims were precluded under the Standards Act. The issue at hand was whether the lawsuits
constituted a “covered class action.” The two individual lawsuits raised almost identical
questions of fact as the class action pending in the same court and had been consolidated with the
class action for pre-trial purposes. The court found that the lawsuits therefore constituted a
“covered class action” and dismissed the state law claims pursuant to SLUSA. All three
individual actions also pursued claims against defendants who were not defendants in the class
action. The court determined that there were not more than fifty persons seeking damages
against these defendants and, therefore, SLUSA did not bar plaintiffs’ claims.
People v. Greenberg, 2012 WL 1582779 (N.Y. App. Div. May 8, 2012).
The appellate court affirmed the denial of defendants’ motion for summary judgment,
finding that the Standards Act did not preclude a civil enforcement action brought by the New
York Attorney General. Specifically, the Attorney General brought the action pursuant to the
Martin Act and the Executive Law, asserting that defendants orchestrated fraudulent transactions
designed to portray an unduly positive picture of AIG’s loss reserves and underwriting
performance. Defendants argued that the action was preempted by SLUSA because the Attorney
General was seeking, in a de facto representative capacity, to litigate claims on behalf of a
“covered class” of AIG investors to recover for their financial losses. After examining the
Reform Act, SLUSA, and other federal statutes, the court rejected defendants’ argument and
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found no evidence that Congress intended to preempt the Attorney General’s state law power to
bring enforcement actions seeking money damages. Instead, the relevant federal legislative
history expressed the importance of the state’s role in policing securities fraud. Accordingly, the
court affirmed the denial of defendants’ motion for summary judgment based on SLUSA
preclusion.
Wilson v. Wells Fargo Advisors, LLC, 2012 WL 5240815 (D. Del. Sept. 25, 2012).
In a putative class action removed to federal court, the magistrate recommended that the
district court grant defendants’ motion to dismiss state law claims arising from the collapse of
the market for auction-rate securities (“ARS”). Plaintiffs asserted breach of fiduciary duty and
breach of a settlement agreement based on defendants’ failure to buy back ARS and the charging
of trust account management fees based on the par value of plaintiffs’ ARS, rather than fair
market value. Defendants moved to dismiss plaintiffs’ state law claims as precluded by the
Standards Act. Plaintiffs contended that their state law claims were not precluded because they
had not asserted any misrepresentations or omissions “in connection with” the purchase or sale
of covered securities. Specifically, plaintiffs argued that defendants’ failure to buy back the ARS
and assessment of excess fees took place after the ARS were sold and, thus, the sale of ARS was
only “background” for their claims. The magistrate rejected plaintiffs’ argument and held that
SLUSA preclusion does not turn on whether the allegations are characterized as facts or as
essential elements of a claim. The court further held that the nature of the relief requested by
plaintiffs was relevant in “connecting” the allegations of the complaint to the purchase or sale of
securities. Here, plaintiffs sought recovery of excess trust management fees and investment
losses and, thus, there could be no doubt that plaintiffs’ claims were “in connection with” the
purchase or sale of a covered security. Accordingly, the magistrate recommended that the court
grant defendants’ motion to dismiss the action as precluded by SLUSA. The magistrate also
recommended that the court deny plaintiffs’ motion to amend to remove claims precluded by
SLUSA, as SLUSA preclusion pertains to actions as a whole, and not to individual claims.
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012).
In a putative class action removed to federal court, the district court granted plaintiffs’
motion to remand on the grounds that the action was not subject to removal pursuant to the
Standards Act. Plaintiffs were purchasers of variable annuities who alleged that their investment
advisors negligently failed to attach guaranteed income benefit riders to their policies. Following
a prior removal and remand to state court, plaintiffs filed second and third amended complaints,
defendants again removed the case to federal court, and plaintiffs sought remand. Defendants
acknowledged that none of the amended complaints set forth a claim of fraud on their face, but
pointed to various deposition testimony by plaintiffs in which they stated that their claims were
based on “lies” and “intentional misstatements” made by defendants. The court rejected this
argument, noting that it was “unaware of any support for the conclusion that deposition
testimony from a layman, even if he is a putative class representative, drawn out by leading
questions from opposing counsel, regarding legal theories of the case and grounds for relief can
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alter the allegations of the case.” The court concluded that any testimony by plaintiffs as to
misrepresentations were the sort of “background details that need not have been alleged, and
need not be proved, which the Third Circuit has determined cannot serve as a basis for SLUSA
removal.” Finally, the court noted that the motion for removal was also untimely and remanded
the case to state court.
Stichting Pensioenfonds ABP v. Merck & Co., 2012 WL 3235783 (D.N.J. Aug. 1, 2012).
The district court granted in part and denied in part defendants’ motion to dismiss
plaintiff’s complaint alleging securities fraud relating to the prescription drug Vioxx. Although
this case was an individual action brought by a pension fund, the court held that it fit within the
definition of a “covered class action” under the Standards Act because it was based on the same
subject matter as a pending class action and other individual actions, and plaintiff agreed to both
coordinated proceedings and coordinated discovery with the other actions. Although the case at
issue was not consolidated with the class action and other individual actions, the court held that
SLUSA was applicable based upon the existence of common questions of law and fact between
the actions, and the involvement of more than fifty parties across the various actions. The court
noted that the Third Circuit had not previously expressed a view on the topic, but the court was
persuaded by cases from other jurisdictions, and by the commonality of facts and substantial
coordination of proceedings, both procedurally and substantively. As such, the court found that
plaintiff’s action was precluded by SLUSA and dismissed plaintiff’s state law claims. The court
further held that several of the alleged misstatements were inactionable under 10b-5(b),
dismissed plaintiff’s claim for scheme liability, and dismissed claims for control person liability
against five of the six individually named defendants.
Niitsoo v. Alpha Natural Res. Inc., 2012 WL 5395812 (S.D.W.V. Nov. 5, 2012).
In a federal securities class action removed under the Standards Act, the district court
granted plaintiffs’ motion to remand on the theory that the Act only permits removal of class
actions alleging state law fraud violations. Plaintiffs alleged only violations of federal law in a
case concerning the merger of two major producers and sellers of coal. The court noted that
courts are divided on the question of whether a securities class action filed in state court can be
removed to federal court if it alleges only violations of federal law. Many courts have found that
SLUSA only prevents plaintiffs from filing under state law, while others have found that it also
prevents plaintiffs from filing under federal law in state court. The court conducted a thorough
review of the statutory language and legislative history, ultimately relying on the Supreme
Court’s dicta in Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006), to conclude that only
covered securities class actions asserting state law fraud claims can be removed to federal court,
where they will be dismissed. Accordingly, because plaintiffs’ federal claims did not constitute a
covered class action under this interpretation of 15 U.S.C. 77p subsection (b), the court found
that the action was not removable to federal court and granted plaintiffs’ motion to remand.
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E.
In re BP P.L.C. Sec. Litig., 843 F. Supp. 2d 712 (S.D. Tex. 2012).
The district court granted in part and denied in part defendants’ motion to dismiss several
putative class action lawsuits arising from an oil spill in the Gulf of Mexico. With respect to
plaintiffs’ common law fraud claims, defendants argued that the claims were precluded by the
Standards Act. Plaintiffs argued that “covered securities” under the Act must be listed and
traded on a national exchange and that although BP ordinary shares are listed on the New York
Stock Exchange, the shares are only traded on the London Stock Exchange. The court disagreed
with plaintiffs’ argument, relying on decisions by other courts that have refused to read a trading
requirement into the definition of “covered securities” under SLUSA. The court further
determined that plaintiffs’ claims were founded on allegations of misrepresentations and
omissions in connection with the purchase of BP ordinary shares. Accordingly, the court held
that the elements of SLUSA were satisfied and plaintiffs’ common law fraud claims were
precluded.
Brady v. Kosmos Energy Ltd., 2012 WL 6204247 (N.D. Tex. July 10, 2012).
The district court addressed the issue of whether class actions brought in state court
asserting only federal claims under the Securities Act of 1933 are removable to federal court.
The court noted a split among courts on this issue and sided with the authorities that have held
that removal is proper. The court concluded that this interpretation of SLUSA is consistent with
“Congress’s broad goal of making federal court the ‘exclusive venue’ for the bulk of securities
class actions.” Accordingly, the court held that removal was proper and denied plaintiffs’
motions to remand.
Facciola v. Greenberg Traurig LLP, 2012 WL 1021071 (D. Ariz. Mar. 20, 2012).
In a putative securities fraud class action related to an alleged Ponzi scheme involving
mortgage “pass-through” investments, the district court granted plaintiffs’ motion for class
certification. Defendants argued that the court should deny plaintiffs’ motion and dismiss their
claims because their claims were precluded by the Standards Act. The court found that SLUSA
preclusion did not apply because the alleged fraud did not stem from the sale of securities on a
national exchange or securities issued by a registered investment company. The court rejected
defendants’ argument that SLUSA precluded the action simply because some of the putative
class members may have sold covered securities in order to purchase the securities at issue.
Accordingly, the court granted plaintiffs’ motion for class certificate and denied defendants’
motion to dismiss based on SLUSA preclusion.
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E.
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012).
In a group of seven putative securities class actions brought exclusively under the
Securities Act of 1933, the court denied plaintiffs’ motion to remand after denying defendants’
motion for a stay of proceedings pending a decision by the Judicial Panel on Multidistrict
Litigation to transfer the actions to the Southern District of New York. The district court
addressed whether the passage of the Standards Act affected the non-removal provision of
15 U.S.C. §77v to allow removal of class actions arising under the 1933 Act and noted that
courts in other districts have reached different conclusions. Here, the court denied plaintiffs’
motion to remand, finding that SLUSA amended §77v to exempt covered class actions from
§77v’s concurrent jurisdiction provision, with the result that “federal courts alone have
jurisdiction to hear covered class actions raising 1933 Act claims.”
Stoody-Broser v. Bank of Am., 2012 WL 1657187 (N.D. Cal. May 10, 2012).
Following remand from the Ninth Circuit, the district court denied defendants’ motion to
dismiss plaintiff’s amended complaint relating to investment of trust assets. Defendants argued
that plaintiff’s claims were precluded by the Standards Act. The court held that an amended
complaint filed by plaintiff changed the substance of plaintiff’s allegations, as it disavowed
claims for misrepresentation and instead alleged breach of fiduciary duty. As plaintiff’s claims
were no longer predicated on material misrepresentations in connection with the sale of
securities, the district court found that they were no longer precluded. Accordingly, the court
denied defendants’ motion to dismiss.
Brown v. China Integrated Energy, Inc., 2012 WL 1129909 (C.D. Cal. April 2, 2012).
In a putative securities fraud class action, the district court denied defendant’s motion to
stay discovery pursuant to the Standards Act in three state court actions pending the court’s
decision on defendant’s motion to dismiss the class complaint. With respect to one of the state
court actions, the court found defendant’s motion to be moot because defendant had already
produced the documents being sought in that case and the case had concluded. With respect to
the remaining state court cases, defendant argued that allowing discovery to proceed in the state
court actions would create “an unacceptable risk” that the federal class action plaintiffs would
obtain discovery before the court determined the sufficiency of the class complaint. The court,
however, noted that the named plaintiffs in the federal action were different from those in the
state action. Moreover, the court explained that a confidentiality order would ensure that
discovery would not be shared with the federal plaintiffs. While there was significant factual
overlap between the federal action and the state action, the court held that such overlap was only
one factor to be considered in deciding whether to stay discovery pursuant to SLUSA.
Accordingly, the court denied the motion to stay because there was little risk that discovery
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would be shared between the state and federal actions and relief short of a stay could protect
defendant’s interests.
F. Liabilities under State Statutory and Common Law
1. Blue Sky Laws
F.1
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (2nd Cir. N.Y. 2012).
Defendant, a securities broker-dealer, underwrote auction rate securities ("ARS"),
including two ARS offerings purchased by plaintiff. When defendant discontinued its practice of
submitting support bids in the auctions, the auctions for plaintiff's ARS failed and the market for
plaintiff's ARS evaporated. Plaintiff argued it was unable to sell its ARS and was left holding
$18.95 million of illiquid and impaired securities. Plaintiff claimed that defendant violated the
California Corporations Code by making misrepresentations in connection with its ARS
purchases. The court dismissed the claim, holding that defendant's disclosures regarding its
support bidding practices were sufficient to preclude a misrepresentation claim and that plaintiff
had failed to allege any material misrepresentations made by defendant in relation to the ARS.
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. Ky. 2012).
Plaintiff bought more than $50 million worth of residential-mortgage-backed securities
from defendants, a brokerage and its employee, without reading the relevant offering documents
before investing. When the national economy entered into recession in 2007 and 2008, the value
of plaintiff's investments plummeted. Plaintiff sued defendant, alleging that defendant
fraudulently induced it to buy and retain the securities by omitting to state the risk involved in
the investment and that prudent underwriting standards were not followed in making a
substantial number of the mortgage loans that backed the securities. Specifically, plaintiff
claimed that defendants violated § 292.320 of Kentucky's Blue Sky Law. The court determined
that the elements of a § 292.320 claim are identical to the elements of a claim under Rule 10b-5
of the Securities and Exchange Act of 1934, and a heightened pleading standard applies to
§ 292.320 claims. The court dismissed plaintiff's § 292.320 claims, holding that plaintiff's
claims based on alleged misrepresentations and omissions concerning the securities' safety and
underwriting standards used failed because they were not plead with sufficient particularity.
Furthermore, plaintiff could not establish that it relied on statements concerning borrowers'
creditworthiness, predatory lending, property valuation, and deviant underwriting practices
because the offering documents disclosed those risks.
F.1
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012).
In 2007, plaintiff hired defendant to create and implement a financial investment plan on
her behalf with full discretionary authority. After a preliminary meeting with defendant, plaintiff
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filled out a Personal Financial Information Questionnaire in which she indicated that her
investment time horizon was 5–10 years and that she was a risk-averse investor, willing to forego
growth in order to avoid losses and preserve principal. By the end of 2008, plaintiff had suffered
approximately $2,000,000 in investment losses. She claimed that but for following defendant’s
investment recommendations and engaging its services, she would have avoided the losses she
suffered. Plaintiff alleged that defendant made material misrepresentations in (1) negligently
supplying plaintiff with a false probability of success rate for its 50-percent equity allocation
scenario, (2) fraudulently or negligently providing plaintiff with misleading performance history
numbers in its Investment Performance Worksheet, and (3) fraudulently failing to inform her that
the SEC had found the Worksheet figures misleading. Plaintiff claimed that such
misrepresentations constituted violations of the Connecticut Uniform Securities Act ("CUSA"),
and defendant moved for summary judgment, claiming that plaintiff's allegations were not
sufficient to sustain a claim under CUSA. The court denied defendant's motion, holding that an
action brought under CUSA may survive insofar as a plaintiff has adequately alleged claims
under either negligent misrepresentation or fraud, and that plaintiff had, in fact, adequately
alleged such claims. Plaintiff’s evidence, including expert opinion as to the inaccuracy of the
figures in the Performance Worksheet, and the SEC communications demonstrating defendant’s
prior awareness of the false and misleading nature of the figures, presented evidence that was
probative of fraud.
F.1
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012).
Plaintiff, an individual investor, filed a complaint alleging that defendant's investment
professionals made fraudulent misstatements to him, or omitted material information, about the
value and expected performance of his investments in silver and gold and executed various
unauthorized trades and transfers on his behalf. The court dismissed plaintiff's fraud claim,
brought under Florida's Blue Sky Law, because the Account Agreement between plaintiff and
defendant explicitly explained the risk of loss associated with investing in precious metals. The
court held that the unequivocal disclosure directly contradicted the alleged misrepresentations
and omissions, and that no consumer could have reasonably believed their investment in silver to
be safe upon reading the disclosure. Plaintiff also alleged that defendant committed fraud under
the statute with omissions related to lack of success in business and prohibition from the futures
industry. The court dismissed plaintiff's fraud-by-omission claim because plaintiff failed to
show how the omissions were a direct and proximate cause of the loss he suffered.
F.1
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter
and placement agent discontinued its practice of submitting support bids in such auctions, the
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff
alleged that defendant made material misstatements and omissions in relation to the ARS under
California's Blue Sky Law by misrepresenting the liquidity risks associated with its ARS and
claimed that had it known the true nature of the securities, it never would have purchased them.
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The court dismissed plaintiff's claim, holding that plaintiff failed to plead the alleged material
misstatements and omissions with sufficient particularity to survive a motion to dismiss because
plaintiff was on notice of both an SEC order and Web site disclosure regarding the underwriter
and placement agent's ARS practices prior to purchasing the ARS at issue. Furthermore,
plaintiff failed to specify what precise misstatements or misrepresentations occurred with respect
to the specific ARS at issue; a securities fraud complaint must specify each misleading statement
that a defendant is alleged to have made.
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).
Defendants, who served as brokers for plaintiffs, recommended that plaintiffs invest in
funds, which were in turn invested into Bernard Madoff's Ponzi scheme. Plaintiffs alleged that
defendants committed securities fraud in violation of Florida's Blue Sky Law in connection with
their investments. In order to state a securities claim under Florida's statute, a plaintiff must
allege justifiable reliance on a misrepresentation or omission of material fact and scienter. The
court dismissed plaintiffs' claim, holding that plaintiffs failed to plead scienter with requisite
particularity because, while plaintiffs claimed that defendants should have known Madoff's
practices were suspect and involved substantial risk, plaintiffs failed to explain the basis for such
knowledge.
M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).
Defendant, a broker-dealer, purchased certain notes comprised of a series of
collateralized debt obligations for resale to investors. Plaintiff purchased these notes from
defendant for $50 million. Plaintiff then entered into an Indenture with LaSalle Bank National
Association ("LaSalle") as trustee. LaSalle was responsible for administering the collateral
underlying the notes and making principal and interest distributions to note holders in
accordance with the Indenture. LaSalle later notified plaintiff of an occurrence of default
pursuant to the Indenture and placed available interest proceeds earned from the collateral
underlying the notes in a reserve account for defendant's benefit rather than paying interest on
the notes. Plaintiff claimed that defendant aided and abetted LaSalle in a breach of its fiduciary
duty by demanding LaSalle apply an incorrect interpretation of the Indenture and wrongfully
diverted available interest proceeds for defendant's benefit, made material misrepresentations and
false statements in its Preliminary Offering Memorandum ("POM"), and violated New York's
Blue Sky Law, the Martin Act, by issuing a materially misleading POM. Defendants claimed
that plaintiff's common law, negligent representation claim was preempted by the Martin Act.
The court explained that while a number of decisions conclude that the Martin Act vests the
attorney general with exclusive enforcement powers and therefore does not provide a right of
action to private litigants such as plaintiff, state law had since evolved. The court held that an
injured investor may bring a common law claim that is not entirely dependent on the Martin Act
for its viability and denied dismissal on the basis of preemption.
F.1
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In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).
Plaintiff, a limited partnership that makes private equity investments for its limited
partner investors, bought $12 million worth of National Century Financial Enterprises, Inc.
("National Century") preferred stock through defendant, a co-placement agent for the offering.
The stock fully lost its value when National Century filed for bankruptcy in 2002. Incidentally,
it is now well established that National Century committed a massive fraud with regard to its
stock offerings. Plaintiff brought suit against defendant, alleging that defendant failed to
disclose that National Century was not operating its business in a manner consistent with what
was represented to plaintiff, committing fraud in violation of Ohio's Blue Sky Law. Defendant
moved for summary judgment on plaintiff's fraud claim, and the court found for defendant. A
successful fraud claim under Ohio's Blue Sky Law requires a showing of justifiable reliance.
Plaintiff was a sophisticated investor that considered itself skilled in due diligence. Furthermore,
plaintiff had adverse information about National Century because Goldman Sachs, which had
considered serving as lead investor on the offering, gave plaintiff a lengthy document outlining
some of the areas of concern that it had about the offering, and plaintiff did not find any of
Goldman Sachs' concerns to be material. Finally, the letter agreement between plaintiff and
defendant stated that plaintiff was a sophisticated institutional investor relying exclusively on its
own due-diligence investigation, sources of material, and credit analysis in deciding to invest in
National Century preferred stock. The court held that the language of the credit agreement and
surrounding factors rendered any claimed reliance by plaintiff unjustifiable.
State v. Marsh & McLennan Companies, Inc., 2012 WL 6212518 (Or. Dec. 13, 2012).
Plaintiff, the state, brought an action against defendant, a brokerage firm, alleging that
defendant engaged in a scheme perpetrated by false and misleading statements in violation of
Oregon's Blue Sky Law that caused plaintiff to lose approximately $10 million on investments in
defendant's stock. Defendant asserted that plaintiff's claims must fail because Oregon's Blue Sky
Law requires a showing of reliance by a plaintiff, and plaintiff failed to establish any direct
reliance by state actors on any of defendant's actions. Furthermore, defendant argued that the
state could not show reliance by means of a presumption of reliance based on the "fraud-on-themarket"
doctrine. The court held that Oregon's Blue Sky Law does require a stock purchaser to
establish reliance; however, a stock purchaser who purchases stock on an efficient, open market
may establish reliance by means of the "fraud-on-the-market" presumption.
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012).
Plaintiffs were customers of Fifth Third Bank and Fifth Third Securities, separate
corporations operating together informally as Fifth Third Financial Advisors ("defendant"). In
2006, a private banker working for defendant introduced plaintiffs to Hughes, an investment
advisor employed by defendant. Plaintiffs met with Hughes and decided to invest their funds in
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options trading with him, making substantial returns on their investments. In 2007, Hughes left
defendant and began working at a new firm. Plaintiffs voluntarily transferred their investment
accounts to Hughes' new firm, where they suffered substantial losses. Plaintiffs sued defendant,
claiming that defendant violated Ohio and Kentucky Blue Sky Laws by committing fraud and
fraudulent disclosure. The court ruled that defendant met its initial burden to show that it did not
commit fraud under Ohio's law because it specifically warned plaintiffs of the inherent risks of
options trading, and plaintiffs failed to show that they justifiably relied on any misrepresentation
by defendant or that any such misrepresentation caused them injury. According to the court, the
bottom line was that plaintiffs earned money on their accounts while Hughes was working for
defendant, and it was not until after Hughes left to join another firm that plaintiffs suffered
losses; plaintiffs did not suffer injury at the hands of defendant. As to plaintiffs' claim of
fraudulent nondisclosure, once Hughes left defendant and plaintiffs were no longer defendant's
clients, defendant no longer had a duty to disclose. Because Kentucky's Blue Sky Law is similar
to Ohio's in that it requires a showing of a material misrepresentation or omission that causes
economic loss, the court reached the same result on plaintiffs' claims under Kentucky law.
Joseph v. Mieka Corp., 282 P.3d 509 (Colo. App. 2012).
Defendants participated in a joint venture to acquire a working interest in two oil and gas
wells. Defendants engaged and authorized a third party to act as a sales representative and
contact potential investors to solicit their interest in the joint venture. Following a hearing, the
Colorado Securities Commissioner concluded that defendants violated the Colorado Securities
Act by acting as unlicensed broker-dealers. Defendants appealed the Commissioner's order, and
the court affirmed the decision. The court held that a broker-dealer may be construed as
engaging in the business of buying or selling securities by authorizing or employing a sales
representative on his or her behalf. Defendants employed a third party as a sales representative
on their behalf by giving him a call list and managing him in qualifying investors; therefore, they
qualified as broker-dealers within the meaning of the Colorado Securities Act.
Cambridge Place Inv. Mgmt. Inc. v. Morgan Stanley & Co., Inc., 2012 WL 5351233 (Mass. Sup.
Ct. Sept. 28, 2012).
Plaintiffs bought residential mortgage-backed securities from defendants, who prepared
offering documents for the securities and then dealt and deposited the securities. Beginning in
the fall of 2006, housing prices began to decline and delinquencies began to increase. As home
prices continued to drop and foreclosures rose, the value of the securities suffered
commensurately, and plaintiffs suffered substantial losses as a result. Plaintiffs sued defendants,
claiming that defendants made false and misleading statements in their offers to sell the
securities in violation of Massachusetts' Blue Sky Law. Defendants moved to dismiss the
claims, arguing that plaintiffs could not allege that defendants made false or misleading
statements when the offering documents for the securities disclosed all the information that
plaintiffs asserted was misrepresented or omitted—that the securities were backed by high-risk
loans originated by flexible underwriting guidelines. The court refused to dismiss the claims,
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arguing that cautionary statements in offering documents only protect a defendant from a
misrepresentation claim when a plaintiff alleges that the defendant made misleading statements
about the possibility that future, unforeseen events could undermine an investment's value
(versus cases where a plaintiff alleges misrepresentations or omissions of historical fact).
Because plaintiffs did not claim that the offering documents failed to warn investors of the risks
of loss associated with the loans, but instead alleged a misrepresentation of historical fact—that
the offering documents failed to disclose that the originators jettisoned altogether the
underwriting guidelines that they professed to follow—plaintiffs' claims survived defendant's
motion to dismiss.
2. Consumer Protection and Other Statutes
F.2
M&T Bank Corp. v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).
Defendant, a broker-dealer, purchased certain notes comprised of a series of
collateralized debt obligations ("CDOs") for resale to investors. Plaintiff purchased these notes
from defendant for $50 million. Plaintiff then entered into an indenture with LaSalle Bank
National Association ("LaSalle") as trustee. LaSalle was responsible for administering the
collateral underlying the notes and making principal and interest distributions to note holders in
accordance with the indenture. LaSalle later notified plaintiff of an occurrence of default
pursuant to the indenture and placed available interest proceeds earned from the collateral
underlying the notes in a reserve account for defendant's benefit rather than paying interest on
the notes. Plaintiff alleged violations of New York's consumer protection law against defendant.
The court dismissed plaintiff's claims because defendant's sale of securities was not a consumeroriented
transaction and, therefore, did not fall within the scope of the law.
3. Common Law Fraud
F.3
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012).
Plaintiffs were investors in defendant, a company whose sole business consisted of
buying residential mortgage-backed securities on margin. Defendant's shares were made
available only to a restricted group of wealthy investors, and they were marketed with ominous
warnings about the high degree of risk associated with purchasing the shares. When the real
estate market and global economy deteriorated in 2008, the shares lost much of their value and
plaintiffs sued defendant for common law fraud and misrepresentation, claiming that defendant’s
offering memorandum was materially false and misleading because while it disclosed liquidity
issues that would threaten defendant could occur, it omitted information that would have alerted
investors to the fact that those events were already occurring. The court dismissed the claim,
holding that plaintiffs failed to plead fraud with sufficient particularity because the offering
memorandum specifically placed buyers on notice of what the company was doing and the fact
219

that it had recently experienced the reversals plaintiffs claim should have been disclosed. In
other words, plaintiffs failed to allege a falsehood.
Berman v. Morgan Keegan & Co., Inc., 455 F. App'x. 92 (2nd Cir. 2012).
Plaintiffs were victims of an allegedly wide-ranging fraudulent scheme involving taxdeferral
transactions. Under the guise of a tax-deferral transaction, Derivium Capital, LLC took
plaintiffs’ securities and purported to loan back to plaintiffs 90 percent of the value of those
securities. Moreover, Derivium represented to plaintiffs that their securities portfolio continued
to receive interest payments. In theory, this allowed plaintiffs to monetize 90 percent of their
securities’ value while deferring payment of capital gains taxes. In reality, however, plaintiffs
allege that Derivium sold their securities at the outset, conveyed 90 percent of the proceeds from
that sale back to plaintiffs in the form of a sham loan, and funneled the remaining 10 percent of
the money into a Derivium principal's personal business ventures. As a result, plaintiffs owed
the Internal Revenue Service over $1 million in back taxes and penalties. Plaintiffs sought to
recover their loss from defendant, one of Derivium’s broker-dealers, for allegedly aiding and
abetting Derivium’s fraud, among other things. The court dismissed plaintiffs' fraud claim,
holding that plaintiffs failed to plead facts sufficient to support the assertion that defendant had
actual knowledge of Derivium's fraudulent scheme. Plaintiffs' allegation that defendant had
knowledge as to how Derivium sold and marketed its 90 percent loan program had no bearing on
defendant's knowledge of the scheme's fraudulence. Additionally, the court determined that
plaintiffs' further allegation that defendant should have been on notice of Derivium's fraud based
on the fact that Derivium sold its customers’ securities outside of the loan term was insufficient
to support a strong inference that defendant was actually aware of Derivium’s fraud. The court
went on to say that even if plaintiffs had pled fraud with sufficient particularity, it would still
dismiss plaintiffs' complaint for failure to allege that defendant provided substantial assistance to
Derivium’s fraudulent scheme when defendant merely executed securities transactions on
Derivium's behalf and at Derivium's direction.
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. 2012).
Plaintiff bought more than $50 million worth of residential-mortgage-backed securities
from defendants, a brokerage and its employee, without reading the relevant offering documents
before investing. When the national economy entered into recession in 2007 and 2008, the value
of plaintiff's investments plummeted. Plaintiff sued defendants, alleging that defendants
fraudulently induced it to buy and retain the securities by omitting to state the risk involved in
the investment and that prudent underwriting standards were not followed in making a
substantial number of the mortgage loans that backed the securities. The court dismissed
plaintiff's claim for fraud by omission because plaintiff failed to plead fraud with sufficient
particularity, and defendants' offering documents expressly warned plaintiff about the risks at
issue and the alleged non-disclosures.
F.3
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F.3
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter
and placement agent discontinued its practice of submitting support bids in such auctions, the
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff sued
defendant for common law fraud, claiming that defendant made material misstatements and
omissions in relation to the ARS. The court dismissed this claim, stating that because the
elements of common law fraud are virtually identical to those required to make a claim under
Section 10(b) of the Securities and Exchange Act of 1934, plaintiff must allege the same
elements as required under Section 10(b). The court found that many of defendant's supposed
misstatements and omissions were not actionable because plaintiff was adequately apprised of
the underwriter and placement agent's ARS practices via website disclosure. In effect, plaintiff
was on notice of all information that a diligent inquiry would have disclosed. Furthermore,
plaintiff failed to allege that defendant acted with adequate scienter because plaintiff's scienter
allegations amounted to nothing more than a general business motive to make a profit.
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).
Defendants, who served as brokers for plaintiffs, recommended that plaintiffs invest in
funds which were in turn invested into Bernard Madoff's Ponzi scheme. Plaintiffs sued
defendants for fraud in connection with their investments, and defendants moved to dismiss the
claims. The court ultimately determined that plaintiffs failed to plead fraud with sufficient
particularity. Plaintiffs identified one of the defendants' employees who allegedly made a
misrepresentation to them, an estimated timeframe for the misrepresentation, and the name of the
city where the alleged misrepresentation was made. The court held that the allegations were only
approximate and generalized; thus, they did not meet the level of detail necessary to put
defendants on notice of the claims against them. Furthermore, plaintiffs failed to plead scienter
with requisite particularity because, while plaintiffs claimed that the defendants should have
known Madoff's practices were suspect and involved substantial risk, plaintiffs failed to explain
the basis for such knowledge.
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).
Plaintiff, a limited partnership that makes private equity investments for its limited
partner investors, bought $12 million worth of National Century Financial Enterprises, Inc.
("National Century") preferred stock through defendant, a co-placement agent for the offering.
The stock fully lost its value when National Century filed for bankruptcy in 2002. Incidentally,
it is now well established that National Century committed a massive fraud with regard to its
F.3
F.3
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stock offerings. Plaintiff brought suit against defendant, alleging that defendant failed to
disclose that National Century was not operating its business in a manner consistent with what
was represented to plaintiff, committing fraud. Defendant moved for summary judgment on
plaintiff's fraud claim, and the court found for defendant. Fraud requires a showing of justifiable
reliance. Plaintiff was a sophisticated investor that considered itself skilled in due diligence.
Furthermore, plaintiff had adverse information about National Century because Goldman Sachs,
which had considered serving as lead investor on the offering, gave plaintiff a lengthy document
outlining some of the areas of concern that it had about the offering, and plaintiff did not find
any of Goldman Sachs' concerns to be material. Finally, the letter agreement between plaintiff
and defendant stated that plaintiff was a sophisticated institutional investor relying exclusively
on its own due-diligence investigation, sources of material, and credit analysis in deciding to
invest in National Century preferred stock. The court held that the language of the credit
agreement and surrounding factors rendered any claimed reliance by plaintiff unjustifiable.
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL 3916652
(N.D. Ind. Sept. 7, 2012).
In 2006, defendants, an investment bank and its vice president, advised plaintiff to enter
into two interest-rate swaps with Lehman Brothers Special Financing, Inc. ("Lehman"). After
Lehman filed for bankruptcy in September 2008, defendants advised plaintiff to terminate the
swaps and provided instructions on how to do so. Among other things, defendants specifically
instructed plaintiff to send default and termination notices to Lehman by fax. Plaintiffs relied on
defendants' superior knowledge and followed the instructions, which turned out to be ineffective.
Plaintiffs claimed that defendants committed fraud by intentionally misrepresenting the
effectiveness of faxing the termination notices. The court dismissed plaintiffs' fraud claim,
holding that plaintiffs failed to plead facts sufficient to support a plausible claim for fraud
because plaintiffs' allegations showed, at most, that defendants negligently advised them
regarding termination of the swaps, and there was no allegation of misrepresentation of a past or
existing fact; rather, the alleged misrepresentation that termination was effective was an
expression of opinion regarding legal effect of an instrument. Plaintiffs also argued that
defendants breached their fiduciary duties by providing incorrect advice regarding the
effectiveness of its termination instructions. The court dismissed the claim, holding that it was
nothing more than reformulation of the statutory negligence claim plaintiffs brought in the same
action. Claims that assert the same facts and same alleged breaches of the same duty of care are
redundant, and a court may strike redundant matter from a pleading.
F.3
4. Breach of Fiduciary Duty and Other Common Law Claims
F.4
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. Ky. 2012).
Plaintiff bought more than $50 million worth of residential mortgage-backed securities
from defendants, a brokerage, and its employee, without reading the relevant offering documents
222

efore investing. When the national economy entered into recession in 2007 and 2008, the value
of plaintiff's investments plummeted. Plaintiff sued defendant, alleging that defendant
fraudulently induced it to buy and retain the securities. Specifically, plaintiff brought common
law claims for fraud and negligent misrepresentation. Plaintiff made three fraudulent
misrepresentation claims against defendant, and the court dismissed each of them. Plaintiff's
claim that defendants' statement that the securities were reasonably safe investments backed by
mortgage loans made according to reasonably prudent investment standards (when, in fact, no
underwriting standards were used) was actionable in theory because it was a misstatement of
present fact concerning the structural integrity of securities. However, the claim failed because it
lacked the particularity required to withstand a motion to dismiss—plaintiff did not indicate
where, when, or to whom the alleged misstatement was made. The court dismissed plaintiff's
remaining fraudulent misrepresentation claims because the express language of the offering
documents warned plaintiff of the risks at issue. Similarly, the court dismissed plaintiff's claims
for fraud by omission because plaintiff failed to plead fraud with sufficient particularity, and
defendants' offering documents expressly warned plaintiffs about the alleged non-disclosures.
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012).
In 2007, plaintiff hired defendant to create and implement a financial investment plan on
her behalf with full discretionary authority. After a preliminary meeting with defendant, plaintiff
filled out a Personal Financial Information Questionnaire in which she indicated that her
investment time horizon was five to ten years and that she was a risk-averse investor, willing to
forego growth in order to avoid losses and preserve principal. By the end of 2008, plaintiff had
suffered approximately $2,000,000 in investment losses. She claimed that but for following
defendant’s investment recommendations and engaging its services, she would have avoided the
losses she suffered. Plaintiff claimed defendant breached his fiduciary duties as her investment
advisor by providing her with false information in connection with his Investment Performance
Worksheet and by failing to inform plaintiff that he had revised his Investment Performance
Worksheet to comply with an SEC audit while defendant was employed by plaintiff. Defendant
moved for summary judgment on the claim, asserting that he did not breach his fiduciary duty.
The court considered plaintiff’s evidence, including expert opinion as to the inaccuracy of the
figures in the Performance Worksheet and the SEC communications demonstrating defendant’s
prior awareness of the false and misleading nature of the figures, and determined that plaintiff's
allegations raised a question of material fact regarding breach. The court denied defendant's
motion for summary judgment on the claim. Plaintiff also claimed that defendant made
negligent representations to her that she relied upon to her detriment, when he (1) advised her
that allocating 50 percent of her assets to equities was the Retirement Plan strategy most likely to
meet her investment goals and (2) supplied her with misleading evidence of “the superior past
returns achieved in its clients’ accounts” in his Investment Performance Worksheet. Defendant
moved for summary judgment on plaintiff's negligent representation claim, arguing that plaintiff
failed to establish that defendant made a false statement of fact, and thus could not sustain her
claim. The court denied summary judgment, holding that the applicable standard for negligent
representation is not a false statement of fact; rather, a plaintiff must only show that the
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defendant failed to exercise reasonable care or competence in obtaining or communicating
information.
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012).
Plaintiff, an individual investor, filed a complaint alleging that defendant's investment
professionals made fraudulent misstatements to him, or omitted material information, about the
value and expected performance of his investments in silver and gold and executed various
unauthorized trades and transfers on his behalf. Specifically, plaintiff claimed that defendant
owed him, and breached, a fiduciary duty by intentionally misleading him regarding the activity
and value in his account, concealing the unauthorized trading that occurred in his account, and
failing to disclose all fees associated with trading, thus giving him a false sense of security about
his investments by representing that it would recoup plaintiff's losses. The court determined that
plaintiff's account was non-discretionary, and that plaintiff alone was responsible for all
decisions based on representations or recommendations made by defendant's brokers. Because
Florida law requires some degree of undertaking on the other side to advise, counsel, and protect
the weaker party in order to establish a fiduciary relationship, the court held that a fiduciary
relationship never existed between plaintiff and defendant. Furthermore, even if a fiduciary
relationship did exist, plaintiff's allegations failed to state a claim for breach with sufficient
particularity because they lacked specifics as to what unauthorized trading occurred, what trades
were unauthorized trades, which fees were charged that were inappropriate, and how the plaintiff
was misled about the activity and value of his account.
In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).
Plaintiff purchased auction rate securities ("ARS") from defendant, a broker-dealer. The
underwriter and placement agent in plaintiff's ARS offerings had a practice of participating as
buyer and seller in the auctions that set interest rates for the ARS it sold. When the underwriter
and placement agent discontinued its practice of submitting support bids in such auctions, the
auctions for plaintiff's ARS failed, and the market for plaintiff's ARS evaporated. Plaintiff sued
defendant for common law negligent misrepresentation. The court dismissed the claim, holding
that because plaintiff was a sophisticated and long-time institutional investor with access to the
underwriter and placement agent's disclosure materials, plaintiff could not allege a justifiable
reliance on defendant's highly general statements regarding the ARS.
BNP Paribas Mortg. Corp. v. Bank of America, N.A., 866 F. Supp. 2d 257 (S.D.N.Y. 2012).
This case arose out of the collapse of Taylor, Bean & Whitaker Mortgage Corp. ("TBW")
and Ocala Funding, its subsidiary (Ocala). Plaintiffs alleged that they had invested over
$1.6 billion in short-term notes issued by Ocala, and that Ocala's assets were supposed to have
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served as collateral for the repayment of the notes; however, due to a massive fraud by TBW,
Ocala's assets were diverted or stolen by TBW. Plaintiffs brought a breach of fiduciary duty
claim against third-party defendants ("defendants"), who were the registered brokers and dealers
of the securities at issue, claiming that defendants undertook the duty to conduct a reasonable
investigation of the notes and to ensure that the notes were suitable for purchase by an investor.
The court dismissed plaintiffs' claim because plaintiffs explicitly disclaimed any fiduciary duty
owed to them by the defendants in their respective contracts. The court indicated that even
without the disclaimer, it still would have dismissed the claim, finding that there is no general
fiduciary duty inherent in an ordinary broker-dealer relationship. In this case, defendants did not
have discretionary trading authority over plaintiffs' accounts, and the relationship between
plaintiffs and defendants lacked the requisite high degree of dominance by the defendants that
was necessary to give rise to a fiduciary relationship. Defendants' only duty as brokers was to
give honest and complete information when recommending a purchase or sale.
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12, 2012).
Plaintiffs brought suit against their brokers (the defendants) for recommending that
plaintiffs invest in funds that were in turn invested into Bernard Madoff's Ponzi scheme.
Plaintiffs claimed that defendants breached fiduciary duties owed to plaintiffs, including the duty
to monitor investments. Defendants moved to dismiss the claim, and the court denied the
motion. Under Florida law, ongoing duties, such as a duty to monitor, may be triggered when a
broker undertakes a substantial and comprehensive advisory role with respect to
nondiscretionary accounts. The court held that plaintiffs stated a claim for breach of the
fiduciary duty to monitor investments by alleging that multiple times a year they met personally
with defendants' account managers, placed trust and confidence in the account managers, and the
account managers knew their investment objectives and needs and made continuing
recommendations and representations regarding the funds. Plaintiffs further alleged that
defendants breached their duty to ensure that their investments were adequately diversified. The
court dismissed this claim, holding that while brokers have a duty to make investments in a
manner suited to their customers' interests, this duty did not extend to a duty on the broker's part
to diversify investments. Finally, plaintiffs claimed that defendants were negligent in failing to
conduct adequate due diligence of the funds. The court dismissed plaintiffs' negligence claim,
holding that Florida's economic loss rule bars such claims when they are based on an allegation
of failure to conduct due diligence.
M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y. 2012).
Defendant, a broker-dealer, purchased certain notes comprised of a series of
collateralized debt obligations for resale to investors. Plaintiff purchased these notes from
defendant for $50 million. Plaintiff then entered into an Indenture with LaSalle Bank National
Association ("LaSalle") as trustee. LaSalle was responsible for administering the collateral
underlying the notes and making principal and interest distributions to note holders in
F.4
F.4
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accordance with the Indenture. LaSalle later notified plaintiff of an occurrence of default
pursuant to the Indenture and placed available interest proceeds earned from the collateral
underlying the notes in a reserve account for defendant's benefit rather than paying interest on
the notes. Plaintiff claimed that defendant aided and abetted LaSalle in a breach of its fiduciary
duty by demanding LaSalle apply an incorrect interpretation of the Indenture and wrongfully
diverted available interest proceeds for defendant's benefit and made material misrepresentations
and false statements in its Preliminary Offering Memorandum. The court dismissed plaintiff's
claim against defendant for aiding and abetting in a breach of fiduciary duty because LaSalle's
alleged conduct did not constitute a breach of its fiduciary duties as trustee. The court also
dismissed plaintiff's negligent misrepresentation claim. A plaintiff may only recover for
negligent misrepresentation where a special relationship of trust or confidence creates a duty for
one party to impart correct information to the other. The court found that defendant's purported
mortgage expertise was not unique enough in the financial industry to engender the requisite
high degree of dominance and reliance in a complex transaction among sophisticated parties
required for a special relationship to exist. The court also held that plaintiff's reliance on offering
memorandum was unreasonable as a matter of law, and any alleged misrepresentation was akin
to an opinion and not a material fact.
F.4
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL 3916652
(N.D. Ind. Sept. 7, 2012).
In 2006, defendants, an investment bank and its vice president, advised plaintiff to enter
into two interest-rate swaps with Lehman Brothers Special Financing, Inc. ("Lehman"). After
Lehman filed for bankruptcy in September 2008, defendants advised plaintiff to terminate the
swaps and provided instructions on how to do so. Among other things, defendants specifically
instructed plaintiff to send default and termination notices to Lehman by fax. Plaintiff relied on
defendants' superior knowledge and followed the instructions, which turned out to be ineffective.
Plaintiff claimed that defendants committed fraud by intentionally misrepresenting the
effectiveness of faxing the termination notices. The court dismissed plaintiff's fraud claim,
holding that plaintiff failed to plead facts sufficient to support a plausible claim for fraud because
plaintiff's allegations showed, at most, that defendants negligently advised it regarding
termination of the swaps, and there was no allegation of misrepresentation of a past or existing
fact; rather, the alleged misrepresentation that termination was effective was an expression of
opinion regarding legal effect of an instrument. Plaintiff also argued that defendants breached
their fiduciary duties by providing incorrect advice regarding the effectiveness of its termination
instructions. The court dismissed the claim, holding that it was nothing more than reformulation
of the statutory negligence claim plaintiff brought in the same action. Claims that assert the
same facts and same alleged breaches of the same duty of care are redundant, and a court may
strike redundant matter from a pleading.
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F.4
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012).
Plaintiffs were customers of Fifth Third Bank and Fifth Third Securities, separate
corporations operating together informally as Fifth Third Financial Advisors ("defendant"). In
2006, a private banker working for defendant introduced plaintiffs to Hughes, an investment
advisor employed by defendant. Plaintiffs met with Hughes and decided to invest their funds in
options trading with him, making substantial returns on their investments. In 2007, Hughes left
defendant and began working at a new firm. Plaintiffs voluntarily transferred their investment
accounts to Hughes' new firm, where they suffered substantial losses. Plaintiffs then raised
several tort claims against defendant, including negligence in the giving of investment advice,
negligent supervision, and negligent misrepresentation. The court ruled that because defendant
warned plaintiffs that options trading was risky in general, defendant offered to help plaintiffs
with alternative investment strategies that involved less risk and less return, and plaintiffs did not
suffer any losses while Hughes was employed with defendant, defendant had met its initial
burden to affirmatively demonstrate that its conduct did not cause harm to plaintiffs. Because
plaintiffs could not show harm, an essential negligence element, plaintiffs failed to prove their
claim for negligence. Plaintiffs also set forth claims against defendant for breach of fiduciary
duty. The court held that once Hughes left defendant and plaintiffs transferred their investments,
defendant no longer owed them a duty because as principal, defendant could not be liable for its
agent's (Hughes) actions that were not within the scope of his employment. Therefore, as a
matter of law, defendant could not be held liable for breach of fiduciary duty for Hughes'
conduct after he had left defendant's employment.
G. Liabilities Involving Clearing Brokers
G.
Katz v. Pershing, LLC, 672 F.3d 64 (1st Cir. 2012).
Plaintiff appealed the district court’s dismissal of a putative class action against a
corporation that sold brokerage execution, clearance, and investment products to financial
organizations. Defendant supplied a product that allowed financial organizations to manage
brokerage accounts over the Internet. When introducing firms used the product, investment
consultants at the firms could access non-public, personal information about consumer accounts.
Plaintiff maintained an account at one of the firms using the product. The firm and defendant
were parties to a clearing agreement that governed their responsibilities regarding the product
and its data. Plaintiff believed that her personal information was inadequately protected by
defendant’s service. Plaintiff alleged breach of contract, breach of implied contract, and
violations of consumer protection laws. The court held that plaintiff had no contract with
defendant because the clearing agreement contained a provision stating that it was not intended
to confer benefits on third parties. Plaintiff argued that when defendant sent customers the
disclosure statement regarding the clearing agreement to comply with NYSE Conduct
Rule 4311, it superseded the disclaimer of third-party beneficiary claims. The court rejected this
argument because modifications to the agreement were forbidden without being signed by the
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parties. Plaintiff argued that the disclosure statement created an implied contract, but there was
no consideration to support her claim. In alleging misrepresentation, the court held that plaintiff
failed to establish causation because the injury she alleged—overpaying for the firm’s services—
was the result of third-party actions. In alleging violation of privacy laws, the court held that
plaintiff failed to prove injury in fact because she had not shown that any of her personal
information had been accessed by unauthorized users. Because plaintiff failed to show causation
and injury, plaintiff lacked constitutional standing under Article III, § 2, clause 1 of the
Constitution. The dismissal was affirmed.
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Bayou Grp., LLC, 2012 U.S.
App. LEXIS 13531 (2d Cir. July 3, 2012).
Appellant, the sole clearing and prime broker for a hedge fund operated as a Ponzi
scheme, appealed the denial of a petition to vacate an arbitration award. After the fund
collapsed, the bankruptcy trustees appointed appellee as the official unsecured creditors
committee of the fund. The committee pursued claims against appellant in a FINRA arbitration
proceeding and was awarded a judgment of over $20 million. The arbitration panel held that
defendant was liable as an “initial transferee” under 11 U.S.C. § 550(a). The Southern District of
New York denied appellant’s petition to vacate. The Court of Appeals for the Second Circuit
affirmed the district court’s decision and found that there was no manifest disregard of the law
by the arbitration panel. Although defendant argued it was only a “mere conduit” of funds, the
court found that the account agreements gave appellant broad discretion such as allowing
appellant to use the funds to “protect itself.” Specifically, the agreement allowed appellant to
require cash or collateral deposits, to require that appellee maintain certain positions and
margins, to lend to itself the securities held, and to liquidate securities without notice. Thus, the
court held that the panel did not manifestly disregard the law when it held that appellant was
liable as a transferee.
G.
GMO Trust v. ICAP Plc, 2012 U.S. Dist. LEXIS 150074 (D. Mass. Oct. 18, 2012).
Plaintiff, a trust, brought a claim for breach of contract against defendant, a broker-dealer
that provided clearing services to an introducing firm, who was also a defendant. Defendant
moved to dismiss for failure to state a claim under Rule 12(b)(6). Defendant argued that it was
acting merely as a clearing broker under an agreement with the introducing firm. Without
determining whether the defendant was acting only as a clearing broker, the court denied in part
the motion to dismiss. The court held that under English law, which governed the contract, the
defendant may still have an independent obligation to the plaintiff as a third-party beneficiary to
the clearing agreement. However, the court noted that authority cited by the defendant was
unclear as to whether the plaintiff may be recognized as a third-party beneficiary to the clearing
contract under English law. Since liability may exist under English law, the court denied the
defendant’s motion to dismiss based on its alleged role as merely a clearing broker.
G.
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G.
In re Nat’l Century Fin. Enters., 846 F. Supp. 2d 828 (S.D. Ohio 2012).
Defendants, an investment bank and a broker-dealer, brought a motion for summary
judgment after being sued for, inter alia, aiding and abetting by institutional investors who
purchased $2 billion in notes issued by a finance firm. Defendants served as initial purchaser
and placement agents for the firm. It was undisputed that the firm had committed a massive
fraud. Defendants had agreed to structure, market, and place the firm’s note offerings with
institutional investors. Defendants argued that they did not substantially assist the fraud because
they performed routine banking functions for the firm. The court explained that substantial
assistance exists when a defendant affirmatively assists, helps conceal, or fails to act when
required to, enables the fraud to proceed and when the defendants’ actions proximately cause the
harm giving rise to primary liability. Defendants cited cases in which courts held that defendants
do not provide substantial assistance by merely following routine instructions in executing wire
transfers of investor funds or by performing ordinary clearing services to an introducing brokerdealer.
Defendants also cited a case in which it was held that there is a clearing firm exception to
aiding and abetting liability. The court held that defendants’ assistance went well beyond
clearing sales transactions because they served as the primary marketer and solicitor of the firm’s
notes. Defendants also made short-term loans to avert defaults that would have revealed the
fraud and made misrepresentations regarding reserve levels to hide the fraud. The court held that
the investors submitted sufficient evidence from which a jury could conclude that defendants’
assistance was critical to the success of the introducing firm’s fraudulent scheme.
Lumen v. Anderson, 280 F.R.D. 451 (W.D. Mo. 2012).
Plaintiffs filed a motion to certify a class action for violations of the Securities Exchange
Act of 1934 on the part of a clearing broker and its directors and officers. Plaintiffs alleged that
defendants made a material misrepresentation by willfully minimizing the bad debt situation of
an account in November 2008. Plaintiffs’ allegations regarding the November 2008 statements
understating defendants’ exposure on the account satisfied the pleading requirements under the
Private Securities Litigation Reform Act (“PSLRA”), which requires plaintiffs to identify
misleading statements or omissions, why they were misleading, and plead with particularity facts
giving rise to a strong inference that the defendants acted with scienter. The court found that the
class period commenced in November 2008 when the first false statement about the account was
made, and that defendants made statements to correct the misstatement in February 2009. The
only plaintiffs who could be part of the class were those who purchased stock after the false
statement in November 2008 and who still held their stocks after the truth was revealed in
February 2009. After finding that the other elements of Rule 23 of the Federal Rules of Civil
Procedure had been met, the court focused on the predominance test, which requires that
questions of law or fact predominate over individual questions. Plaintiffs satisfied this element
by relying on the fraud on the market theory because publicly available information was
reflected in the market price and investors’ reliance on public material misrepresentations could
be presumed. The only question was whether the market rapidly assimilated public information
and defendants failed to prove that it did not. The court granted the motion to certify class as to
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investors who bought their stock after the fraud occurred and held it after the truth had been
revealed, and denied the motion as to those who sold their stock before the truth was revealed.
Carter v. Holdman, 95 So. 3d 560 (La. Ct. App. 2012).
Defendants, a clearing broker and a registered representative, appealed the confirmation
of an arbitration award in favor of plaintiff investor. Plaintiff set up an IRA following the advice
of the registered representative and invested in two hedge funds managed by the registered
representative. The clearing broker served as custodian of plaintiff’s IRA. Defendants became
affiliated with another securities firm, but both continued to manage plaintiff’s investments and
sent plaintiff monthly statements, which indicated that plaintiff’s investments were stable. In
October 2008, defendants informed plaintiff that the value of his investments had plummeted.
Plaintiff filed a statement of claim with FINRA alleging breach of contract, breach of fiduciary
duty, negligence, fraud, and violations of state securities laws. Under the terms of the customer
service agreement, Texas law governed the contract. The three-member arbitration panel
rendered a 2-to-1 decision holding defendants liable for nearly $900,000. Defendants filed a
motion to vacate the award, arguing that Texas Civil Practice and Remedies Code Section 33.013
bars joint and several liability unless a party is more than 50% responsible for damages. The
court held that parties agreeing to arbitration accept the risk of mistakes of fact or law unless
statutory grounds exist for vacating the award. Louisiana Revised Statute 9:4210 set forth the
only grounds for vacating arbitration awards: (1) the award is obtained by corruption, fraud, or
undue means; (2) there is evidence of arbitrator partiality or corruption; (3) the arbitrators were
guilty of misconduct by refusing to postpone the hearing where there was sufficient cause or by
refusing to hear material evidence or any other misconduct prejudicing one of the parties; (4) the
arbitrators exceeded their powers or failed to make a final, mutual, and definite award. The fact
that one dissenting arbitrator would have reduced damages due to market decline was also not a
basis for vacating the award.
G.
H. Secondary Liability
1. Respondeat Superior
SEC v. Morgan Keegan & Co., 678 F.3d 1233 (11th Cir. 2012).
In an action by the Securities and Exchange Commission against defendant investment
bank, the SEC alleged defendant violated Section 17(a) of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Eleventh Circuit
vacated a previous decision granting summary judgment to defendant and remanded for further
proceedings, holding that four instances of private misrepresentations by registered
representatives was enough to satisfy the element of materiality in both actions and subjected
defendant to liability through the doctrine of respondeat superior. The SEC claimed defendant
misrepresented auction rate securities (ARS) to be safe investments with no liquidity risk and
continued to recommend ARS even when defendant knew of such a risk. The SEC cited to four
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customers of defendant who stated that defendant’s registered representatives misled them
regarding the risk associated with ARS. Defendant provided information on its Web site and in
its manual to warn of liquidity risks. The SEC conceded that these sources adequately warned
and described the liquidity risk. However, these materials were not given directly to customers
nor were customers informed directly about the location of this information. In its summary
judgment motion, defendant challenged the SEC’s failure to meet the element of “materiality” in
each claim for fraud. Defendant argued that four instances of misrepresentations to investors
was not enough to make these statements material. The court rejected this reasoning. It clarified
that the standard for materiality is based upon the total mix of information available to a
hypothetical reasonable investor, not necessarily the public at large, and would include any
private communications. The misrepresentations of four registered representatives could subject
defendant to liability under the theory of respondeat superior for violation of the securities laws
so long as these registered representatives were acting within the scope of their authority.
Further, the court held that the mere existence of written disclosures on defendant’s Web site and
in their manual, without evidence that the investors actually received notice or delivery of such
information, would not change this finding of materiality.
Sgaliordich v. Lloyd’s Asset Mgmt., 2012 U.S. Dist. LEXIS 135045 (E.D.N.Y. Sept. 20, 2012).
Plaintiff, an investor, filed suit against defendants, a wealth management firm and
individual registered representatives, alleging violations of various state securities laws related to
misrepresentations concerning the sale of commodities. The broker-dealer moved to dismiss on
the ground that they were not liable for the misrepresentations as the individual brokers were
acting as independent contractors. The account agreement expressly acknowledged this
relationship. In denying the motion to dismiss, the court noted that the agreement alone did not
establish as a matter of law that the registered representatives were not employees. Rather, the
doctrine of respondeat superior may apply based on the amount of control exercised by the
broker-dealer over the registered representatives.
H.1
Ho v. Duoyuan Global Water, Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).
Plaintiffs, individual investors, filed suit against defendant, a private investment
company, based on material misstatements and omissions related to an initial public offering.
The claim was based on the actions of defendant’s managing director who signed the registration
documents. Defendant filed a motion to dismiss, alleging that respondeat superior did not apply
since the managing director was not acting on behalf of the defendant. The court noted that the
managing director had “dual roles” and was acting on behalf of another organization when he
signed the registration statements. As the plaintiff failed to show how the defendant controlled
the managing director’s actions, the motion to dismiss was granted.
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Lewy v. Skypeople Fruit Juice, Inc., 2012 U.S. Dist. LEXIS 128416 (S.D.N.Y. Sept. 7, 2012).
Plaintiffs, individual investors, filed a putative class action for violation of federal
securities laws. Defendants include a U.S.-based corporation doing business in China, the
corporation’s officers, directors, controlling shareholder, and an underwriter of securities offered
by the company. Plaintiffs alleged that defendants made false statements in required reporting
documents. The corporation, certain officers and directors, and the underwriter moved to
dismiss certain claims alleged by plaintiffs. In particular, plaintiffs alleged that defendant
corporation violated Section 10(b) of the Securities Exchange Act of 1934 by knowingly or
recklessly making false financial statements regarding its 2009 performance and business
structure in its U.S. filings. The court held that plaintiffs pled falsity with particularity and raised
a strong inference of scienter in regards to these filings. In finding scienter, the court held that
plaintiffs adequately alleged that the corporation was vicariously liable for the alleged violations
of the chief financial officer under a theory of respondeat superior. The court held that an
employer is liable under respondeat superior if the employee, in committing the act complained
of, was acting within the scope of his or her employment. The court held that plaintiffs alleged
non-conclusory facts plausibly establishing that the CFO acted within the scope of her
employment when making the allegedly false statements in the U.S. filings. Although the court
held that defendant corporation may be held vicariously liable under a theory of respondeat
superior, the court found that plaintiff failed to sufficiently allege a violation of Section 10(b).
Defendants’ motion to dismiss was granted in part, and denied in part.
Rahman v. Kid Brands, Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012).
Investors who purchased a common stock of defendant company filed a class action
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5. Plaintiff alleged that defendant, a children’s furniture manufacturer, avoided import
duties on its subsidiaries’ products by misidentifying manufacturer and shipper countries of
origin in violation of U.S. anti-dumping laws and further engaged in illegal staffing practices.
Plaintiff also alleged that defendant simultaneously made statements to the public and in filings
with the Securities and Exchange Commission that their internal controls were effective and
accurate, thereby downplaying their liabilities for this misconduct. When this wrongdoing was
later made public, defendant’s stock price decreased dramatically. Plaintiff claimed that all
elements of fraud had been met. Defendant moved to dismiss arguing that in light of the
pleading requirements under the Private Securities Litigation Reform Act of 1995 (PSLRA),
plaintiff failed to meet her burden of proof as to the element of scienter, as she had not set forth
facts that pled with particularity that individual corporate employees had the requisite scienter.
Therefore, according to defendant, there was no basis to impute liability to the corporation
through the doctrine of respondeat superior. The court agreed with defendant’s reasoning,
reiterating that the PSLRA required heightened pleading requirements for securities fraud
allegations. Although it conceded that it may be possible to plead scienter as to a corporation
generally without pleading scienter as to an individual, the court determined that plaintiff failed
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even to plead sufficiently particular facts as to a corporate or collective theory of scienter.
Therefore, the motion to dismiss was granted since the defendant corporation could not be held
liable on the theory of respondeat superior.
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa. Jan. 5,
2012).
Plaintiffs sued defendants to recover investments they made in a limited partnership sold
by defendant, a registered representative. The partnership was not offered or sold through his
employer, a Registered Investment Advisor (RIA). The limited partnership was formed in 1995
and had one partner, whose sole principal was the registered representative. The registered
representative solicited millions of dollars of funds for the limited partnership under false
pretenses. He failed to invest the funds as promised and misappropriated and converted funds
for his own benefit. The registered representative was arrested in February 2009 and later pled
guilty to violating the securities laws by creating a scheme to defraud investors, including
plaintiffs. He further admitted to diverting money from investors for his own personal use and
operating a Ponzi scheme. The registered representative was working for the defendant RIA
during his operation of the scheme, where he served as the managing director, vice president,
secretary, and treasurer. Plaintiffs claimed that the RIA violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, both primarily and under the doctrine of respondeat
superior for the actions of the registered representative. The RIA moved for summary judgment.
The court granted the motion, finding that it could not be held liable for the actions of an
employee acting in the scope of his employment for a wholly separate entity. The court reasoned
that plaintiffs brought suit against the registered representative for his fraudulent conduct
involving an entity completely unrelated to the defendant RIA. The court further noted that “the
doctrine of respondeat superior, though applicable in [some cases] has not been and should not
be widely expanded in the area of federal securities regulation.”
Stout St. Funding LLC v. Johnson, 873 F. Supp. 2d 632 (E.D. Pa. 2012).
Plaintiff, a provider of commercial loans to real estate investors, filed suit against
defendant insurance underwriter and others, alleging negligent supervision. The claim related to
misappropriation of funds by defendant’s agent, who performed title insurance and closing
services. Defendant moved for summary judgment, arguing that plaintiff’s vicarious
liability/respondeat superior claim must fail because plaintiff never alleged that the agent was
actually an employee of defendant. The court dismissed this argument, holding that additional
discovery was required to determine if implied authority existed. However, the court dismissed
the claim for negligent supervision because the misappropriation of funds occurred after the
contract with defendant was terminated. The court noted that the end of the relationship
terminates liability, and thus no claim for negligent supervision could exist.
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H.1
Thorpe v. Ameritas Inv. Corp., 2012 U.S. Dist. LEXIS 134049 (E.D.N.C. Sept. 19, 2012).
Plaintiff, a 61-year-old trustee of a revocable trust, sued defendant life insurance
corporation and its financial advisor for recommending the sale of annuities. Plaintiff alleged
violations of a variety of state and federal securities laws, as well as breach of implied covenant
of good faith and fair dealing, breach of fiduciary duty, and fraud. Plaintiff also accused the
defendant financial advisor of being negligent in selling the annuities. Plaintiff sought recovery
from defendant life insurance corporation on the basis of respondeat superior. Defendant
brought a motion to dismiss, alleging that the economic loss rule bars a plaintiff’s negligence and
respondeat superior claims where a contract allocates the risk between the parties. However, no
contract was identified. The court denied the motion relating to the negligence and respondeat
superior claims, holding that the defendant failed to identify a contract that allocated the risk
between the parties.
Grant v. Houser, 2012 U.S. Dist. LEXIS 18539 (E.D. La. Feb. 15, 2012).
In this portion of the litigation, the court denied defendants registered representative,
broker-dealer, and insurance company’s motion to dismiss claims of plaintiff, an investor.
Plaintiff alleged both state and federal causes of action against defendants based upon a
$250,000 investment he made in an LLC. The investment was made upon the recommendation
of defendant registered representative. The investment was described to plaintiff as potentially
earning him two to three percent each month, with his money returned within three to six
months, but with no explanation as to the interest he would hold in the LLC, if any, or any
documentation evidencing the investment. The court found that the plaintiff had sufficiently
pled the time, place, and contents of the false representations. The allegations also raised a
strong inference of scienter, in that, if true, they established “severe recklessness” in defendant
registered representative’s behavior. Reliance and loss causation—two remaining elements of a
Rule 10b-5 claim—were also satisfied. All of the elements for a breach of contract claim had
been pled, and for pleading purposes, the court found the existence of a special relationship of
trust and confidence constituting a fiduciary relationship between defendant registered
representative and plaintiff. The court held that while this appeared to be a “selling away”
investment, the facts pled established respondeat superior liability as to the defendant brokerdealer.
The court noted that for respondeat superior to exist there must be an employeremployee
relationship, a negligent tort or tortious act on the part of an employee, and the act
complained of must be committed in the course and scope of employment. Plaintiff’s complaint
met these requirements in that it alleged the registered representative managed plaintiff’s
investment account, the account was held with defendant broker-dealer, and that defendant
broker-dealer approved of the registered representative’s selling of investments and receipt of
commissions. The court noted that these allegations constitute a sufficient claim for respondeat
superior.
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H.1
In re BP P.L.C., Sec. Litig., 843 F. Supp. 2d 712 (S.D. Tex. 2012).
Investors filed a class action alleging violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 against the corporate defendants and four individual
defendants and violations of Section 20(a) of the Exchange Act against all individual defendants,
which included nine present and former officers and directors. Defendants moved to dismiss.
Plaintiffs claimed they purchased their shares in reliance on the corporate defendants’
representation that it had implemented appropriate safety mechanisms to prevent catastrophic
incidents in the company’s deep water drilling operations. On April 20, 2010, defendant’s oil rig
exploded, causing the company share prices to drop by over half of their previous value in the
two months following the incident. Plaintiffs claim that the corporate defendants made
representations about their commitment to safety throughout the class period despite later
evidence revealing those representations to be grossly inaccurate. To meet the element of
scienter regarding the Rule 10b-5 violation, plaintiffs pointed to several disclosures made to the
public regarding the corporate defendants’ progress in safety operations. Plaintiffs claimed there
were such blatant errors in these disclosures that the corporate defendants should be deemed to
have had reckless indifference to the truth. The court recognized the problem with pleading
collective intent for scienter in a corporate setting could be the result of a series of acts is that
none of those acts may have been completed with the requisite scienter, and thus were not
imputable to the corporation through the doctrine of respondeat superior. The court noted that
although they had not pled specific scienter on the part of individual corporate officials,
plaintiffs had presented very specific instances of the corporate defendants’ disclosures, which
were so blatantly inaccurate as to be deemed reckless. This recklessness satisfied the element of
scienter for liability under Rule 10b-5. The court denied the motion to dismiss.
Levin v. Barry Kaye & Assoc., 858 F. Supp. 2d 914 (S.D. Ohio 2012).
Plaintiff brought suit against defendant insurance agents to void a sale of an insurance
policy he alleged was sold in violation of Ohio’s Blue Sky Laws and Ohio common law.
Plaintiff also brought an action against defendant insurance company, the issuer of the policy,
under theories of vicarious liability claiming that defendant insurance company was vicariously
liable for defendant insurance agents’ actions. Plaintiff bought the life insurance policy for the
purpose of reselling it later for a profit. He purchased the policy through defendant insurance
agents, but was not able to later resell it, contrary to what he claimed defendant insurance agents
had represented. Defendant insurance company was the issuer of the policy that plaintiff
purchased, but claimed it was not liable for the actions of defendant insurance agents. Plaintiff
argued that an insurance company could be held liable for the actions of its agents under the
doctrine of respondeat superior. Defendant insurance company conceded that one of the
defendant insurance agents was an authorized insurance agent of theirs, but claimed that he was
acting as an insurance broker in the relevant transaction, not their insurance agent, when he sold
the policy to plaintiff. Thus, it claimed it could not be held liable for any defendant insurance
agents’ actions in selling the policy. The court agreed with defendant insurance company. It
cited Damon’s Missouri, Inc. v. Davis, 590 N.E.2d 254 (Ohio 1992), which distinguished an
insurance agent from an insurance broker and held that an insurance broker is customarily not
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held out as an agent of one particular insurance company. In denying plaintiff’s motion for
partial summary judgment, the court held that there was a genuine issue of material fact as to the
liability of defendant insurance company for actions involving the defendant insurance agents.
Curry v. Hansen Med., Inc., 2012 U.S. Dist. LEXIS 112449 (N.D. Cal. Aug. 10, 2012).
Defendants, medical company and former employees, moved to dismiss a putative class
action brought by plaintiff shareholders. Plaintiffs alleged that defendants induced them to
acquire stock at artificially inflated prices by making knowing and intentional misstatements
regarding defendant company’s revenue recognition and sales performance in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court noted that to plead a
valid Rule 10b-5 violation, a complaint must allege that the defendant engaged in deceptive
conduct with scienter. To meet this requirement against defendant medical company, plaintiffs
alleged scienter under the doctrine of respondeat superior. The plaintiffs claimed that a former
senior vice president of commercial operations of defendant medical company manipulated
financial results to increase revenue. The court noted that so long as scienter is appropriately
alleged for the officers and directors of a company, then it is appropriately alleged for the
company itself. The court found that the plaintiffs adequately alleged the officers’ scienter in
regard to the scheme to recognize revenue prematurely and that the officer undertook this
scheme in the scope of his employment, to benefit his employer, and that his scienter was
imputed to defendant medical company through vicarious liability. The court recognized that
although defendant medical company may not be primarily liable for securities fraud, it is
secondarily liable under the theory of respondeat superior. Thus, the court found that the
Rule 10b-5 claim against the defendant corporation was sufficiently alleged.
H.1
Cho v. UCBH Holdings, Inc., 2012 U.S. Dist. LEXIS 123234 (N.D. Cal. Aug. 29, 2012).
Plaintiffs filed putative securities class actions against defendants commercial bank and
its officers, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and
violations of Section 20(a) of the Exchange Act. Defendants filed motions to dismiss for failure
to timely serve and failure to prosecute. The court first reviewed the sufficiency of the
Section 10(b) violation allegations. The court had previously dismissed the amended complaint,
finding that plaintiffs had failed to allege with particularity facts that demonstrate a strong
inference of scienter as to any defendant. At issue was whether plaintiffs’ amended complaint
was sufficient to cure these defects. The court noted that to adequately plead scienter, the
complaint must state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind. In finding this scienter requirement was met, the court
relied on admissions and a guilty plea by defendant bank’s vice president and manager of credit
policy. Imputing these admissions to defendant bank based on respondeat superior, the court
found that the scienter requirement was met. In support, the court referenced the employee’s
fraudulent overvaluing of collateral and attempts to falsify the bank’s books and records in an
effort to conceal the extent to which the collateral securing impaired loans had been overvalued.
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As such, the court held there was a sufficient showing for scienter under a respondeat superior
theory and denied the motion to dismiss the Section 10(b) violations.
Fid. First Home Mortg. Co. v. Williams, 2012 Md. App. LEXIS 135 (Md. Ct. Spec. App.
Nov. 27, 2012).
Defendant, a mortgage broker, appealed a verdict awarding damages to plaintiff, an
individual, based on claims for fraud, breach of fiduciary duty, and violations of the Protection of
Homeowners in Foreclosure Act. Liability of the broker was based on actions by its employees
under a theory of respondeat superior and failure to supervise. The trial court found that the
employees had engaged in a scheme where they would convince distressed homeowners that
they could avoid losing their homes to foreclosure by selling the homes to the employees, but
remaining in the properties as tenants. Plaintiff sold her home to an employee of defendant
broker after receiving a solicitation for mortgage services. The employee failed to make
mortgage payments and the property was eventually foreclosed. Defendant appealed, alleging
that it was not liable under a theory of respondeat superior because the actions by the employees
were outside the scope of their employment. Defendant contended that while the original
solicitation may have been within the scope of employment, the fraudulent conduct by the
employee did not relate to defendant’s business of offering loan refinances. In support,
defendant noted that the employees’ meeting with the plaintiff and paperwork was completed
outside the defendant’s offices. The court emphasized that the original solicitation stemmed
from a letter by defendant, employees acted as loan officers on the fraudulent loan, defendant
broker received fees based on the fraudulent loan, and that the executives of defendant broker
had knowledge of the employees’ fraudulent conduct. The judgment of the trial court imposing
liability under a theory of respondeat superior was affirmed.
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Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Cuyahoga County Aug. 9,
2012).
Plaintiff, an executor of a decedent’s estate, sued defendant life insurance company, its
agent, and its agent’s employer, alleging that its agent sold the decedent an unsuitable financial
product. Defendant’s agent sold decedent, then 82, a single-purchase payment immediate
annuity. When the decedent passed away less than a year later, the balance of the annuity was
delivered to defendant. Claims against the defendant were stayed while claims against the agent
were referred to arbitration. A FINRA arbitration panel dismissed all of the estate’s claims
against the agent and agent’s employer with prejudice. The award was confirmed. Based on the
arbitration award, defendant moved for summary judgment. Plaintiff opposed the motion,
asserting that defendant failed to properly train and supervise its agent. On appeal, the court
found that the defendant did not raise any causes of action specifically against the defendant.
Furthermore, because no liability was found against the agent during the arbitration proceedings,
there could be no liability imposed upon defendant for its agent’s actions. Thus, summary
judgment in favor of the defendant was appropriate.
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Okla. Firefighters Pension & Ret. Sys. v. Smith & Wesson Holding Corp. (In re Smith & Wesson
Holding Corp. Sec. Litig.), 669 F.3d 68 (1st Cir. 2012).
Plaintiff investors filed a class action suit against defendant corporation and two of its
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5. Plaintiffs alleged that defendants issued false and misleading public statements
about the demand for its products. The district court, finding a lack of misrepresentation and of
scienter, granted summary judgment to defendants and plaintiffs appealed. The First Circuit
affirmed the district court’s ruling. Because plaintiffs failed to provide sufficient proof to state a
primary securities violation under Section 10(b) of the Exchange Act or Rule 10b-5, the Court of
Appeals held that plaintiffs also failed to state a claim for Section 20(a) control person liability.
Finn v. Barney, 471 F. App’x 30 (2d Cir. 2012).
Plaintiff investors filed suit against defendant financial corporation alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The district
court dismissed the claims for failure to state a claim and plaintiffs appealed. The Second
Circuit affirmed the dismissal finding that plaintiffs failed to adequately plead manipulative
conduct or reasonable reliance. Because the complaint failed to state a primary securities
violation, the Court of Appeals held that it also failed to state a claim for Section 20(a) control
person liability.
Frederick v. Mechel OAO, 475 F. App’x 353 (2d Cir. 2012).
Plaintiff trustees filed a class action suit against defendant corporation and its officers,
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
district court dismissed the complaint for failure to state a claim and plaintiffs appealed. The
Second Circuit affirmed the dismissal finding that plaintiffs failed to adequately plead scienter.
Finding that the complaint failed to state a primary securities violation, the Court of Appeals held
that it also failed to state a claim for Section 20(a) control person liability.
Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d Cir. 2012).
Plaintiff investor brought suit against a broker-dealer, its parent company, and two
securities rating agencies. The broker-dealer had underwritten auction rate securities that
plaintiff had bought. It also participated as a buyer and seller of the securities, and it did this to
prevent auction failures. In 2006, the Securities and Exchange Commission reached a settlement
agreement with a group of banks, including defendant broker-dealer, that had participated in the
auction rate securities market. The SEC alleged that the banks, including defendant, had violated
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the securities laws by intervening in auctions without making adequate disclosures to investors.
Subsequently, as required by the SEC, the broker-dealer disclosed to the public and to investors
its participation in and intervention in the auction rate securities market. Plaintiff alleged that
these disclosures were false and misleading. When the broker-dealer ceased its participation in
intervention in the auction rate securities market, the market for plaintiff’s securities disappeared.
Plaintiff brought claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934, and also alleged that defendant parent company was liable as a control person under
Section 20(a) of the Exchange Act. In addition, plaintiff alleged violations of California
Corporations Code Sections 25500 and 25501 and alleged control person liability under
California Corporations Code Section 25504. Plaintiff based its claims on a market manipulation
theory. Defendants moved to dismiss the complaint. The district court granted dismissal of the
complaint, holding that the defendant broker-dealer’s disclosures regarding its participation and
intervention in the auction rate securities market were sufficient to put plaintiff on notice.
Plaintiff appealed, and the appellate court affirmed the district court’s judgment. The appellate
court first noted that in a recent case it had considered a substantially similar claim by a different
plaintiff involving a market manipulation theory, and had rejected that claim. In that earlier case,
the appellate court had held that the defendant broker-dealer’s disclosures had been sufficient to
preclude a market manipulation claim. The primary question in this case, then, was whether
plaintiff had raised new issues and alleged new facts that would require a different result than the
one that came out of the prior case. The appellate court concluded that plaintiff had not alleged
sufficient new facts that would dictate a result contrary to the one that came out of the earlier
case, and affirmed dismissal of the Section 10(b) and Rule 10b-5 claims. For similar reasons, as
well as for choice-of-law reasons, the appellate court dismissed plaintiff’s California securities
law claim. Given that there was no primary violation of securities laws, the court also affirmed
dismissal of plaintiff’s control liability claim.
Mill Bridge V, Inc. v. Benton, 2012 U.S. App. LEXIS 19248 (3d Cir. Sept. 13, 2012).
Plaintiff, a seller of a corporation’s shares, brought suit against several defendants who
had bought his shares. Plaintiff alleged that defendant buyers failed to disclose material nonpublic
information about the corporation before they purchased plaintiff’s shares. Specifically,
plaintiff alleged that defendant buyers failed to disclose that the corporation was considering and
negotiating a merger. Plaintiff seller alleged violations of Section 10(b) and 20(a) of the
Securities Exchange Act of 1934. The district court granted defendants’ motion for summary
judgment on the Section 10(b) claim, concluding that plaintiff had not shown that the alleged
failure to disclose the potential merger was “material.” The district court also found that plaintiff
had failed to show that defendants actually knew the alleged non-public information when they
purchased plaintiff’s shares. Given the dismissal of the Section 10(b) claims, the district court
also dismissed the Section 20(a) claims. The appellate court affirmed the district court’s
judgment. The appellate court held that based on the record before the court, the negotiations
between the corporation and another entity regarding a potential merger had not yet become
material at the time of the sale. The court also determined that plaintiff had failed to create a
genuine issue of fact as to whether the defendants knew about the merger negotiations at the time
of the sale. Therefore, the appellate court affirmed the district court’s judgment and dismissal of
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the Section 10(b) claim. Given the affirmation of the district court’s dismissal of the
Section 10(b) claim, the appellate court also affirmed the dismissal of the control person liability
claims.
In re Anadigics, Inc., 484 F. App’x 742 (3d Cir. 2012).
In a class action, plaintiff shareholders brought suit against a corporation, its former
CEO, and its former CFO. Plaintiffs alleged that during the class period, defendants issued
material misrepresentations regarding defendant corporation’s manufacturing capacity, its ability
to meet demand for its products, its customers’ purchasing practices and habits, and other
matters. Plaintiffs argued that these alleged misrepresentations constituted violations of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and imputed Section 20(a)
liability on the former CEO and CFO. Defendants moved to dismiss the complaint. The district
court granted dismissal of all of plaintiffs’ Section 10(b) and Rule 10b-5 claims, holding that the
alleged misstatements were either non-actionable forward-looking statements that were protected
by the Private Securities Litigation Reform Act safe harbor provisions or inadequately supported
by particularized factual allegations demonstrating falsity or scienter. The district court also
dismissed plaintiffs’ Section 20(a) control person liability claims given its holding that plaintiffs
had failed to allege a primary violation of securities laws. Plaintiffs appealed the district court’s
judgment. The appellate court, for substantially the same reasons articulated by the district
court, affirmed the district court’s judgment dismissing plaintiffs’ claims.
Waterford Inv. Serv., Inc. v. Lewis Bosco, 682 F.3d 348 (4th Cir. 2012).
The defendant appealed a district court ruling that it must arbitrate claims brought by
investors before FINRA. The plaintiffs alleged that they received bad advice from their financial
advisor and named him as well as his current and prior investment firm as parties to the
arbitration. The district court found that because the financial advisor was an associated person
of the defendant investment firm during the events in question, the defendant must arbitrate the
claims. The Court of Appeals affirmed. FINRA defines a person associated with a member as a
natural person engaged in the investment banking or securities business who is directly or
indirectly controlling or controlled by a member. To determine whether the financial advisor
was an associated person, the court looked to Section 20(a) of the Securities Exchange Act of
1934 and its definition of control person liability. In that context, courts give heavy
consideration to the power or potential power to influence and control the activities of a person,
as opposed to the actual exercise of control. Adopting this analysis, the court found that the
defendant investment firm had the power to control the investment advisor, and thus that he was
an associated person.
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Fulton County Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047 (7th Cir. 2012).
Plaintiff investor appealed the dismissal of its complaint against defendant private
mortgage insurer and its managers, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 for an alleged fraudulent statement made by a party that has
46% of its equity units owned by defendants. A third-party corporation also owned 46% of the
party’s equity units, meaning that defendants and the third-party corporation were equally
matched bloc holders. The Seventh Circuit affirmed the lower court’s dismissal of plaintiff’s
Section 20(a) claim, holding that defendants’ non-majority ownership did not make defendants
liable because defendants could not exercise unilateral control.
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012).
In a class action, plaintiff investors brought suit against a pharmaceutical corporation and
a number of individual defendants. Plaintiffs alleged that defendants made materially false and
misleading statements and omissions regarding a drug that was being developed by defendant
corporation. More specifically, plaintiffs alleged that defendants had made misrepresentations or
omissions regarding the drug’s efficacy, safety, and potential partnerships for developing the
drug. Plaintiffs brought claims pursuant to Sections 10(b), 20(a), and Rule 10b-5 of the
Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933.
Defendants moved to dismiss the complaint. The district court granted dismissal of the
complaint, and plaintiffs appealed. The appellate court affirmed the district court’s judgment.
The court first turned to the Section 10(b), Rule 10b-5, and Section 11 primary violation claims.
The court held that plaintiffs had failed to allege that any of the purportedly false or misleading
statements were actually false or misleading. The court further held that the inference of
defendants’ scienter was weak, and that it certainly did not outweigh the inference that
defendants had a non-fraudulent intent in making the statements. For these reasons, the appellate
court affirmed the district court’s dismissal of plaintiffs’ primary violation claims under
Section 10(b), Rule 10b-5, and Section 11. The court then turned to plaintiffs’ control liability
claims under Section 20(a) and Section 15, and the court held that these claims could not stand
without an adequately-pled primary violation claim. With this in mind, the appellate court
affirmed the district court’s dismissal of the control liability claims.
In re Veriphone Holdings, Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,238 (9th Cir.
Dec. 21, 2012).
In a class action, plaintiff investors brought suit against a corporation, its CEO, and its
CFO, alleging violations of Sections 10(b), 20A, 20(a) and Rule 10b-5 of the Securities
Exchange Act of 1934. Plaintiffs alleged that defendants had repeatedly adjusted their financial
results so that they would align with corporate expectations. The district court dismissed
plaintiffs’ complaint, and plaintiffs appealed. The appellate court first addressed the district
court’s dismissal of the Sections 10(a), 20A and Rule 10b-5 claims. The district court had
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dismissed these claims, holding that plaintiffs had failed to sufficiently allege scienter. On
review, the appellate court held that the allegations, viewed holistically, gave rise to strong
inference that defendants were deliberately reckless to the truthfulness or falsity of the
statements regarding the corporation’s financial results. For this reason, the appellate court
reversed the district court’s dismissal of the Sections 10(b), 20A and Rule 10b-5 claims. The
appellate court then reviewed the district court’s dismissal of the Section 20(a) control liability
claims. The district court held that plaintiffs had failed to sufficiently allege scienter with
respect to a supply chain controller at the corporation. The supply chain controller was the
purported controlled person, whose predicate violations of securities laws served as the basis for
the Section 20(a) control liability claims. The appellate court noted that plaintiffs, on appeal, did
not challenge the district court’s holding that plaintiffs had failed to allege scienter as to the
purported controlled person. Given that plaintiffs failed to challenge this determination, the
appellate court was faced with a Section 20(a) control person liability claim, but no predicate
violation of the securities laws. The court, therefore, affirmed the district court’s dismissal of the
Section 20(a) claims.
In re Level 3 Commc’ns Sec. Litig., 667 F.3d 1331 (10th Cir. 2012).
Plaintiff investors filed a class action suit against defendant officers alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. The district
court dismissed the complaint for failure to state a claim and one plaintiff appealed. The Tenth
Circuit affirmed the dismissal finding that plaintiff failed to adequately plead scienter. Finding
that the complaint failed to state a primary securities violation, the Court of Appeals also
affirmed the dismissal of the Section 20(a) control person liability claim.
SEC v. Huff, 455 F. App’x 882 (11th Cir. 2012).
In a Securities and Exchange Commission civil enforcement action, defendant corporate
officer appealed the district court’s finding that he was responsible for numerous
misrepresentations and omissions in his company’s SEC filings and liable as a control person for
violation of Section 20(a) of the Securities Exchange Act of 1934. The Eleventh Circuit
affirmed the district court’s finding. The court reasoned that defendant exerted sufficient control
and was the moving force behind the filing’s misrepresentations and omissions because he
reviewed and approved the inaccurate SEC filings. Therefore, defendant was liable as a control
person for violation of Section 20(a) of the Exchange Act.
Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713 (11th Cir. 2012).
Plaintiffs, a putative class action, alleged violations of Section 10(b) and Rule 10b-5
along with Section 20(a) of the Securities Exchange Act of 1934, alleging that the holding
company misrepresented the level of risk associated with commercial real estate loans held by a
subsidiary. Certain of the defendants were alleged to be liable for misstatements as control
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persons under Section 20(a) of the Exchange Act. The district court discarded two of the jury’s
interrogatory answers and granted a motion for judgment as a matter of law. The Court of
Appeals affirmed the decision on grounds that the evidence was insufficient to support losses
caused by the alleged fraud rather than the collapse of the real estate market, as required to make
a securities fraud claim under Rule 10b-5 of the Exchange Act. Since the primary violations
were dismissed, the control person violations were also dismissed.
Kinnett v. Strayer Educ., Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,227 (11th Cir. Dec. 13, 2012).
In a class action, plaintiff investors brought suit against a corporation in the education
sector and a number of its employees. Plaintiffs alleged that defendants made false or
misleading statements concerning their recruitment and enrollment policies and practices.
Plaintiffs further alleged that in a conference call with investors, defendants subsequently
revealed the falsity of their statements. Plaintiffs alleged that defendants had revealed that
diminishing student enrollment was the result of government intervention that forced defendants
to bring their recruiting practices into compliance with the law. Plaintiffs alleged that these
revelations resulted in a 20% decline in the corporate stock price. Based on these allegations,
plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The district court granted defendants’ motion to dismiss the complaint, and plaintiffs appealed.
On review, the appellate court first addressed the district court’s dismissal of the plaintiffs’
Section 10(b) claims. The appellate court affirmed dismissal of these claims, holding that
plaintiffs failed to sufficiently allege loss causation. The court held that in the conference call
with investors on which all of plaintiffs’ claims were based, defendants had not made any
statements or representations that would justify the inference that defendants had previously
engaged in improper recruiting practices and therefore invited government intervention. The
appellate court held that nothing in the alleged statements corrected any prior disclosures or
revealed any material omissions with regard to the defendants’ recruiting practices.
Accordingly, the appellate court held that plaintiffs had failed to sufficiently allege loss
causation. Given plaintiffs’ failure to allege loss causation, the appellate court affirmed the
dismissal of plaintiffs’ Section 10(b) claims. With no sufficiently pled predicate violation of
securities laws, the appellate court also affirmed the district court’s dismissal of the Section 20(a)
control liability claims.
In re Novell, Inc. S’holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).
Former shareholders brought a class action against a software company’s former
directors and a corporation for conduct arising out of the software company’s merger with the
corporation. After finding that plaintiffs failed to establish an aiding and abetting claim against
the purchasing corporation, the court went on to consider plaintiffs’ Section 14(a), Rule 14a-9(a),
and Section 20(a) claims under the Securities Exchange Act of 1934. Plaintiffs alleged liability
under Section 14(a) and Rule 14a-9(a) for material misstatements and omissions in a proxy
statement and control person liability under Section 20(a). Section 20(a) holds liable any person
who controls a party responsible for a securities violation. The purchasing corporation could not
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e liable for a primary violation of Section 14(a) or Rule 14a-9(a) without plaintiffs adequately
pleading control of the software company’s proxy materials by the purchasing corporation.
Plaintiffs alleged that the purchasing corporation had supervisory control over the composition of
the proxy statement, but the court held that simply having the power to control was insufficient.
Plaintiffs failed to plead that the purchasing corporation actually exercised control over the
software company’s proxy materials or actively participated in the software company’s decisionmaking
process. The court granted the motion to dismiss the Exchange Act claims against the
purchasing corporation.
In re Genzyme Corp. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,802 (D. Mass. Mar. 30,
2012).
Investors sued a biotechnology corporation and its executives, alleging violations of
Section 10(b), Rule 10b-5, and control person liability under Section 20(a) of the Securities
Exchange Act of 1934. Defendants allegedly failed to disclose facts about viral outbreaks that
set back production of a new product and manufacturing compliance deficiencies that set back
FDA approval while assuring investors that the product was on track to receive FDA approval.
To state a claim for securities fraud under Section 10(b) and Rule 10b-5, one of the essential
elements is scienter. To satisfy the scienter element, a plaintiff must show that the defendant
engaged in intentional conduct to deceive or defraud investors by controlling or artificially
affecting the price of securities. Scienter can be demonstrated by establishing either that
defendants consciously intended to defraud, or acted with a high degree of recklessness. The
more compelling inference was that the corporation was attempting to develop a product that was
progressing toward FDA approval, and did not expect that setbacks would have a significant
impact on the ultimate approval so as to require more disclosure than there had been. The
complaint therefore failed to adequately allege scienter. Plaintiffs’ control person liability
claims under Section 20(a), which provides for derivative liability for persons who control others
who are primarily liable under the Exchange Act, failed because the plaintiffs failed to properly
allege a primary violation of the securities laws. The court dismissed the Section 20(a) claims
for failure to state a claim.
Urman v. Novelos Therapeutics Inc., 867 F. Supp. 2d 190 (D. Mass. 2012).
Defendants, a biopharmaceutical company and its CEO, president, and director were sued
by plaintiffs, investors in the company. Plaintiffs alleged that the defendants made misleading
statements concerning testing of new drugs and survival rates of patients taking those drugs.
Plaintiffs alleged securities fraud causes of action under Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934, as well as Section 20(a) of the Exchange Act for control
person liability. Defendants moved to dismiss. Because the plaintiffs failed to plead underlying
Section 10(b) and Rule 10b-5 violations, the court granted the defendants’ motion to dismiss,
including the Section 20(a) claims since there was no primary violation found under
Section 10(b) and Rule 10b-5.
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Aronson v. Advanced Cell Tech., Inc., 2012 U.S. Dist. LEXIS 140750 (D. Mass. July 16, 2012).
This action arises out of warrants to purchase securities issued to the plaintiffs by the
defendant. Plaintiffs claimed violations of the agreement because the defendants concealed the
occurrence of transactions that should have triggered adjustments to the plaintiffs’ shares, and, as
a result, the plaintiffs purchased stock at inflated prices and thus obtained fewer shares than they
should have under the agreement. The plaintiffs brought claims under Section 10(b) of the
Securities Exchange Act of 1934, Rule 10b-5, and claims against the administrator of the estate
of the defendants’ former CEO under Section 20(a) of the Exchange Act for control person
liability. The court granted the defendants’ motion to dismiss for failure to state a claim. The
court found that the plaintiffs did not state claims under Section 10(b) and Rule 10b-5 because
one of the warrants was issued after the pricing period, thus there was no requirement that notice
be issued. The other warrant may have been issued during the pricing period. The remaining
securities claims were time-barred. In addition, the plaintiffs failed to plead scienter because
there was insufficient evidence of intent to defraud or recklessness. Since the primary violations
failed, the control person claims likewise failed and were dismissed. Thus, the defendants’
motion to dismiss was granted.
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Lenartz v. Am. Superconductor Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,951 (D. Mass. July 26,
2012).
Plaintiffs, purchasers of defendants’ common stock, brought a securities class action
alleging violations of Sections 10(b) and 20(a) as well as Rule 10b-5 of the Securities Exchange
Act of 1934 against the issuer and certain officers and directors. The plaintiffs also alleged
violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 against the issuer,
individual defendants, and the underwriter of the offering at issue. The plaintiffs alleged
misstatements regarding revenue forecasts and business relationships and alleged insider trading.
Their claims failed because the plaintiffs did not show that the officers and directors knew or
were reckless in not knowing that the issuer was improperly recognizing revenue and thus
artificially inflating the stock price. The opportunity to benefit from such wrongdoing alone was
not found to show scienter. Also, the plaintiffs could not show that the insider sales were
unusual or suspicious in timing or amount because the plaintiffs did not show information about
defendants’ sales before and after the class period. The control person claims under Section 15
of the Securities Act and Section 20(a) of the Exchange Act failed because the plaintiffs did not
properly plead any primary violation.
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass. 2012).
Plaintiffs sued financial institutions and their directors and officers, alleging that
defendants violated Sections 410(a) and (b) of the Massachusetts Uniform Securities Act
(“MUSA”) by misstating or omitting material facts in the offering documents of their mortgage-
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acked securities. The documents represented that the loans were underwritten using prudent
standards and that valuations of the properties were conducted in accordance with appraisal
guidelines and that the resulting loan-to-value (“LTV”) ratios were reliable. Plaintiffs
sufficiently alleged widespread abandonment of underwriting guidelines, that defendants
misrepresented the standard used to generate appraisals, and that the appraisals and LTV ratios
had no basis in fact. MUSA Section 410(a) imposes liability on any person who offers or sells a
security by means of any untrue statement of a material fact or omission of a fact that would
have made the statement not misleading. MUSA Section 410(b) also imposes liability on any
person who controls a seller liable under subsection (a). It was undisputed that the nonunderwriter
defendants did not transfer title of the securities to plaintiffs. Since MUSA
Section 410(a) is only applicable to defendants that have offered or sold securities, the court
dismissed the MUSA Section 410(a) claims against the non-underwriters. To state a control
person claim under Section 410(b), plaintiffs must plead a primary violation under
Section 410(a). Section 410(b) claims against defendants who were alleged to be control persons
of non-underwriters were dismissed because plaintiffs failed to plead primary violations by nonunderwriters.
For all other defendants, plaintiffs’ allegations that they controlled primary
violators were sufficient to survive a motion to dismiss.
Capital Ventures Int’l v. UBS Sec. LLC, 2012 U.S. Dist. LEXIS 140663 (D. Mass. Sept. 28,
2012).
Plaintiff investors purchased over $100 million in residential mortgage-based securities.
Plaintiffs thereafter brought suit against the underwriter of the securities, the sponsor of the
underlying mortgages, and the depositor who securitized the mortgages and sold the mortgage
loans to mortgage-backed securities trusts. Plaintiff alleged violations of Section 410 of the
Massachusetts Uniform Securities Act (“MUSA”). Section 410(a) is modeled after
Section 12(a)(2) of the Securities Act of 1933, and imposes civil liability on offerors and sellers
of securities who make misleading statements or omissions about said securities. Section 410(b)
of MUSA imposes civil liability on any person who controls a liable offeror or seller. Plaintiffs
brought Section 410(a) claims against all three defendants. Plaintiffs also brought
Section 410(b) claims against defendant sponsor and defendant depositor, alleging that defendant
sponsor controlled defendant depositor and both defendant sponsor and defendant depositor
controlled the trusts and that both defendants should therefore be liable as control persons. All
three defendants moved to dismiss the Section 410(a) claims, and defendant depositor and
defendant sponsor moved to dismiss the Section 410(b) claims against them. The court refused
to dismiss the Section 410(a) claim against defendant underwriter, holding that plaintiffs had
sufficiently pled a number of actionable misstatements or omissions and materiality. The court
granted the dismissal of the Section 410(a) claims against defendant sponsor and defendant
depositor, holding that while the allegations served to show that defendant depositor and
defendant sponsor played a role in the securitization of the securities, the allegations did not
show that defendant depositor played a role in the offering or selling of the securities as required
by Section 410(a) of MUSA. The court also dismissed plaintiffs’ Section 410(b) claims of
control liability as against both defendant sponsor and defendant depositor. The court noted that
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plaintiffs’ Section 410(b) claims against defendant depositor and defendant sponsor relied on the
allegation that defendant sponsor controlled defendant depositor and both controlled the trusts
into which the securitized mortgages had been placed, but pointed out that plaintiffs had failed to
allege any primary violation of Section 410(a) by either the trusts or defendant depositor. With
no primary violators, the court held that neither defendant depositor nor defendant sponsor could
be held liable as control persons under Section 410(b) of MUSA.
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2012 U.S.
Dist. LEXIS 141626 (D. Mass. Oct. 1, 2012).
The court considered plaintiffs’ motion to proceed with litigation begun more than four
years ago against defendants, who were issuers and underwriters of mortgage-backed securities
purchased by plaintiffs. The court also considered defendants’ renewed motion to dismiss.
Plaintiffs had brought their claims under Sections 11, 12(a)(2), and 15 of the Securities Act of
1933, as well as other violations based on alleged misstatements and omissions with respect to
the underwriting of the loan. The court stated that to survive a motion to dismiss, plaintiffs must
plausibly demonstrate that defendants misrepresented or omitted material information about
defendants’ underwriting guidelines. The court granted plaintiffs’ motion to proceed with the
litigation and denied defendants’ motion to dismiss and to exclude certain expert testimony. The
court found that defendants’ efforts to impugn plaintiffs’ evidence was factual in nature and
better suited to a summary judgment motion, and that plaintiffs had standing to bring their claim.
Datto Inc. v. Broadband, 856 F. Supp. 2d 359 (D. Conn. 2012).
Plaintiff corporation filed suit against defendant, a former corporate officer. Defendant
filed a counterclaim. Defendant alleged plaintiff violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, by knowingly making false, manipulative, and deceptive
representations concerning defendant’s right to acquire an ownership interest in the corporation.
The court dismissed defendant’s Section 10(b) counterclaim for failure to adequately plead a
claim. Because there was no primary violation of the Exchange Act, the Section 20(a) control
person liability counterclaim was also dismissed.
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,766 (D.
Conn. Mar. 19, 2012).
Plaintiff investors filed suit against defendant fund, its managers, and investment advisors
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
Plaintiffs alleged that defendants misrepresented and failed to correct misleading information
regarding a fund that plaintiffs invested in. Defendants filed motions to dismiss the
Section 20(a) control person liability claim, stating that plaintiffs (1) failed to state an underlying
securities violation under Section 10(b); and (2) failed to make a prima facie showing of control
person liability by not sufficiently alleging control and culpable participation. The court denied
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the defendants’ motions to dismiss. It held that plaintiffs sufficiently pled a Section 10(b) claim
and adequately pled control and culpable participation by alleging: (1) defendants exerted
control over the primary violators by having influential roles in their respective corporations,
holding closed door meetings regarding the investment fund at issue, and conducting
communications with the fund’s members; and (2) defendants were culpable participants and had
actual knowledge of fraudulent activity since defendants knew and understood that the primary
violators were departing from their own investment standards with respect to a majority of the
fund’s investments. Because plaintiffs sufficiently pled that defendants controlled the primary
violators and culpably participated in the primary violations, the Section 20(a) claims survived
defendants’ motions to dismiss.
Brodzinsky v. FrontPoint Partner LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,818 (D. Conn.
Apr. 25, 2012).
Plaintiff shareholders filed a putative class action suit against defendant investment
advisors, corporation, and hedge funds under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. Plaintiffs alleged that defendants “tipped” material, non-public
information, which caused the hedge fund defendants to sell 46% of the stock at issue. This
resulted in plaintiff shareholders suffering financial losses. Defendants filed motions to dismiss
plaintiffs’ Section 20(a) control person liability claims, which the court granted because
plaintiffs failed to adequately plead a primary violation of the Exchange Act.
Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan Acceptance
Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,744 (E.D.N.Y. Feb. 23, 2012).
Plaintiff, a defined benefit pension plan, individually and on behalf of a class of investors
who purchased over $36 billion in mortgage-backed securities, brought a class action against
defendant, a broker-dealer, and three of its directors. Plaintiffs alleged violations of Sections 11
and 15 of the Securities Act of 1933 based on alleged misstatements and omissions of material
facts in offering documents. Defendants filed a motion to dismiss all claims. The individual
defendants argued that the plaintiff failed to allege sufficient control person liability to sustain a
Section 15 claim and failed to allege that any individual defendant was a culpable participant in
the alleged violations. Plaintiff argued that culpable participation was not required for control
person liability.
In order to show control person liability at the pleading stage, the court stated that
plaintiff must plead (1) a primary violation; and (2) control over the primary violator. Since
individual defendants were all officers and directors of the primary violator and they signed the
two registration statements at issue, the court held that plaintiff sufficiently alleged control over
the primary violator. The court stated that it is an open question as to whether the same culpable
participation defense available to causes of action arising under Section 20(a) is also applicable
to causes of action arising under Section 15. The court noted that the Second Circuit has held
that a plaintiff establishes a prima facie case of control person liability under Section 20(a) by
showing a primary violation by the controlled person and control of the primary violator by the
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targeted defendant. Once the plaintiff makes out a prima facie case of Section 20(a) liability, the
burden shifts to the defendant to show that he acted in good faith and that he did not directly or
indirectly induce the act or acts constituting the violation. The court held that even if Section 15
was subject to the same requirements as Section 20(a), the complaint was sufficient to allege a
violation of Section 15.
Orlan v. Spongetech Delivery Sys., Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,781 (E.D.N.Y.
Mar. 29, 2012).
Plaintiffs, investors who purchased shares of Spongetech Delivery Systems, Inc., filed a
consolidated class action against the company and its officers and directors, alleging violations
of federal securities laws and regulations, including Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Section 15 of the Securities Act of 1933. The defendants filed a
motion to dismiss. In order to establish a prima facie case of control person liability under
Section 20(a), a plaintiff must show: (1) a primary violation by the controlled person; (2) control
of the primary violator by the defendant; and (3) that the defendant was, in some meaningful
sense, a culpable participant in the controlled person’s fraud. The court noted that the Third
Circuit construes the control person provisions of the Exchange Act broadly.
Defendant, a director, held approximately 13.86% of all available voting shares
outstanding. He did not dispute that there was a violation of Section 10(b). In analyzing
whether he exercised sufficient control to justify control person liability, the court noted that
director status alone is not sufficient. However, it also noted that he was far more involved with
the company and its day-to-day management and operations than a mere outside director. He
managed daily operations, introduced the company to business, sales, contractual, and
fundraising opportunities, evaluated potential acquisition candidates, and served as a consultant
for the company. The court held that it could not, as a matter of law, conclude that plaintiffs
failed to establish that defendant controlled the company. Nevertheless, the court granted the
director’s motion to dismiss, finding that plaintiffs failed to establish that defendant was a
culpable participant in the purported fraud. The court emphasized that plaintiffs appeared to rely
on a “group pleading theory,” and that they had not sufficiently pleaded this aspect of their
claim.
With regard to plaintiffs’ Section 15 claim, the court stated that to establish control
person liability under Section 15 at the pleading stage a plaintiff must plead: (1) a primary
violation; and (2) control over the primary violator. The court found that the plaintiff had
sufficiently pled both of these elements. The court denied the defendants’ motion to dismiss the
Section 15 claim, noting that it is unsettled whether plaintiffs are required to plead culpable
participation as an additional requirement under Section 15.
Hutchins v. NBTY, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,791 (E.D.N.Y. Mar. 30, 2012).
Plaintiff, individually and on behalf of all purchasers of NBTY’s common stock between
November 9, 2009 and April 27, 2010, filed suit against defendants NBTY, Inc. and two of its
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officers and directors. Plaintiffs alleged violations of Section 10(b), Rule 10b-5, and
Section 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that defendants made
false or misleading statements about NBTY’s business and they did not disclose information
about lost business and future prospects.
Defendants filed a motion to dismiss. The court stated that in order to properly plead a
claim for control person liability, the plaintiff must allege: (1) a primary violation by a
controlled person; (2) actual control by the defendant; and (3) the controlling person’s culpable
participation in the primary violation. The court concluded that plaintiff sufficiently pled
violations of Section 10(b), defendants did not dispute that they were control persons, and
defendants culpably participated in the primary violation. Therefore, defendants’ motion to
dismiss was denied.
In re Gen. Elec. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012).
Plaintiff filed a putative class action suit alleging violations of Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933 against defendant corporation, its subsidiary, and the corporations’
officers and directors. Plaintiff alleged that the corporation failed to disclose information
regarding its financial status and the financial status of its subsidiary during the relevant class
period. Plaintiff also alleged that the corporation’s and subsidiaries’ officers made materially
misleading statements regarding the corporation’s financial status during the class period.
Plaintiff alleged control person claims under Section 20(a) of the Exchange Act against
two individual directors of the corporation. With regard to those claims, the court stated that
plaintiffs had adequately alleged Section 10(b) claims and noted that to survive a motion dismiss,
plaintiffs were merely required to plead facts supporting a reasonable inference that defendants
had the potential power to influence or direct the activities of the primary violator. The
individual defendants did not contest that they were controlling persons. The court denied
defendants’ motion to dismiss the Section 20(a) claims, concluding plaintiff sufficiently pled a
Section 20(a) violation.
The defendants only contested liability under Section 15 on the grounds that plaintiff had
not properly pled violations of Sections 11 or 12. Because the court held that plaintiffs had
adequately pleaded those claims, their Section 15 control person claim also survived.
In re Vivendi Universal, S.A. Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012).
Domestic and foreign individual shareholders filed complaints asserting claims against a
foreign global media corporation and its officers for control person liability under Section 20(a)
of the Securities Exchange Act of 1934, among other things. Defendants moved for partial
judgment on the pleadings and to dismiss claims of individual plaintiffs who purchased shares on
the Paris Bourse. Defendants argued that the Section 20(a) claim must be dismissed under the
Supreme Court’s decision in Morrison v. National Australia Bank Limited, 130 S. Ct. 2869
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(2010), for the proposition that the Exchange Act does not have extraterritorial reach. In
dismissing the plaintiffs’ control person liability claim, the court applied the decision in
Morrison and held that it could not address claims based on the purchase of ordinary shares that
were not listed for trading purposes on any U.S. exchange. The court further held that the
decision in Morrison should be extended to the plaintiffs’ Securities Act of 1933 claims as well.
Pub. Emples. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 280 F.R.D. 130 (S.D.N.Y. 2012).
Plaintiff moved to certify a class of all persons and entities that purchased or acquired
certificates of defendants’ offering, which derived from a pool of securitized fixed-rate, secondlien
home mortgages. Plaintiff alleged that the offering documents for the certificates contained
untrue statements and omitted material facts in violation of Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933. With respect to these claims, the court held that plaintiff had carried its
burden in showing the necessary requirements, and granted plaintiff’s motion for class
certification.
In re Merrill Lynch Auction Rate Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH), 96,741 (S.D.N.Y.
Feb. 15, 2012).
Plaintiff filed a complaint alleging various state and federal causes of action against
defendant corporations, a broker-dealer, its parent company, and an institutional investment
dealer. Plaintiff asserted claims for market manipulation and material misstatements or
omissions under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiff
asserted a control person liability claim under Section 20(a) of the Exchange Act against the
broker-dealer, which moved to dismiss all claims.
The court found that the Section 10(b) claim against the broker-dealer failed because
plaintiff did not allege any actionable misstatement or omission or that the broker-dealer acted
with the requisite scienter. Therefore, the court also dismissed plaintiff’s Section 20(a) claim
against the parent company because plaintiff failed to adequately allege a primary violation
under the Exchange Act.
Arfa v. Mecox Lane Ltd., 2012 Fed. Sec. L. Rep. (CCH) 96,753 (S.D.N.Y. Mar. 1, 2012).
Plaintiff filed an amended consolidated class action complaint alleging violations of
Section 11 and Section 15 of the Securities Act of 1933 against defendant corporation, its board
of directors, its CFO, and underwriters involved in its initial public offering (IPO). Plaintiff
alleged that defendants included or allowed the inclusion of materially false and misleading
statements in the registration statement and prospectus issued in connection with the IPO.
Among plaintiff’s claims were control person violations against the corporate officers and
directors under Section 15. The court held that the complaint failed to adequately plead a
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Section 11 violation and accordingly dismissed plaintiff’s derivative control person Section 15
claim.
Space Coast Credit Union v. Barclays Capital, Inc., 2012 U.S. Dist. LEXIS 38488 (S.D.N.Y.
Mar. 19, 2012).
Plaintiff credit union filed suit against defendant corporations Barclays and State Street
for violations of securities laws, including Section 20(a) of the Securities Exchange Act of 1934.
Plaintiff’s claims arose out of defendants’ representations that State Street, a purported
“independent, third-party collateral manager,” would select the collateral for the collateralized
debt obligation at issue, and that this qualified as an untrue statement of material fact made in
connection with the purchase or sale of a security if in fact Barclays possessed control over the
selection of the collateral. Defendants moved to dismiss. The court dismissed plaintiff’s control
person claim against State Street, finding that because plaintiff did not sufficiently allege State
Street was, in some meaningful sense, a culpable participant in the alleged fraud, plaintiff did not
state a claim against State Street for controlling person liability under Section 20(a). The court
reasoned that plaintiff’s “conclusory allegation” that State Street was aware or directly
participated in a continuous course of conduct to conceal adverse material information provided
no particularized facts, and thus did not state a Section 20(a) claim.
Dodona I LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012).
Lead plaintiff filed a class action complaint alleging that defendant corporations and
executives of the corporations committed securities and common law fraud. Plaintiff alleged that
defendants made omissions of material fact when they did not disclose to investors that their
products were structured and issued as part of defendants’ strategy to reduce its exposure to
subprime-mortgage risk and to profit by betting against their own product. Plaintiff also alleged
that defendants did not genuinely believe that their product would have a realistic chance of
being profitable for investors. Defendant moved to dismiss the complaint. In order to establish a
prima facie case under Section 20(a) of the Securities Exchange Act of 1934, a plaintiff must
show: (1) a primary violation by the controlled person; (2) control of the primary violator by the
targeted defendant; and (3) that the controlling person was in some meaningful sense a culpable
participant in the fraud perpetrated.
The court held that plaintiff pled a primary violation under Section 10(b). With respect to
the Section 20(a) control person violation, the court found plaintiff sufficiently alleged that the
individual defendants were in charge of structuring, marketing, and selling the products, the
defendants each controlled at least one primary violator and that they were, in some meaningful
sense, culpable participants in the alleged fraudulent omissions. Therefore, the court denied
defendants’ motions to dismiss the Section 20(a) claims.
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N.J. Carpenters Health Fund v. NovaStar Mortg., Inc., 2012 U.S. Dist. LEXIS 56010 (S.D.N.Y.
Mar. 29, 2012).
Plaintiff, a health fund, filed a class action complaint alleging that defendant, a mortgage
corporation, disregarded its underwriting guidelines in originating residential mortgage loans and
then, through its subsidiary, arranged for the sale of securities to investors that were
collateralized by the mortgage loans. Defendant corporations, registered broker-dealers, were
the underwriters for the certificates.
Plaintiff alleged that the offering documents for the certificates contained material
misstatements and/or omissions in violation of Sections 11, 12, and 15 of the Securities Act of
1933 and that defendant underwriters for the certificates failed to perform sufficient due
diligence in connection with the offering. Plaintiff alleged violations of Section 15 against the
parent corporation and two officers of the parent corporation as controlling persons of the parent
corporation. Plaintiff claimed that the individual defendants were responsible for preparing and
filing the offering documents and, as senior officers of the parent corporation, they were
responsible for selecting the mortgages to be included in the security, structuring the offering,
and pricing the sale of the certificates on the offering. The issuer is a wholly-owned subsidiary
of the parent corporation and plaintiff alleged that the parent corporation had direct
responsibilities in selecting the mortgages in the pool, structuring the offering, and pricing the
certificates. Because the court found that plaintiffs failed to adequately allege a primary
violation of Sections 11 and 12 of the Securities Act, the court also dismissed plaintiff’s claim
under Section 15.
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.
2012).
Plaintiffs, a class of all persons or entities who purchased or acquired interests in
mortgage-backed security pass-through certificates that were prepared and offered by
defendants, filed a consolidated class action complaint against defendants, and their officers and
directors for violations of Sections 11, 12, and 15 of the Securities Act of 1933. Defendants
moved to dismiss. With regard to plaintiffs’ Section 15 control person claim, defendants argued
that plaintiffs failed to allege a primary violation or plead facts demonstrating that any individual
defendant was a control person.
In order to establish a prima facie Section 15 claim, the court required plaintiffs to show:
(1) control; and (2) an underlying violation of Section 11 or Section 12(a)(2). The court held that
plaintiffs adequately pled primary violations and went on to consider if plaintiffs had adequately
pled control. Control was defined as “the power to direct or cause the direction of the
management and policies of the primary violators, whether through the ownership of voting
securities, by contract, or otherwise.” While noting that the Second Circuit has not yet ruled on
whether culpable participation is required, the court stated that a majority of district courts in the
Second Circuit, including itself, do not require it. Because the individual defendants were
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officers or directors of the depositors who signed the registration statements, the court held that
plaintiffs had adequately pled control. The defendants’ motion to dismiss was denied.
Janbay v. Canadian Solar, Inc., 2012 U.S. Dist. LEXIS 47125 (S.D.N.Y. Mar. 30, 2012).
Plaintiff filed a consolidated class action complaint alleging violations of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 against defendant corporation, and
individual defendants, as control persons. Plaintiff alleged that during the class period,
defendants made false and/or misleading statements and failed to disclose material adverse
information about the corporation’s business, operations, and prospects. Plaintiff alleged control
person claims under Section 20(a) of the Exchange Act against the individual defendants. The
defendants filed a motion to dismiss.
The court stated that to adequately plead a claim under Section 20(a) of the Exchange
Act, the plaintiff must allege: (1) a primary violation of the Act by a controlled person; (2) direct
or indirect control by the defendant of the primary violator; and (3) “culpable participation.” The
court noted that plaintiffs had not adequately alleged a primary violation under Section 10(b),
and none of the purported control persons were culpable participants in any alleged fraud.
Therefore, the court dismissed plaintiff’s Section 20(a) claims.
In re JP Morgan Auction Rate Sec. Mktg. Litig., 867 F. Supp. 2d 407 (S.D.N.Y. 2012).
Plaintiff, representing a class of investors who purchased auction rate securities for which
the broker-dealer served as an auction dealer between July 10, 2004 and February 13, 2008,
asserted claims for market manipulation, misrepresentations, and omissions in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs also alleged that
defendant corporation violated Section 20(a) of the Exchange Act. Defendant moved to dismiss
all of the plaintiffs’ claims. Plaintiff moved for a stay of the proceedings, including the motion
to dismiss. With regard to the control person claim under Section 20(a), the court denied
plaintiff’s motion to stay and granted defendant’s motion to dismiss because the court held that
plaintiff did not adequately plead any underlying violation of securities law.
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).
Plaintiffs’ putative class action, alleging both federal securities claims and state law
claims, was part of a larger multi-district litigation. The litigation arose out of plaintiffs’
investments in various of defendants’ funds and defendants’ merger agreement. Plaintiffs
alleged various violations of securities laws, including violations under Sections 10(b) and 20(a),
of the Securities Exchange Act of 1934 and Rule 10b-5. The court held that to establish a prima
facie case of control person liability, a plaintiff must show: (1) a primary violation by the
controlled person; (2) control of the primary violator by the defendant; and (3) that the defendant
was, in some meaningful sense, a culpable participant in the controlled person’s fraud. It noted
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that, at the pleading stage, the extent to which the control must be alleged is governed by Federal
Rules of Civil Procedure Rule 8’s pleading standard. Plaintiffs alleged control person liability
claims under Section 20(a) against seven individual defendants. In defendants’ motions to
dismiss the control person claims, they merely contended that the Section 20(a) claim must be
dismissed based on plaintiffs’ failure to sufficiently allege a primary violation. Finding that the
plaintiffs had adequately alleged a Section 10(b) claim, the court denied defendants’ motions to
dismiss the Section 20(a) claims.
McKenna v. Smart Techs., 2012 Fed. Sec. L. Rep. (CCH) 96,795 (S.D.N.Y. Apr. 3, 2012).
Plaintiff filed a class action against defendant corporation, its officers and directors, and
two other defendants that held significant numbers of shares of the company prior to its initial
public offering. Plaintiffs alleged that the offering documents contained material misstatements
and/or omissions of fact. In addition to various federal securities violations, plaintiffs claimed
that the corporation and large shareholders violated Section 15 of the Securities Act of 1933.
The court stated that for plaintiff’s Section 15 claims to survive a motion to dismiss,
plaintiff was required to allege a primary violation and “actual control” of the primary violator
by the defendant. The court held that plaintiff did not adequately plead a primary violation with
regard to corporate defendant, and thus, dismissed the Section 15 claim against it. The court
found, however, that plaintiff did adequately plead primary violations with regard to the large
shareholders, and therefore went on to analyze whether there was “actual control” as to those
defendants.
The court agreed with defendants that 23.5% or 47% of stock ownership and ability to
appoint directors was not sufficient to allege “control” under Section 15. Plaintiff argued that the
court should consider the defendants’ stock ownership and board presence collectively, and the
court held that the collective 70% stock ownership and board presence was sufficient to show
actual control. Defendants also argued that plaintiff’s complaint should be dismissed for failure
to allege “culpable participation.” Noting that the issue of whether culpable participation is
required for Section 15 claims under the Securities Act is an open question in the Second Circuit,
the court declined to require it. (The court also stated that the majority of courts in the Second
Circuit do not require it.) Accordingly, the court denied the shareholder defendants’ motion to
dismiss the Section 15 claims.
In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277 (S.D.N.Y. 2012).
Plaintiffs filed a putative class action alleging federal securities violations as part of a
larger multi-district litigation against two defendant corporations and defendant corporations’
officers and directors. The court held that to establish a prima facie case of control person
liability, a plaintiff must show: (1) a primary violation by the controlled person; (2) control of
the primary violator by the defendant; and (3) that the defendant was, in some meaningful sense,
a culpable participant in the controlled person’s fraud. Finding that plaintiffs had not adequately
alleged a Section 10(b) violation against one of the defendant corporations, the court dismissed
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the claims against the two individual defendants who were officers or directors of that defendant
corporation. Additionally, because one of the individual defendants did not assume the role of
CEO of one of the defendant corporations until after the alleged misstatements or omissions took
place the court dismissed the Section 20(a) claims against that individual defendant as well. The
court held that plaintiffs had adequately alleged a Section 10(b) violation against the other
defendant corporation, and thus, the first prong of Section 20(a) was satisfied as to the corporate
defendant. Defendant argued in its motion to dismiss with regard to the corporate defendant that
their claim should be dismissed because plaintiffs failed to sufficiently allege a primary
violation. Because the court found that plaintiffs had adequately alleged a primary violation, it
denied the corporate defendant’s motion to dismiss.
Fed. Hous. Fin. Agency v. UBS Ams, Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).
Plaintiff, the Federal Housing Finance Agency (FHFA), filed an amended complaint
against defendant corporation and affiliated entities and individuals asserting claims under
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, the Virginia Securities Act, the
District of Columbia Securities Act, and negligent misrepresentation. Defendants filed a motion
to dismiss the amended complaint.
Plaintiff alleged control person liability claims under Section 15 against individual
defendants as well as a defendant parent corporation. With respect to the individual defendants,
the court stated that the act of signing a registration statement, as the individual defendants in
this case were alleged to have done, is a manifestation of the signor’s responsibility for the
information contained in the document, and therefore sufficient to establish control person status.
With respect to the corporate defendant, the court held that the complaint’s allegation of the
defendant’s involvement in coordinating the securitization process and determining the structure
of offerings was sufficient to allege that the defendant controlled the issuing and selling of
certificates for the purpose of establishing control person liability. Therefore, the court denied
the defendants’ motions to dismiss the Section 15 claims.
In re ITT Educ. Servs. Inc. S’holder & Derivatives Litig., 859 F. Supp. 2d 572 (S.D.N.Y. 2012).
Plaintiff filed an amended consolidated class action complaint against defendant
corporation and two officers of defendant corporation. Plaintiff alleged violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Defendants
filed a motion to dismiss. The court dismissed plaintiff’s control person claim against the
individual defendants under Section 20(a) because plaintiffs had failed to adequately allege a
primary violation of the Exchange Act.
In re CRM Holdings, Ltd., 2012 U.S. Dist. LEXIS 66034 (S.D.N.Y. May 10, 2012).
Plaintiffs, investors who purchased common stock of defendant between the date of their
initial public offering and November 5, 2008, filed a class action against defendant corporation
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and its officers and directors. The complaint alleged that all defendants violated Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 and that certain individual defendants
violated insider trading laws. The plaintiffs also alleged that all individual defendants violated
Section 20(a) of the Exchange Act. Plaintiffs alleged that, by virtue of their high-level positions,
ownership and contractual rights, participation and awareness of the company’s operations, and
knowledge of the false financial statements filed by the company, the individual defendants had
the power to influence and control the decision-making of the company, including the false and
misleading statements that the company disseminated. The court dismissed plaintiffs’
Section 20(a) claim because plaintiffs failed to state an underlying Section 10(b) violation.
Solow v. Citigroup, Inc., 2012 U.S. Dist. LEXIS 70022 (S.D.N.Y. May 18, 2012).
Plaintiff filed a complaint against defendant corporation and its chief executive officer.
Plaintiff asserted three causes of action against both defendants under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5, against the CEO under Section 20(a) of the
Exchange Act for control person liability, and against both defendants for common law fraud.
The court stated that in order to establish a prima facie case of control person liability, a
plaintiff must show: (1) a primary violation by the controlled person; (2) control of the primary
violator by the defendant; and (3) that the controlling person was in some meaningful sense a
culpable participant in the alleged fraud perpetrated by the controlled person. Finding that
plaintiff had failed to plead a primary violation of securities law, the court dismissed plaintiff’s
control person liability claim.
Redwen v. Sino Clean Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,933 (S.D.N.Y. June 4,
2012).
Plaintiffs, purchasers of common stock of the defendant, alleged defendants made false
and misleading statements by overstating the revenues and operations. The plaintiffs alleged
causes of action under Sections 11 and 15 of the Securities Act of 1933. The court dismissed the
claims with leave to amend. The second amended complaint asserted claims for violations of the
Securities Act Sections 11 and 15 against the individual defendants as control persons. The court
denied the defendants’ motions to strike and to dismiss, because the defendants could not show
that the reports it wanted to strike had no bearing on the subject of the litigation, and the records
showed that the defendants had an incentive to file false filings with the Securities and Exchange
Commission.
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 477 B.R. 351 (Bankr. S.D.N.Y.
June 20, 2012).
This was a bench memorandum decision and an order denying a motion of the class
action plaintiffs for a determination that the commencement of a securities class action against
non-debtor parties is not prohibited by a permanent injunction issued by the court or violative of
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the automatic stay. The trustee had previously entered into a settlement agreement, and in this
action, the court accused the plaintiffs of attempting to use inventive pleadings to sidestep the
stay and injunction that resulted from the agreement. The court rejected the plaintiffs’ arguments
that it should look past this and focus on the differences between their harms and the trustee’s,
because the claim was derivative. The plaintiffs had tried to argue that one individual was a
control person at Bernard L. Madoff Investment Services who owed a duty to the plaintiffs to
prevent their purchasing fraudulent securities; however, this claim amounted to allegations
regarding the general direction and control and actions to the detriment of all creditors, which
was based on a common harm. The court further concluded that the plaintiffs were attempting to
re-litigate a prior decision.
Richman v. Goldman Sachs Grp., Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,926 (S.D.N.Y.
June 21, 2012).
The plaintiffs alleged that defendants violated Sections 10(b), 20(a), and Rule 10b-5 of
the Securities Exchange Act of 1934 and Rule 10b-5 and Section 20(a) of the Exchange Act.
The plaintiffs were purchasers of the defendants’ common stock. The plaintiffs alleged that the
defendants made material omissions regarding their receipt of Wells notices from the Securities
and Exchange Commission relating to the defendants’ role in the synthetic collateralized debt
obligations, and conflicts of interest that arose from the defendants’ role in funding certain
collateralized debt obligation transactions. The court held that the plaintiffs did not show that the
defendants’ non-disclosure of the receipt of the Wells notice made previous disclosures about
government investigations materially misleading. The court also held that the defendants had no
affirmative duty to make such a disclosure, and the plaintiffs could not plead scienter. However,
the court held that the plaintiffs sufficiently alleged misstatements about business practices and
conflicts of interest, and the plaintiffs could show scienter and loss causation based upon these
specific allegations. The court denied the motion to dismiss the control person claims because
the plaintiffs alleged sufficient facts under Section 10(b) and Rule 10b-5, and scienter for
purposes of primary liability of the Exchange Act.
In re Longtop Fin. Techs. Ltd. Sec. Litig., 2012 U.S. Dist. LEXIS 91004 (S.D.N.Y. June 28,
2012).
Plaintiffs, investors, filed this class action alleging false and misleading public statements
in connection with the purchase of the company stock. The claim alleged the chief financial
officer knew that the defendant company had falsified its records, improperly stated expenses,
artificially inflated gross margins, and fabricated its revenues and net income. The plaintiffs
alleged that the CFO was intimately involved with financial reporting, and that he benefited
personally by selling shares during the class period. Plaintiffs brought claims under
Section 10(b) and Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934.
Defendants moved to dismiss the complaint. The court held that there were sufficient facts
specifically targeting the CFO to state claims under Sections 10(b) and 20(a), because the
complaint stated with particularity two categories of statements made by the CFO that were
allegedly false. The plaintiffs properly pled a primary violation under Section 10(b) of the
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Exchange Act, as well as reliance and control, because the CFO had control over the financial
statements of the company and direct involvement in its financial reporting. Thus, the plaintiffs
properly pled both Sections 10(b) and 20(a) claims and the defendant’s motion to dismiss was
denied.
Pa. Pub. Sch. Emp. Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y. 2012).
This is a securities class action against defendants, their current and past officers and
directors, underwriters, and accountant. The plaintiffs alleged purposeful concealment of the
defendants’ reliance on Mortgage Electronic Registration Systems Inc. (“MERS”) and exposure
to billions of dollars of loan repurchase claims arising from the sale of mortgage-backed
securities in their Securities and Exchange Commission filings, press releases, and earnings calls,
which rendered those disclosures misleading. The plaintiffs alleged violations of Sections 11
and 15 of the Securities Act of 1933 and violations of Section 10(b) and Rule 10b-5 and
Section 20(a) of the Securities Exchange Act of 1934. The defendants moved to dismiss. The
court held the plaintiffs’ allegations that defendants concealed repurchase claims was factually
insufficient to plead material misstatements or omissions. However, the other claims that
defendants made material misstatements or omissions regarding their vulnerability to repurchase
claims were adequately pled. While plaintiffs alleged underlying primary violations for their
Section 20(a) claims, the claims were dismissed because the plaintiffs failed to allege
particularized facts that the executive defendants had culpable participation in the fraud
perpetrated by the controlled person. The Section 15 control person claim under the Securities
Act was dismissed because the underlying Section 11 claim was dismissed, as it was time-barred.
S&S NY Holdings, Inc. v. Able Energy, Inc., 2012 U.S. Dist. LEXIS 105892 (S.D.N.Y. July 27,
2012).
In this proceeding of the defendant’s motion to dismiss, the court focused only on the
plaintiffs’ claims against the defendant’s former CEO for control person liability under
Section 15 of the Securities Act of 1933. The defendant dealt in the retail distribution of heating
oil, gas, kerosene, and diesel. The agreement giving rise to the dispute was a commercial loan
between the plaintiffs and defendant. Pursuant to the settlement agreement, the former CEO sent
plaintiffs a letter offering to allow them to convert a portion of the amount owed by the
defendant into common stock, which the plaintiffs attempted to accept, but the defendant’s new
CEO responded that he did not agree with the terms and that the former CEO did not have
authority to issue the letter. The court held that the settlement agreement expunged any
misrepresentations made in prior agreements, thus the plaintiffs could not state a primary
violation and the former CEO could not be held liable as a control person. In addition, the
settlement agreement contained a full release, thus the control person claim was dismissed
against the former CEO. The defendant’s motion to dismiss was granted.
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Krasner v. Rahfco Funds LP, 2012 U.S. Dist. LEXIS 134351 (S.D.N.Y. Aug. 9, 2012).
Plaintiff investors filed suit against several defendants including, notably, several
investment funds, a general partner of the investment funds, and various associated individuals.
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934 in connection with an alleged Ponzi scheme. Plaintiffs also alleged violations of
Section 20(a) as to several defendants—the vice president of the general partner of the funds, a
fund manager, and several of the funds themselves. These defendants moved to dismiss. The
district court first determined that the complaint sufficiently pled only that the fund manager and
the general partner had violated Section 10(b). The court then examined the Section 20(a)
claims. The court, noting that an individual cannot be found to be a control person solely
because of their position as an officer of an entity, concluded that plaintiffs had insufficiently
pled that the vice president of the general partner actually exercised the necessary control over
the general partner. Accordingly, the court dismissed the Section 20(a) claim as against the vice
president of the general partner. Turning next to the fund manager defendant and the defendant
investment funds, the court determined that neither of these defendants controlled any entity that
had committed a Section 10(b) violation. Therefore, the court dismissed the Section 20(a) claims
as against these defendants as well.
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977 (S.D.N.Y.
Aug. 15, 2012).
Plaintiff investors brought a class action against two subdivisions of an asset management
company, a director of those two subdivisions, and the CEO of the asset management company.
Plaintiffs accused all of the defendants of participating in a deceptive scheme, thereby violating
Section 10(b) and Rules 10b-5(a) and 10b-5(c) of the Securities Exchange Act of 1934.
Plaintiffs also brought a Rule 10b-5(b) claim against defendant director for his misleading
disclosures. Finally, plaintiffs brought a “control liability claim under Section 20(a) of the Act”
against defendant CEO. The defendants moved to dismiss the claims. The court dismissed
plaintiffs’ Rule 10b-5(a) and Rule 10b-5(c) claims because plaintiffs failed to sufficiently allege
reliance on defendants’ defective conduct. Finding that plaintiffs had no claims under
Rules 10b-5(a) and 10b-5(c) and that there was no primary violation under these rules, plaintiffs’
Section 20(a) claims based on these allegations were subject to dismissal. The court then turned
to plaintiffs’ Rule 10b-5(b) claim against defendant director. The court found that plaintiffs had
sufficiently alleged a Rule 10b-5(b) claim against defendant director for his misleading
disclosures. The court then addressed whether plaintiffs had sufficiently alleged that defendant
director’s Rule 10b-5(b) violations gave rise to Section 20(a) control person liability on the part
of defendant CEO. The court first noted that plaintiffs had not sufficiently alleged that defendant
CEO controlled the actual deceptive conduct perpetrated by defendant director. The court
further noted that plaintiffs failed to sufficiently allege that defendant CEO was actually a control
person at all and that he controlled the entities who were responsible for the misstatements.
Based on these findings, the court granted dismissal of the remaining Section 20(a) claim against
defendant CEO.
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Lau v. Mezei, 2012 Fed. Sec. L. Rep. (CCH) 96,987 (S.D.N.Y. Aug. 15, 2012).
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Plaintiff alleged that defendant accountant fraudulently misrepresented that defendant
investment funds were low risk investment vehicles, thereby violating Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 and Section 12(a)(2) of the Securities Act of
1933. Plaintiff further alleged that defendant investment funds controlled the accountant, and
that they were therefore liable as control persons under Section 20(a) of the Exchange Act and
Section 15 of the Securities Act. Plaintiff premised his control person argument on the view that
defendant funds and defendant accountant had a principal-agent relationship. Defendants moved
for summary judgment as against all of plaintiff’s claims. The court granted summary judgment
with respect to the Section 12(a)(2) claim, and consequently granted summary judgment with
respect to the Section 15 control liability claim. The district court denied summary judgment as
to plaintiff’s Rule 10b-5 claim against defendant accountant, finding that there were sufficient
material disputes of fact on that claim. The court then turned to plaintiff’s control person
arguments premised on the principal-agent relationship. The court found that there was
insufficient evidence that the funds and the accountant had a principal-agent relationship. The
court also found that there was insufficient evidence that defendant funds had controlled
defendant accountant in any way or authorized him to act on their behalf. Based on these
findings, the court granted summary judgment against plaintiff as to the Section 20(a) control
liability claim.
In re IndyMac Mortgage-Backed Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,985 (S.D.N.Y.
Aug. 17, 2012).
In a putative class action, plaintiff investors brought suit against a registrant, a number of
its former officers and directors, and underwriters, alleging violations of Sections 11, 12(a)(2),
and 15 of the Securities Act of 1933 in connection with the issuance of mortgage pass-through
certificates. Lead plaintiffs moved for class certification, appointment as class representatives,
and appointment of class counsel. Defendants opposed the motion with respect to one of its
certificate offerings, arguing that lead plaintiffs had no Sections 11, 12(a)(2), or 15 claims as to
the certificates. Defendants argued, therefore, that lead plaintiffs could not lead a class action
alleging such claims. The court agreed with defendants and dismissed the claims as to these
certificate offerings. The court first held that lead plaintiffs had no standing to bring a
Section 12(a)(2) claim based on the certificates, because lead plaintiffs admittedly purchased the
certificates in the secondary market. Next, the court held that lead plaintiffs’ Section 11 claims
as to the certificates were time-barred. Finally, the court held that lead plaintiffs had no
Section 15 control liability claims as to the certificates, because a Section 15 claim depends on
the existence of a valid Section 11 or Section 12 claim. The court concluded that lead plaintiffs
could not represent class members who had claims based on these certificates because lead
plaintiffs themselves had no viable securities claims as to these certificates. Given that lead
plaintiffs had no viable securities claims as to these certificates, all class claims concerning these
certificates were dismissed.
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Ho v. Duoyuan Global Water Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).
In a class action, plaintiff investors filed suit against a corporation (“defendant
corporation”) and a number of its executives and directors, underwriters, external auditors, as
well as a company (“defendant company”) which had held a large portion of defendant
corporation’s shares prior to public trading. Plaintiffs alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of
1933. Plaintiffs alleged that defendants issued statements misrepresenting defendant
corporation’s financial conditions, and overstating the number of its distributors in a number of
public offering documents. Plaintiffs alleged that these purported misrepresentations led to a
decline in value of defendant corporation’s stock. Defendants moved to dismiss the complaint.
The court, after determining that plaintiffs had sufficiently alleged primary violations under
Sections 11 and 10(b), turned to the control liability claims under Sections 15 and 20(a). First,
the court addressed defendant officers’ motion. Given that the officer defendants had based their
entire motion on the mistaken belief that plaintiffs had failed to sufficiently plead a primary
violation of the securities laws, the court refused to grant defendant officers’ motion to dismiss.
Second, the court addressed the director defendants’ motion. The court granted defendant
directors’ motion to dismiss, holding that plaintiffs’ control liability allegations against defendant
directors were conclusory and therefore insufficient. Finally, the court turned to defendant
company’s motion to dismiss. Plaintiffs argued that defendant company was liable as a control
person because it had appointed one of the allegedly culpable directors. The court held,
however, that being the mere appointer of an allegedly culpable director is not the equivalent of
having control. The court held that the complaint failed to allege specific facts demonstrating
that defendant company had actual control over the corporation, rather than mere influence. The
court therefore dismissed the control liability claims against defendant company.
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757 (S.D.N.Y.
Aug. 29, 2012).
Plaintiff shareholders filed a class action against a corporation, its CEO, and its CFO
based on allegations that defendants made false or misleading representations that induced
plaintiffs to purchase corporate stock. When defendant corporation’s alleged misrepresentations
came to light through the public media, the stock price plummeted, thereby injuring plaintiffs.
Plaintiffs brought claims against all defendants under Section 10(b) of the Securities Exchange
Act of 1934, as well as control liability claims under Section 20(a) of the Exchange Act.
Defendants moved to dismiss all claims. The court first addressed the defendants’ motion to
dismiss plaintiffs’ Section 10(b) claims. This motion was primarily based on two premises:
first, that the alleged misrepresentations made by the corporation were actually true, and second,
that plaintiffs had failed to allege loss-causation because the most explicit revelations of the
corporation’s alleged misrepresentations to the public occurred after the fall in stock price. As to
the first premise, the court held that truth of alleged misrepresentations is not an appropriate
argument to make on a motion to dismiss a Section 10(b) claim—rather, it is a defense on the
merits. As to the second premise, the court held that plaintiffs had sufficiently pled loss-
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causation by pointing to less explicit revelations of defendant corporation’s alleged
misrepresentations to the public occurring before the fall in stock price. The court therefore
refused to grant defendants’ motion to dismiss the Section 10(b) claim, holding that plaintiffs
had sufficiently stated a claim for relief under that statute. The court then turned to the
Section 20(a) claims against the CEO and the CFO. The court noted that defendants’ motion to
dismiss these claims was premised entirely on the argument that plaintiffs had failed to allege a
primary violation by the corporation. Given the court’s determination that plaintiffs had
sufficiently alleged a primary violation of securities laws by the corporation, and that defendants
provided no other basis for their motion to dismiss the Section 20(a) claim, the court denied the
motion.
In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y. Aug. 30,
2012).
A class of investors and several individual plaintiffs brought claims against a corporation,
its executives, and certain underwriters under Sections 10(b) and 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, alleging that the defendants had made material
misrepresentations in their SEC filings and with regard to a variety of securities offerings.
Specifically, plaintiffs alleged that defendants misrepresented their exposure to subprime and
Alt-A mortgages, their risk management procedures, and their core capital financials.
Defendants moved to dismiss the claims premised on all three of these alleged
misrepresentations. The court granted these motions to dismiss in part and denied in part. With
respect to the claims based on alleged misrepresentations regarding exposure to subprime and
Alt-A mortgages and risk management procedures, the court denied defendants’ motion to
dismiss. The court first determined that plaintiffs had adequately alleged violations of
Section 10(b) and Rule 10b-5 with regard to these alleged misrepresentations. Turning to
plaintiffs’ Section 20(a) claims, the court held that plaintiffs had sufficiently alleged that
defendant executives had acted with control and culpability. With respect to plaintiffs’ claims
premised on the alleged misrepresentations regarding defendant corporation’s core capital
financials, the court held that plaintiffs had not sufficiently stated culpable misstatements and
granted defendants’ motion to dismiss as to the Section 10(b), Rule 10b-5, and Section 20(a)
claims.
In re Proshares Trust Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,998 (S.D.N.Y. Sept. 7,
2012).
In a putative class action, plaintiff investors brought suit against two trusts and a number
of individuals. Plaintiff alleged that the trust had filed registration statements in connection with
a number of its investment vehicles that had contained material misrepresentations or omissions.
More specifically, plaintiffs alleged that defendants had failed to adequately disclose particular
risks associated with these investment vehicles. Plaintiffs alleged that when these purported
risks materialized, plaintiffs suffered financial injury. Plaintiffs brought claims under
Sections 11 and 15 of the Securities Act of 1933. Defendants moved to dismiss the complaint.
The court first addressed the Section 11 primary violation claims. The court held that the
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egistration statements filed by defendants adequately conveyed the specific risks associated with
the investment vehicles, including the risks that allegedly materialized. The court held that the
statements were therefore not misleading, and the court dismissed the Section 11 primary
violation claims. The court then dismissed the Section 15 control liability claims, holding that a
Section 15 control person liability claim cannot be maintained without an adequately-pled
primary violation.
Lewy v. Skypeople Fruit Juice Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,999 (S.D.N.Y. Sept. 7,
2012).
In a putative class action, plaintiff shareholders brought suit against a corporation, several
of its officers and directors, its controlling shareholder, and the underwriter of certain securities
issued by the corporation. Plaintiffs alleged that defendants had failed to disclose a related-party
transaction, and also alleged that defendants had misstated various financial figures in required
filings. Plaintiffs alleged that they relied on these omissions and misstatements to their
detriment. Plaintiffs brought claims under Sections 11, 12, and 15 of the Securities Act of 1933,
as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved
to dismiss the complaint. Turning first to the Securities Act claims, the court held that plaintiffs
had sufficiently alleged material misrepresentations and omissions in support of their primary
violation claims. The court also held that plaintiffs had sufficiently pled a Section 15 control
liability claim, concluding that the allegations sufficiently demonstrated that the relevant
directors and officers had actual control over the alleged misrepresentations and omissions. The
court then held that the plaintiffs had failed to sufficiently allege a Section 10(b) claim based on
defendant corporation’s 2008 financial statements and the related-party transaction, concluding
that plaintiffs had failed to satisfy the heightened particularity requirements for fraud claims and
failed to sufficiently allege scienter. The court also held, however, that plaintiffs had sufficiently
alleged a Section 10(b) claim based on defendant corporation’s 2009 financial statements.
Turning then to the Section 20(a) claims, the court held that plaintiffs had sufficiently alleged
Section 20(a) claims but only those that were predicated on the 2009 financial statements as
primary violations.
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In re China Valves Tech. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,023 (S.D.N.Y. Sept. 12,
2012).
In a putative class action, plaintiff investors brought suit against a corporation, several of
its officers and directors, and one of its independent auditors. Plaintiffs alleged that defendants
failed to disclose material facts relating to two of defendant corporation’s acquisitions—more
specifically, that defendant corporation failed to disclose its related-party nature. Plaintiffs also
alleged that defendant corporation overstated its financial results in both a registration statement
and a prospectus statement, as the plaintiffs noted discrepancies between financial figures in
defendant corporation’s Securities and Exchange Commission filings and Chinese regulatory
filings. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933. The court first analyzed
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the Section 10(b) primary violation claims. The court held that plaintiffs had failed to allege that
the related party transactions were material or that disclosure of these transactions was required
under the law. The court also held that plaintiffs’ allegations regarding overstatement of
financial results did not meet the heightened pleading standards required for fraud claims. The
court concluded that plaintiffs had failed to allege a material misrepresentation or omission with
the required particularity, and the court dismissed the Section 10(b) claims. For these same
reasons, the court dismissed the Section 11 and Section 12 claims. Given that plaintiffs had
failed to sufficiently allege a primary violation of the securities laws, the court also dismissed the
control liability claims under Section 20(a) and Section 15.
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., 2012 U.S. Dist. LEXIS 146640 (S.D.N.Y.
Sept. 27, 2012).
In a class action, defendant bank and several individual defendants were sued by plaintiff
investors who had purchased an investment vehicle from defendant bank. Plaintiffs alleged that
defendants made several false and misleading statements related to the investment vehicle.
Plaintiffs alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss
the complaint. The court first determined that plaintiffs had failed to sufficiently allege a
primary violation of the securities laws. More specifically, the court held that plaintiffs had
failed to allege scienter and particularized facts with regard to the Section 10(b) claims. As
regards the Sections 11 and 12(a)(2) claims, the court held that plaintiffs had failed to
sufficiently allege that the statements at issue were false. The court therefore dismissed the
Section 10(b) claims, Section 11 claims, and Section 12(a)(2) claims. Given that plaintiffs had
failed to allege a primary violation of the securities laws, the court also dismissed the
Section 20(a) and Section 15 control liability claims.
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 Fed. Sec. L. Rep. (CCH)
97,040 (S.D.N.Y. Sept. 27, 2012).
Plaintiff hedge funds brought suit against a corporation and a number of its directors and
officers. Plaintiffs alleged that defendants made materially false representations that inflated
defendant corporation’s share price, caused plaintiffs to purchase and hold shares at the inflated
share price, and injured plaintiffs when the truth was revealed and the share price plunged.
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934 and alleged Section 20(a) control liability. Defendants moved to dismiss the complaint.
The court held that plaintiffs had failed to allege loss causation, that many of the statements atissue
were protected by the safe harbor provisions of the Private Securities Litigation Reform
Act, and that plaintiffs had failed to plead falsity with respect to several of the statements atissue.
The court concluded that plaintiffs had failed to state a claim under Section 10(b) and
Rule 10b-5. Once the court dismissed those claims, the court then dismissed the Section 20(a)
claims because of plaintiffs’ failure to allege a primary violation of the securities laws.
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In re UBS AG Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,037 (S.D.N.Y. Sept. 28, 2012).
In a putative class action, plaintiff investors brought suit against a corporation, a number
of its executives, and several of its underwriters for actions related to a securities offering.
Plaintiffs alleged that defendants issued fraudulent statements regarding defendant corporation’s
auction rate securities, its mortgage-related securities portfolio, and its compliance with federal
tax and securities laws. Plaintiffs brought claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933.
Defendant corporation and defendant executives moved to dismiss the Securities Act claims
while the underwriters moved to dismiss the Exchange Act claims. The court turned first to
defendant corporation and defendant executives’ motion. The court held that plaintiffs failed to
sufficiently allege scienter with respect to the purported misrepresentations regarding the
mortgage-backed securities portfolio and the auction rate securities. The court also held that
plaintiffs failed to sufficiently allege materiality with regard to the purported tax fraud. The
court therefore dismissed the Section 10(b) claims as against defendant corporation and
defendant executives, and dismissed the Section 20(a) control liability claims for failure to plead
a primary violation of the securities laws. The court turned next to the underwriters’ motion to
dismiss. The court held that a number of plaintiffs lacked standing to bring a Section 12 claim
against defendant underwriters. More generally, the court held that the plaintiffs failed to allege
that purported misrepresentations were material. The court therefore dismissed the Section 11
and 12 claims. Given that no primary violation had been alleged against defendant underwriters,
the court also dismissed the Section 15 control liability claims.
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052 (S.D.N.Y.
Oct. 15, 2012).
This case arose out of the defendant’s bankruptcy proceedings, involving eight
consolidated securities actions brought by California public entities and an insurance company,
asserting claims against defendant’s former officers, directors, and auditor for alleged violations
of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, California common law, and Sections 25400, 25401, 25504, and 25500
of the California Corporations Code. The plaintiffs alleged that offering documents with respect
to securities that plaintiffs purchased were false and misleading, because they incorporated the
defendant’s financial statements that contained misleading statements and material omissions.
Defendants moved to dismiss on grounds that the plaintiffs did not adequately plead that the
defendants controlled the alleged primary violations of Section 11; however, the court found this
argument to be unsupported by the statutes or any other authority. The court also held that the
defendant’s argument that only control persons who signed a relevant registration statement may
be liable under Section 15 to be without merit. On that basis, the motion to dismiss the
Section 15 claim was denied. The court granted the motion to dismiss certain Section 10(b)
claims which failed to state a claim. Specifically, the Section 10(b) claims based on
misstatements or omissions relating to stress tests, GAAP violations, valuations of CRE Assets,
and concentrations of credit risk as to two individual defendants were all dismissed, as were the
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Section 20(a) claims based on those primary violation. As to the remaining Section 10(b) and
related Section 20(a) claims, the court rejected the defendant’s argument that those claims should
fail because the defendant did not have the requisite control over the primary violator. The court
noted that control exists when a person has power directly or indirectly to direct or cause the
direction or management and policies of a person, whether through ownership of voting
securities or otherwise. Because the individual defendants had the power to direct or cause the
direction of management and policies of the defendant company, the court declined to dismiss
the remaining Section 20(a) claims against them. Finally, the court found that the claims under
Section 25504 of the California Corporations Code for control person liability failed for failure
to plead a primary violation, because the defendants, as the underwriters and non-issuers of the
securities in question, were not in privity with the plaintiffs.
Ross v. Lloyds Banking Grp., PLC, 2012 Fed. Sec. L. Rep. (CCH) 97,056 (S.D.N.Y. Oct. 16,
2012).
This is a putative class action alleging that the defendants committed securities fraud
when they misstated and omitted material information regarding the acquisition of a bank by the
defendants. The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of
1934, including Section 20(a) control person liability. The court considered the defendants’
motion to dismiss. Defendants argued that plaintiffs did not satisfy the pleading requirements of
the Private Litigation Securities Reform Act, plaintiffs did not allege actionable misstatements or
omissions, loss causation, and all of the claims were time-barred. The court held that the
complaint did not plausibly allege that the defendants were liable for material misstatements or
omissions and thus granted the defendants’ motion to dismiss. The court held that the plaintiffs
failed to plead primary violations since they could not show that any allegedly undisclosed facts
were material. Thus, all claims, including the Section 20(a) claims, were dismissed.
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Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,075
(S.D.N.Y. Nov. 5, 2012).
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as
conservator for Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleges misconduct on the
part of the nation’s largest financial institutions in connection with the offer and sale of certain
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint
alleged that the offering documents used to market and sell residential mortgage-back securities
as Fannie and Freddie during the relevant period contained material misstatements or omissions
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that
characterize the underlying mortgages. On these bases, the complaint alleged claims under
Sections 11, 12, and 15 of the Securities Act of 1933, the Virginia Securities Act
Sections 13.1-522(A)(ii) and (C), and the District of Columbia Securities Act
Sections 31-5606.05(a)(1)(B), and (c). The FHFA also asserted claims of fraud and aiding and
abetting fraud under the common law of New York State. The defendants’ motions to dismiss
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were granted with respect to the Virginia Securities Act claims, the plaintiffs’ claims of owneroccupancy
and loan-to-value ratio fraud relating to the securities for which the defendant served
as the lead underwriter, and the plaintiffs’ claims of owner-occupancy fraud relating to the
securities for which certain defendants served as a sponsor depositor or lead underwriter. The
motions to dismiss were denied in all other respects.
Lau v. Mezei, 2012 Fed. Sec. L. Rep. (CCH) 96,987 (S.D.N.Y. Aug. 15, 2012).
Plaintiff alleged that defendant accountant fraudulently misrepresented that defendant
investment funds were low risk investment vehicles, thereby violating Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934 and Section 12(a)(2) of the Securities Act of
1933. Plaintiff further alleged that defendant investment funds controlled the accountant, and
that they were therefore liable as control persons under Section 20(a) of the Exchange Act and
Section 15 of the Securities Act. Plaintiff premised his control person argument on the view that
defendant funds and defendant accountant had a principal-agent relationship. Defendants moved
for summary judgment as against all of plaintiff’s claims. The court granted summary judgment
with respect to the Section 12(a)(2) claim, and consequently granted summary judgment with
respect to the Section 15 control liability claim. The district court denied summary judgment as
to plaintiff’s Rule 10b-5 claim against defendant accountant, finding that there were sufficient
material disputes of fact on that claim. The court then turned to plaintiff’s control person
arguments premised on the principal-agent relationship. The court found that there was
insufficient evidence that the funds and the accountant had a principal-agent relationship. The
court also found that there was insufficient evidence that defendant funds had controlled
defendant accountant in any way or authorized him to act on their behalf. Based on these
findings, the court granted summary judgment against plaintiff as to the Section 20(a) control
liability claim.
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977 (S.D.N.Y.
Aug. 15, 2012).
Plaintiff investors brought a class action against two subdivisions of an asset management
company, a director of those two subdivisions, and the CEO of the asset management company.
Plaintiffs accused all of the defendants of participating in a deceptive scheme, thereby violating
Section 10(b) and Rules 10b-5(a) and 10b-5(c) of the Securities Exchange Act of 1934.
Plaintiffs also brought a Rule 10b-5(b) claim against defendant director for his misleading
disclosures. Finally, plaintiffs brought a “control liability claim under Section 20(a) of the Act”
against defendant CEO. The defendants moved to dismiss the claims. The court dismissed
plaintiffs’ Rule 10b-5(a) and Rule 10b-5(c) claims because plaintiffs failed to sufficiently allege
reliance on defendants’ defective conduct. Finding that plaintiffs had no claims under
Rules 10b-5(a) and 10b-5(c) and that there was no primary violation under these rules, plaintiffs’
Section 20(a) claims based on these allegations were subject to dismissal. The court then turned
to plaintiffs’ Rule 10b-5(b) claim against defendant director. The court found that plaintiffs had
sufficiently alleged a Rule 10b-5(b) claim against defendant director for his misleading
disclosures. The court then addressed whether plaintiffs had sufficiently alleged that defendant
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director’s Rule 10b-5(b) violations gave rise to Section 20(a) control person liability on the part
of defendant CEO. The court first noted that plaintiffs had not sufficiently alleged that defendant
CEO controlled the actual deceptive conduct perpetrated by defendant director. The court
further noted that plaintiffs failed to sufficiently allege that defendant CEO was actually a control
person at all and that he controlled the entities who were responsible for the misstatements.
Based on these findings, the court granted dismissal of the remaining Section 20(a) claim against
defendant CEO.
In re IndyMac Mortgage-Backed Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,985 (S.D.N.Y.
Aug. 17, 2012).
In a putative class action, plaintiff investors brought suit against a registrant, a number of
its former officers and directors, and underwriters, alleging violations of Sections 11, 12(a)(2),
and 15 of the Securities Act of 1933 in connection with the issuance of mortgage pass-through
certificates. Lead plaintiffs moved for class certification, appointment as class representatives,
and appointment of class counsel. Defendants opposed the motion with respect to one of its
certificate offerings, arguing that lead plaintiffs had no Sections 11, 12(a)(2), or 15 claims as to
the certificates. Defendants argued, therefore, that lead plaintiffs could not lead a class action
alleging such claims. The court agreed with defendants and dismissed the claims as to these
certificate offerings. The court first held that lead plaintiffs had no standing to bring a
Section 12(a)(2) claim based on the certificates, because lead plaintiffs admittedly purchased the
certificates in the secondary market. Next, the court held that lead plaintiffs’ Section 11 claims
as to the certificates were time-barred. Finally, the court held that lead plaintiffs had no
Section 15 control liability claims as to the certificates, because a Section 15 claim depends on
the existence of a valid Section 11 or Section 12 claim. The court concluded that lead plaintiffs
could not represent class members who had claims based on these certificates because lead
plaintiffs themselves had no viable securities claims as to these certificates. Given that lead
plaintiffs had no viable securities claims as to these certificates, all class claims concerning these
certificates were dismissed.
Ho v. Duoyuan Global Water Inc., 2012 U.S. Dist. LEXIS 121670 (S.D.N.Y. Aug. 24, 2012).
In a class action, plaintiff investors filed suit against a corporation (“defendant
corporation”) and a number of its executives and directors, underwriters, external auditors, as
well as a company (“defendant company”) which had held a large portion of defendant
corporation’s shares prior to public trading. Plaintiffs alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of
1933. Plaintiffs alleged that defendants issued statements misrepresenting defendant
corporation’s financial conditions, and overstating the number of its distributors in a number of
public offering documents. Plaintiffs alleged that these purported misrepresentations led to a
decline in value of defendant corporation’s stock. Defendants moved to dismiss the complaint.
The court, after determining that plaintiffs had sufficiently alleged primary violations under
Sections 11 and 10(b), turned to the control liability claims under Sections 15 and 20(a). First,
the court addressed defendant officers’ motion. Given that the officer defendants had based their
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entire motion on the mistaken belief that plaintiffs had failed to sufficiently plead a primary
violation of the securities laws, the court refused to grant defendant officers’ motion to dismiss.
Second, the court addressed the director defendants’ motion. The court granted defendant
directors’ motion to dismiss, holding that plaintiffs’ control liability allegations against defendant
directors were conclusory and therefore insufficient. Finally, the court turned to defendant
company’s motion to dismiss. Plaintiffs argued that defendant company was liable as a control
person because it had appointed one of the allegedly culpable directors. The court held,
however, that being the mere appointer of an allegedly culpable director is not the equivalent of
having control. The court held that the complaint failed to allege specific facts demonstrating
that defendant company had actual control over the corporation, rather than mere influence. The
court therefore dismissed the control liability claims against defendant company.
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757 (S.D.N.Y.
Aug. 29, 2012).
Plaintiff shareholders filed a class action against a corporation, its CEO, and its CFO
based on allegations that defendants made false or misleading representations that induced
plaintiffs to purchase corporate stock. When defendant corporation’s alleged misrepresentations
came to light through the public media, the stock price plummeted, thereby injuring plaintiffs.
Plaintiffs brought claims against all defendants under Section 10(b) of the Securities Exchange
Act of 1934, as well as control liability claims under Section 20(a) of the Exchange Act.
Defendants moved to dismiss all claims. The court first addressed the defendants’ motion to
dismiss plaintiffs’ Section 10(b) claims. This motion was primarily based on two premises:
first, that the alleged misrepresentations made by the corporation were actually true, and second,
that plaintiffs had failed to allege loss-causation because the most explicit revelations of the
corporation’s alleged misrepresentations to the public occurred after the fall in stock price. As to
the first premise, the court held that truth of alleged misrepresentations is not an appropriate
argument to make on a motion to dismiss a Section 10(b) claim—rather, it is a defense on the
merits. As to the second premise, the court held that plaintiffs had sufficiently pled losscausation
by pointing to less explicit revelations of defendant corporation’s alleged
misrepresentations to the public occurring before the fall in stock price. The court therefore
refused to grant defendants’ motion to dismiss the Section 10(b) claim, holding that plaintiffs
had sufficiently stated a claim for relief under that statute. The court then turned to the
Section 20(a) claims against the CEO and the CFO. The court noted that defendants’ motion to
dismiss these claims was premised entirely on the argument that plaintiffs had failed to allege a
primary violation by the corporation. Given the court’s determination that plaintiffs had
sufficiently alleged a primary violation of securities laws by the corporation, and that defendants
provided no other basis for their motion to dismiss the Section 20(a) claim, the court denied the
motion.
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In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y. Aug. 30,
2012).
A class of investors and several individual plaintiffs brought claims against a corporation,
its executives, and certain underwriters under Sections 10(b) and 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, alleging that the defendants had made material
misrepresentations in their SEC filings and with regard to a variety of securities offerings.
Specifically, plaintiffs alleged that defendants misrepresented their exposure to subprime and
Alt-A mortgages, their risk management procedures, and their core capital financials.
Defendants moved to dismiss the claims premised on all three of these alleged
misrepresentations. The court granted these motions to dismiss in part and denied in part. With
respect to the claims based on alleged misrepresentations regarding exposure to subprime and
Alt-A mortgages and risk management procedures, the court denied defendants’ motion to
dismiss. The court first determined that plaintiffs had adequately alleged violations of
Section 10(b) and Rule 10b-5 with regard to these alleged misrepresentations. Turning to
plaintiffs’ Section 20(a) claims, the court held that plaintiffs had sufficiently alleged that
defendant executives had acted with control and culpability. With respect to plaintiffs’ claims
premised on the alleged misrepresentations regarding defendant corporation’s core capital
financials, the court held that plaintiffs had not sufficiently stated culpable misstatements and
granted defendants’ motion to dismiss as to the Section 10(b), Rule 10b-5, and Section 20(a)
claims.
Lewy v. Skypeople Fruit Juice Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,999 (S.D.N.Y. Sept. 7,
2012).
In a putative class action, plaintiff shareholders brought suit against a corporation, several
of its officers and directors, its controlling shareholder, and the underwriter of certain securities
issued by the corporation. Plaintiffs alleged that defendants had failed to disclose a related-party
transaction, and also alleged that defendants had misstated various financial figures in required
filings. Plaintiffs alleged that they relied on these omissions and misstatements to their
detriment. Plaintiffs brought claims under Sections 11, 12, and 15 of the Securities Act of 1933,
as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved
to dismiss the complaint. Turning first to the Securities Act claims, the court held that plaintiffs
had sufficiently alleged material misrepresentations and omissions in support of their primary
violation claims. The court also held that plaintiffs had sufficiently pled a Section 15 control
liability claim, concluding that the allegations sufficiently demonstrated that the relevant
directors and officers had actual control over the alleged misrepresentations and omissions. The
court then held that the plaintiffs had failed to sufficiently allege a Section 10(b) claim based on
defendant corporation’s 2008 financial statements and the related-party transaction, concluding
that plaintiffs had failed to satisfy the heightened particularity requirements for fraud claims and
failed to sufficiently allege scienter. The court also held, however, that plaintiffs had sufficiently
alleged a Section 10(b) claim based on defendant corporation’s 2009 financial statements.
Turning then to the Section 20(a) claims, the court held that plaintiffs had sufficiently alleged
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Section 20(a) claims but only those that were predicated on the 2009 financial statements as
primary violations.
In re Proshares Trust Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,998 (S.D.N.Y. Sept. 7,
2012).
In a putative class action, plaintiff investors brought suit against two trusts and a number
of individuals. Plaintiff alleged that the trust had filed registration statements in connection with
a number of its investment vehicles that had contained material misrepresentations or omissions.
More specifically, plaintiffs alleged that defendants had failed to adequately disclose particular
risks associated with these investment vehicles. Plaintiffs alleged that when these purported
risks materialized, plaintiffs suffered financial injury. Plaintiffs brought claims under
Sections 11 and 15 of the Securities Act of 1933. Defendants moved to dismiss the complaint.
The court first addressed the Section 11 primary violation claims. The court held that the
registration statements filed by defendants adequately conveyed the specific risks associated with
the investment vehicles, including the risks that allegedly materialized. The court held that the
statements were therefore not misleading, and the court dismissed the Section 11 primary
violation claims. The court then dismissed the Section 15 control liability claims, holding that a
Section 15 control person liability claim cannot be maintained without an adequately-pled
primary violation.
In re China Valves Tech. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,023 (S.D.N.Y. Sept. 12,
2012).
In a putative class action, plaintiff investors brought suit against a corporation, several of
its officers and directors, and one of its independent auditors. Plaintiffs alleged that defendants
failed to disclose material facts relating to two of defendant corporation’s acquisitions—more
specifically, that defendant corporation failed to disclose its related-party nature. Plaintiffs also
alleged that defendant corporation overstated its financial results in both a registration statement
and a prospectus statement, as the plaintiffs noted discrepancies between financial figures in
defendant corporation’s Securities and Exchange Commission filings and Chinese regulatory
filings. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933. The court first analyzed
the Section 10(b) primary violation claims. The court held that plaintiffs had failed to allege that
the related party transactions were material or that disclosure of these transactions was required
under the law. The court also held that plaintiffs’ allegations regarding overstatement of
financial results did not meet the heightened pleading standards required for fraud claims. The
court concluded that plaintiffs had failed to allege a material misrepresentation or omission with
the required particularity, and the court dismissed the Section 10(b) claims. For these same
reasons, the court dismissed the Section 11 and Section 12 claims. Given that plaintiffs had
failed to sufficiently allege a primary violation of the securities laws, the court also dismissed the
control liability claims under Section 20(a) and Section 15.
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Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 Fed. Sec. L. Rep. (CCH)
97,040 (S.D.N.Y. Sept. 27, 2012).
Plaintiff hedge funds brought suit against a corporation and a number of its directors and
officers. Plaintiffs alleged that defendants made materially false representations that inflated
defendant corporation’s share price, caused plaintiffs to purchase and hold shares at the inflated
share price, and injured plaintiffs when the truth was revealed and the share price plunged.
Plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934 and alleged Section 20(a) control liability. Defendants moved to dismiss the complaint.
The court held that plaintiffs had failed to allege loss causation, that many of the statements atissue
were protected by the safe harbor provisions of the Private Securities Litigation Reform
Act, and that plaintiffs had failed to plead falsity with respect to several of the statements atissue.
The court concluded that plaintiffs had failed to state a claim under Section 10(b) and
Rule 10b-5. Once the court dismissed those claims, the court then dismissed the Section 20(a)
claims because of plaintiffs’ failure to allege a primary violation of the securities laws.
Lighthouse Fin. Grp. v. Royal Bank of Scot. Grp., 2012 U.S. Dist. LEXIS 146640 (S.D.N.Y.
Sept. 27, 2012).
In a class action, defendant bank and several individual defendants were sued by plaintiff
investors who had purchased an investment vehicle from defendant bank. Plaintiffs alleged that
defendants made several false and misleading statements related to the investment vehicle.
Plaintiffs alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendants moved to dismiss
the complaint. The court first determined that plaintiffs had failed to sufficiently allege a
primary violation of the securities laws. More specifically, the court held that plaintiffs had
failed to allege scienter and particularized facts with regard to the Section 10(b) claims. As
regards the Sections 11 and 12(a)(2) claims, the court held that plaintiffs had failed to
sufficiently allege that the statements at issue were false. The court therefore dismissed the
Section 10(b) claims, Section 11 claims, and Section 12(a)(2) claims. Given that plaintiffs had
failed to allege a primary violation of the securities laws, the court also dismissed the
Section 20(a) and Section 15 control liability claims.
In re UBS AG Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,037 (S.D.N.Y. Sept. 28, 2012).
In a putative class action, plaintiff investors brought suit against a corporation, a number
of its executives, and several of its underwriters for actions related to a securities offering.
Plaintiffs alleged that defendants issued fraudulent statements regarding defendant corporation’s
auction rate securities, its mortgage-related securities portfolio, and its compliance with federal
tax and securities laws. Plaintiffs brought claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 as well as Sections 11, 12, and 15 of the Securities Act of 1933.
Defendant corporation and defendant executives moved to dismiss the Securities Act claims
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while the underwriters moved to dismiss the Exchange Act claims. The court turned first to
defendant corporation and defendant executives’ motion. The court held that plaintiffs failed to
sufficiently allege scienter with respect to the purported misrepresentations regarding the
mortgage-backed securities portfolio and the auction rate securities. The court also held that
plaintiffs failed to sufficiently allege materiality with regard to the purported tax fraud. The
court therefore dismissed the Section 10(b) claims as against defendant corporation and
defendant executives, and dismissed the Section 20(a) control liability claims for failure to plead
a primary violation of the securities laws. The court turned next to the underwriters’ motion to
dismiss. The court held that a number of plaintiffs lacked standing to bring a Section 12 claim
against defendant underwriters. More generally, the court held that the plaintiffs failed to allege
that purported misrepresentations were material. The court therefore dismissed the Section 11
and 12 claims. Given that no primary violation had been alleged against defendant underwriters,
the court also dismissed the Section 15 control liability claims.
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052 (S.D.N.Y.
Oct. 15, 2012).
This case arose out of the defendant’s bankruptcy proceedings, involving eight
consolidated securities actions brought by California public entities and an insurance company,
asserting claims against defendant’s former officers, directors, and auditor for alleged violations
of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, California common law, and Sections 25400, 25401, 25504, and 25500
of the California Corporations Code. The plaintiffs alleged that offering documents with respect
to securities that plaintiffs purchased were false and misleading, because they incorporated the
defendant’s financial statements that contained misleading statements and material omissions.
Defendants moved to dismiss on grounds that the plaintiffs did not adequately plead that the
defendants controlled the alleged primary violations of Section 11; however, the court found this
argument to be unsupported by the statutes or any other authority. The court also held that the
defendant’s argument that only control persons who signed a relevant registration statement may
be liable under Section 15 to be without merit. On that basis, the motion to dismiss the
Section 15 claim was denied. The court granted the motion to dismiss certain Section 10(b)
claims which failed to state a claim. Specifically, the Section 10(b) claims based on
misstatements or omissions relating to stress tests, GAAP violations, valuations of CRE Assets,
and concentrations of credit risk as to two individual defendants were all dismissed, as were the
Section 20(a) claims based on those primary violation. As to the remaining Section 10(b) and
related Section 20(a) claims, the court rejected the defendant’s argument that those claims should
fail because the defendant did not have the requisite control over the primary violator. The court
noted that control exists when a person has power directly or indirectly to direct or cause the
direction or management and policies of a person, whether through ownership of voting
securities or otherwise. Because the individual defendants had the power to direct or cause the
direction of management and policies of the defendant company, the court declined to dismiss
the remaining Section 20(a) claims against them. Finally, the court found that the claims under
Section 25504 of the California Corporations Code for control person liability failed for failure
to plead a primary violation, because the defendants, as the underwriters and non-issuers of the
securities in question, were not in privity with the plaintiffs.
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Ross v. Lloyds Banking Grp., PLC, 2012 Fed. Sec. L. Rep. (CCH) 97,056 (S.D.N.Y. Oct. 16,
2012).
This is a putative class action alleging that the defendants committed securities fraud
when they misstated and omitted material information regarding the acquisition of a bank by the
defendants. The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of
1934, including Section 20(a) control person liability. The court considered the defendants’
motion to dismiss. Defendants argued that plaintiffs did not satisfy the pleading requirements of
the Private Litigation Securities Reform Act (“PLSRA”), plaintiffs did not allege actionable
misstatements or omissions, loss causation, and all of the claims were time-barred. The court
held that the complaint did not plausibly allege that the defendants were liable for material
misstatements or omissions and thus granted the defendants’ motion to dismiss. The court held
that the plaintiffs failed to plead primary violations since they could not show that any allegedly
undisclosed facts were material. Thus, all claims, including the Section 20(a) claims, were
dismissed.
Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,075
(S.D.N.Y. Nov. 5, 2012).
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as
conservator for Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleges misconduct on the
part of the nation’s largest financial institutions in connection with the offer and sale of certain
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint
alleged that the offering documents used to market and sell residential mortgage-back securities
as Fannie and Freddie during the relevant period contained material misstatements or omissions
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that
characterize the underlying mortgages. On these bases, the complaint alleged claims under
Sections 11, 12, and 15 of the Securities Act of 1933, the Virginia Securities Act
Sections 13.1-522(A)(ii) and (C), and the District of Columbia Securities Act
Sections 31-5606.05(a)(1)(B), and (c). The FHFA also asserted claims of fraud and aiding and
abetting fraud under the common law of New York State. The defendants’ motions to dismiss
were granted with respect to the Virginia Securities Act claims, the plaintiffs’ claims of owneroccupancy
and loan-to-value ratio fraud relating to the securities for which the defendant served
as the lead underwriter, and the plaintiffs’ claims of owner-occupancy fraud relating to the
securities for which certain defendants served as a sponsor depositor or lead underwriter. The
motions to dismiss were denied in all other respects.
Dobina v. Weatherford Int’l Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,081 (S.D.N.Y. Nov. 7,
2012).
This class action arose out of statements regarding the international controls and
accounting practices of the defendant company, after it announced that it had previously
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understated its tax expenses. The plaintiffs, led by a pension fund, alleged that the defendant and
some of its officers as well as its accounting firm violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by knowingly issuing materially
false statements regarding the defendant’s tax accounting, and omitting to state facts necessary to
make the statements that were made not misleading. The defendant moved to dismiss for failure
to state a claim. One executive was found to possess the requisite scienter because of his
involvement in designing and evaluating the defendant company’s internal controls. Similarly,
the plaintiffs adequately alleged scienter with regard to the defendant company; however, they
did not sufficiently allege scienter with respect to the other individual defendants, because their
role in designing the internal controls was not particularly alleged. Plaintiffs’ claims regarding
manipulation of tax rate expenses failed because the plaintiffs did not adequately plead scienter.
The plaintiffs similarly failed to plead scienter as to the accounting defendant. Finally,
plaintiffs’ claims under Section 20(a) of the Exchange Act for control person liability against
certain individual defendant officers and the company did not fail, because they had the power to
direct or cause the direction of the management and policies of the defendant company.
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,079
(S.D.N.Y. Nov. 8, 2012).
The Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and
Freddie Mac, alleged misconduct on the part of the defendant financial institutions in connection
with the offer and sale of certain mortgage-backed securities. The FHFA asserted that the
offering documents contained misstatements or omissions, and brought claims alleging
violations of Sections 11, 12, and 15 of the Securities Act of 1933, including Section 15 control
person liability, as well as the Virginia Securities Act Section 13.1-522(A)(ii) and (C), and
District of Columbia Securities Act Sections 31-5606.05(a)(1)(B) and (c). The FHFA also
alleged fraud and aiding and abetting liability under the common law of New York State. The
fraud claims were dismissed because the plaintiff did not plead fraud with particularity. The
claims against the defendant treasurer who signed the registration statement for liability under
Section 11 of the Securities Act and Section 15 control person liability did not fail, because the
defendant treasurer signed the registration statement. The plaintiff’s claims under the District of
Columbia Blue Sky statute also survived, because contrary to the defendants’ assertions, that
statute did not require a plaintiff to allege elements of reliance on the alleged misstatements.
Defendants’ arguments that the plaintiff’s demands for rescission and punitive damages were
improper failed, because the defendants did not establish that the plaintiff’s delay in making a
demand for rescission was unreasonable, and because the complaint adequately supported a
demand for punitive damages under New York law.
Fed. Hous. Fin. Agency v. Barclays Bank PLC, 2012 U.S. Dist. LEXIS 165138 (S.D.N.Y.
Nov. 19, 2012).
This is one of 16 actions in which the Federal Housing Finance Agency (“FHFA”) as
conservator of Fannie Mae and Freddie Mac (“Fannie and Freddie”) alleged misconduct on the
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part of the nation’s largest financial institutions in connection with the offer and sale of certain
mortgage-backed securities purchased by Fannie and Freddie from 2005 to 2007. The complaint
alleges that the offering documents used to market and sell residential mortgage-back securities
Fannie and Freddie during the relevant period contained material misstatements or omissions
with respect to the owner-occupancy status, loan-to-value ratio, and underwriting standards that
characterize the underlying mortgages. Plaintiffs alleged claims under Sections 11, 12, and 15 of
the Securities Act of 1933, the Virginia Securities Act Sections 13.1-522(A)(ii) and (C), and the
District of Columbia Securities Act Sections 31-5606.05(a)(1)(B), and (c). Defendants were a
bank and several corporate associates and three associated individuals. The court considered the
defendants’ motion to dismiss. The defendants’ claimed that they could not be held liable under
the Virginia Securities Act for primary or control person violations. The court held that the
Virginia Securities Act required contractual privity between the plaintiff and defendant and
accordingly dismissed the primary and control person claims against defendants under this Act
for lack of contractual privity. The motion to dismiss the remaining claims was denied.
Fed. Hous. Fin. Agency v. SG Ams. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,210 (S.D.N.Y.
Nov. 27, 2012).
Plaintiff, Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and
Freddie Mac (“Fannie and Freddie”) alleged misconduct on the part of the defendants, and its
corporate affiliates as well as individual defendants who signed shelf registration statements in
connection with the offer and sale of mortgage-backed securities purchased by Fannie and
Freddie. The complaint asserted that the offering documents used to sell certain residential
mortgage-backed securities to Fannie and Freddie during the relevant period contained material
misstatements or omissions with respect to the owner-occupancy status, loan-to-value ratio, and
underwriting standards that characterize the underlying mortgages. The complaint alleged
claims under Sections 11, 12, and 15 of the Securities Act of 1933, Section 13.1-522(A)(ii) and
(C) of the Virginia Securities Act, and Section 31-5606.05(a)(1)(B) and (c) of the District of
Columbia Securities Act. The court considered the defendants’ motion to dismiss. The motion
was granted with respect to the Virginia Securities Act claims against non-selling defendants and
all attendant control person claims, as well as the Section 12 claims and the District of Columbia
Securities Act claims against underwriters with respect to certificates purchased from other
parties. Specifically, the court held that the defendants made statements of belief about matters
of objective fact. Because the alleged primary violations failed, the control person claims also
failed.
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,234
(S.D.N.Y. Dec. 17, 2012).
Plaintiff investors brought a number of common law claims and securities fraud claims
against a corporation and a number of its executives. Plaintiffs alleged that defendant
corporation had contracted to buy two companies. In order to finance these acquisitions,
plaintiffs alleged that defendants had approached them about the possibility of securing a loan.
At the conclusion of these negotiations, plaintiffs agreed to lend defendants $7.25 million, which
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was to be used for the sole purpose of funding the acquisition of the two companies. As part of
this loan arrangement, defendant corporation was required to make periodic payments to
plaintiffs. Defendant corporation, however, immediately defaulted on these obligations.
Plaintiffs alleged that defendants had materially misrepresented the financial condition and
business prospects of defendant corporation in order to induce plaintiffs to agree to the loan
transaction and in order to induce plaintiffs to refrain from exercising their rights under the loan
transaction. Based on these allegations, plaintiffs brought a multitude of claims against
defendants, including claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. After several defendants defaulted by failing to respond to the complaint, plaintiffs moved
for default judgment with respect to their Sections 10(b) and 20(a) claims against the defaulting
defendants. The court first noted that Rule 55(b) of the Federal Rules of Civil Procedure, as
interpreted by case law, establishes a defaulting defendant’s liability with respect to well-pleaded
claims in a complaint. The court first turned to address the Section 10(b) claims against the
defaulting defendants. The court held that the complaint sufficiently alleged a Section 10(b)
claim against, among others, defendant corporation. The court then turned to the Section 20(a)
control liability claims brought against one of the defaulting defendant executives. The court
held that the complaint sufficiently alleged that the defaulting defendant executive had acted
with scienter and had actual control over defendant corporation at the time of the alleged
misrepresentations. The court, therefore, held that the complaint sufficiently alleged a
Section 20(a) control liability claim against the defaulting defendant executive, and granted
plaintiffs’ motion for default judgment as against that executive.
Fed. Hous. Fin. Agency v. Ally Fin. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,235 (S.D.N.Y.
Dec. 19, 2012).
Plaintiff, a governmental agency, brought suit against a number of financial institutions.
Plaintiff alleged misconduct in connection with the offer and sale of a number of mortgagebacked
securities. More specifically, plaintiff alleged that the offering documents used to market
these securities contained material misrepresentations with respect to the owner-occupancy state,
loan-to-value ratio, and underwriting standards that characterized the mortgages underlying the
securities. Plaintiff brought claims under Sections 11, 12, and 15 of the Securities Act of 1933.
The lead defendant brought a motion to dismiss which argued, among other things, that the
complaint did not sufficiently allege control person liability with respect to the lead defendant
under Section 15. Plaintiff’s Section 15 control liability claim against the lead defendant was
based upon purported primary violations of Sections 11 and 12 by three of the lead defendants’
subsidiaries. The lead defendant argued that it had entered into an operating agreement with one
of its subsidiaries which, inter alia, required the subsidiary to maintain a number of directors
who were independent from the lead defendant, maintain books and records that were separate
from those of the lead defendant, and maintain a corporate identity that was distinct from that of
the lead defendant. The lead defendant argued that this operating agreement established as a
matter of law that the lead defendant did not control the subsidiary. The court held, however,
that the complaint included allegations that cast doubt on any appearance of independence
created by the operating agreement. The court held that the operating agreement’s terms were
not so unambiguous, given the allegations in the complaint, to demonstrate as a matter of law
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that the lead defendant did not control the subsidiary. For this reason, the court refused to grant
the lead defendant’s motion to dismiss the Section 20(a) control liability claims.
Warchol v. Green Mountain Coffee Roasters Inc., 2012 U.S. Dist. LEXIS 9851 (D. Vt. Jan. 27,
2012).
Investors sued a corporation for alleged violations of Section 10(b) of the Securities
Exchange Act of 1934 and individual defendants as control persons under Section 20(a).
Section 20(a) holds liable those who control persons who have violated securities laws. The
complaint alleged false statements connected to the corporation’s earnings by the CEO and CFO.
The statements were proven falsely inflated after an internal audit and SEC investigation.
Plaintiffs attempted to prove scienter under Section 10(b) by showing motive and opportunity to
commit fraud and recklessness on defendants’ part. Plaintiffs failed to prove motive and
opportunity through insider stock sales because the complaint did not allege that any insiders
made sales during the class period. Plaintiffs also failed to articulate motive when the deal was
completed after the corporation admitted its earnings were overvalued. Plaintiffs contended
defendants should have been aware of facts belying the statements, such as defendants’ poor
accounting practices and improper shipments to a third-party vendor, and recklessly failed to act.
But facts amounting to an inference of scienter must be at least as compelling as any inference of
non-fraudulent and non-reckless intent. The optimistic view of the facts that lapses in disclosure
control and faulty accounting were unintended consequences of the company’s rapid growth was
more compelling. To establish liability under Section 20(a), a plaintiff must show: (1) a primary
violation by a controlled person; (2) control of the primary violator by the defendant; and (3) that
the controlled person was a culpable participant in the primary violation. Because plaintiffs
failed to show a primary violation, the court granted defendants’ motions to dismiss.
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IBEW Local 98 Pension Fund v. Cent. Vt. Pub. Serv. Corp., 2012 U.S. Dist. LEXIS 36784 (D.
Vt. Mar. 19, 2012).
Shareholders of a corporation brought a putative class action against the corporation and
individual members of the board. Plaintiffs’ claims arose out of the purchase of the corporation
by a third party. Plaintiffs specifically alleged, among other things, that all defendants violated
Section 14(a) of the Securities Exchange Act of 1934 and Section 20(a). Plaintiffs alleged all
defendants, individually and in concert, violated Section 14(a) by filing incomplete and
potentially misleading proxy statements. In dismissing the claim, the court held that the
plaintiffs adequately alleged material omissions from the proxy statement but did not further
allege that those omissions rendered other statements in the proxy statement false or misleading.
With regards to the Section 20(a) claim, the court dismissed the claim because a plaintiff alleging
a violation of Section 20(a) must show “a primary violation by the controlled person and control
of the primary violator by the targeted defendant . . . and show that the controlling person was in
some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.”
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). Thus, because there was no
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primary violation by the controlled person, the court held that there was no violation under
Section 20(a).
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012).
Plaintiff investors filed a class action suit against defendant corporation and its officers
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11,
12(a)(2), and 15 of the Securities Act of 1933. Plaintiffs alleged for all claims that defendants
made false and misleading statements regarding defendant corporation’s financial position.
Defendants filed motions to dismiss, claiming that plaintiffs insufficiently pled all claims. In
regard to the Section 20(a) Exchange Act claim, the court granted defendants’ motions to dismiss
because plaintiffs failed to state a primary violation under Section 10(b). As for the Section 15
Securities Act claim, the court granted defendants’ motions to dismiss because plaintiffs failed to
sufficiently plead their Sections 11 and 12(a)(2) claims. Because there were no primary
violations of the Exchange and Securities Acts, the plaintiffs’ control person liability claims were
dismissed.
SEC Police & Fire Prof’ls of Am. Ret. Fund v. Pfizer, Inc., 2012 U.S. Dist. LEXIS 16782 (D.N.J.
Feb. 10, 2012).
Investors who purchased or acquired shares of a company purchased by defendant
corporation filed a class action against defendants, including the acquiring corporation and the
company’s senior executives. During the class period, the company was engaged in the
discovery, development, manufacture, and distribution of pharmaceutical and health care
products. The individual defendants all served as senior executives at the company during the
class period.
Plaintiffs alleged that all of the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5. Plaintiffs further alleged that five individual senior
executives violated Section 20(a) and that two of these executives also violated Section 20A of
the Exchange Act. Defendants filed a motion to dismiss. The court held that plaintiffs failed to
allege a primary violation of the Exchange Act; therefore, their claims under Sections 20(a) and
20A must also be dismissed.
Rahman v. Kid Brands Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012).
Plaintiff, representing a putative class of investors who purchased the common stock of a
company between March 26, 2010 and August 16, 2011, filed a class action against the company
and its officers and directors, alleging securities fraud under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5. The court found that plaintiff’s complaint was
deficient in alleging violations of Section 10(b) and Rule 10b-5. Since the viability of plaintiffs’
Section 20(a) claim was contingent upon the success of plaintiff’s Section 10(b) claim, the court
dismissed plaintiff’s Section 20(a) claim.
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Pipefitters Local 636 Defined Benefit Plan v. Tekelec, 2012 Fed. Sec. L. Rep. (CCH) 96,788
(D.N.J. May 22, 2012).
Plaintiffs filed a class action against defendant corporation and its officers and directors,
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5. Plaintiffs claimed that defendants made materially false or misleading statements
that inflated the company’s stock price, and that after problems in the company’s
telecommunications market and disappointing financial results were revealed, the stock price
dropped significantly, causing losses to investors.
Defendants filed a motion to dismiss, which the court granted. With regard to the
Section 20(a) claim, the court held that because plaintiffs had not adequately alleged that
defendants violated Section 10(b) or Rule 10b-5, the plaintiffs’ claim under Section 20(a) should
also be dismissed.
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Monk v. Johnson & Johnson, 2012 U.S. Dist. LEXIS 71425 (D.N.J. May 22, 2012).
Plaintiff filed suit against a corporation and four of its officers and directors. Plaintiff
alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
against all five defendants. Plaintiff alleged a violation of Section 20(a) of the Exchange Act
against the four individual defendants. Defendants moved to dismiss all claims. The court
granted defendants’ motion to dismiss with respect to two of the individual defendants. The
court denied the corporation’s and the other two individual defendants’ motions to dismiss the
Section 10(b) and Rule 10b-5 claim. The court noted that in order to hold the individuals liable
under Section 20(a), plaintiff must prove: (1) that one person controlled another person; and
(2) that the controlled person was liable under the Act. The court held that because the plaintiff
adequately pled scienter against the two remaining individual defendants, the plaintiff
sufficiently alleged control person liability under Section 20(a).
Plaintiff moved for reconsideration of the two dismissed Section 20(a) claims. Plaintiff
argued that the law only required him to show: (1) an underlying violation by the company; and
(2) circumstances establishing defendants’ control over the company’s actions. Plaintiff argued
that the court wrongfully required culpable participation as a third element of the Section 20(a)
claim. The court held plaintiff had conflated culpable participation with scienter, and that only
scienter was required to survive a motion to dismiss. According to the court, culpable
participation must be proven at trial but that it is not required to survive a motion to dismiss. The
court also noted a split among district courts in the Third Circuit: some hold that culpable
participation must be shown at the pleading stage, while others hold that it is only necessary to
prove culpable participation at trial.
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Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions Inc.,
2012 Fed. Sec. L. Rep. (CCH) 96,955 (D.N.J. July 31, 2012).
This is a securities class action based on alleged misstatements and omissions in offering
documents filed by defendants with the Securities and Exchange Commission. The claims arose
out of the defendants’ sale of mortgage-backed securities certificates through public offering,
alleging that the defendants failed to disclose information regarding its lending practices. The
defendants moved to dismiss on grounds that the claims were time-barred, that the plaintiffs
lacked standing to bring claims based on securities they did not purchase, and that the plaintiffs
failed to state a claim under Section 11 of the Securities Act of 1933 as well as Section 12(a)(2).
Defendants also argued that the plaintiffs did not plead a cognizable economic loss, and that
there was no claim for control person liability under Section 15 of the Securities Act. The
defendants’ motion to dismiss was granted, because the plaintiffs did not carry their burden of
showing why they were not on inquiry notice of the basis for their claims, therefore their claim
was time-barred.
Stichting Pensioenfonds ABP v. Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 96,980 (D.N.J.
Aug. 1, 2012).
Plaintiff, an institutional investor, brought suit against a pharmaceutical company and a
number of its officers. Plaintiff alleged that defendant corporation had made material
misrepresentations and omissions regarding the cardiovascular safety aspects of one of its more
popular medicinal products. Plaintiff brought claims under Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934, as well as Section 20(a) control liability claims. Defendants
moved to dismiss plaintiff’s claims, with one defendant executive filing a separate motion to
dismiss. After determining that plaintiff had sufficiently alleged a violation of Rule 10b-5, the
court turned to the Section 20(a) control liability claims. The defendant executives who had filed
a joint motion to dismiss argued that plaintiff had failed to allege that they culpably participated
in the issuance of the purportedly fraudulent misrepresentations. The court agreed, holding that
the complaint lacked particularized allegations of fact demonstrating that these executives had
acted or failed to act with the intent to further the alleged fraud. The court therefore dismissed
the Section 20(a) control liability claims against these executives. The court then turned to the
separate motion to dismiss filed by the individual executive. The court noted that the individual
executive based his entire motion to dismiss on the mistaken belief that plaintiff had failed to
allege a primary violation of the securities laws. The court refused to grant the individual
executive’s separate motion to dismiss, because the court had already ruled that plaintiff had
sufficiently alleged a primary violation of the securities laws.
In re Merck & Co., 2012 U.S. Dist. LEXIS 123800 (D.N.J. Aug. 29, 2012).
Plaintiff investors brought suit against a pharmaceutical corporation and a number of its
executives. Plaintiffs alleged that defendants had made material misrepresentations and
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omissions regarding the cardiovascular safety profile of one of its more popular medicinal
products. Plaintiffs brought claims under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. Defendants moved to dismiss plaintiffs’ claims. The court held that several, but
not all, of the alleged misrepresentations were either mere puffery, forward-looking statements
protected by the Private Securities Litigation Reform Act’s safe harbor provisions, or statements
of past earnings. These kinds of misrepresentations, the court held, were not actionable and to
the extent that the Section 10(b) claims were based on these purported misrepresentations, they
were dismissed. The court then turned to the Section 20(a) control liability claims brought
against defendant executives. The court held that the complaint failed to sufficiently plead
control liability as to seven of the individual defendants. The court held that plaintiffs failed to
allege specific facts establishing a strong inference that these individuals deliberately or
recklessly acted to deceive investors about the cardiovascular safety profile of this popular drug.
For this reason, the court dismissed the Section 20(a) control liability claims as against those
seven executives.
In re Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,239 (D.N.J. Dec. 20, 2012).
Plaintiff, a foreign investor, brought suit against a corporation and a number of its
executives in connection with alleged material misrepresentations and omissions with respect to
the cardiovascular safety profile of one of the corporation’s most popular drugs. Although
similar claims had been raised against defendants in a putative class action, plaintiff had elected
to bring an independent action on behalf of itself. Plaintiff brought claims under Sections 10(b)
and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Defendants moved to dismiss
the claims. Defendants argued that the Section 10(b) claims were barred by a five-year statute of
repose. Defendants also argued that the Section 20(a) claim should be dismissed, given the lack
of a predicate violation of Section 10(b). The court first held that the Section 10(b) claims were
not barred by the statute of repose, holding that the timely filing of the class action complaint had
tolled the statute of repose applicable to plaintiff’s Section 10(b) claims. Given that the sole
basis for defendants’ motion to dismiss the Section 10(b) claim was erroneous, the court refused
to dismiss the Section 10(b) claim. The court then addressed the motion to dismiss the
Section 20(a) claims. The court noted that defendants’ sole argument for dismissing the
Section 20(a) claims was that there was no predicate violation of Section 10(b). Given that
defendants had failed to dismiss the Section 10(b) claims, the court refused to dismiss the
Section 20(a) claims.
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa. Jan. 6,
2012).
This case arose out of a Ponzi scheme. Plaintiffs alleged that various corporations, which
the perpetrator had an interest in, and individual directors were liable under Section 20(a) of the
Securities Exchange Act of 1934 for the perpetrator’s actions. To succeed on a claim under
Section 20(a), a plaintiff must show: (1) one person controlled another person or entity; (2) that
the controlled person or entity committed a primary violation of the securities laws; and (3) that
the defendant was a culpable participant in the fraud. Fox Int’l Relations v. Fiserv Sec., Inc.,
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490 F. Supp. 2d 590, 601 (E.D. Pa. 2007). Because plaintiffs relied solely on the inaction of the
other defendants to support their position, the court granted summary judgment for defendants on
the claim. It held that inaction alone cannot be a basis for Section 20(a) liability.
Underland v. Alter, 2012 Fed. Sec. L. Rep. (CCH) 96,939 (E.D. Pa. July 11, 2012).
This was a securities class action brought by purchasers of defendants’ notes. The court
previously dismissed certain claims and allowed the amended complaint to proceed. The
plaintiffs claimed that the officers and directors signed the Securities and Exchange Commission
Registration Statements that contained material misstatements and omissions to sell its notes.
The plaintiffs alleged violations of the Securities Act of 1933, Sections 11, 12(a)(2), and control
person liability under Section 15. The defendants’ motion to dismiss was denied, because the
plaintiffs adequately pled its claims under the Exchange Act.
In re Constellation Energy Group, Inc., 2012 U.S. Dist. LEXIS 44036 (D. Md. Mar. 28, 2012).
Plaintiffs filed a class action against a corporation, its officers, directors, and
underwriters. Plaintiffs alleged violations of Sections 11 and 12(a)(2) of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934 with respect to alleged
misrepresentations and omissions regarding the corporation’s exposure and collateral obligations
to Lehman Brothers’ bankruptcy. Plaintiffs sought to hold the individual defendants liable as
control persons under Section 15 of the Securities Act and Section 20(a) of the Exchange Act.
The first two amended complaints did not include sufficient factual allegations to support
scienter or severe recklessness under the Private Securities Litigation Reform Act of 1995
(“PSLRA”). Plaintiffs moved to file a third amended complaint, alleging that informal discovery
produced new evidence of scienter and materiality. Plaintiffs’ efforts to show scienter through
severe recklessness did not meet the PSLRA’s high bar of showing defendants were so reckless
as to be oblivious to readily apparent malfeasance. The third amended complaint contained new
evidence of prior knowledge of missing credit information, but it fell short of the particularity
and proof of severe recklessness needed to survive a motion to dismiss under the PSLRA.
Furthermore, because it was not Lehman Brothers that owed defendant money, plaintiffs failed
to allege material exposure to Lehman Brothers’ bankruptcy. Finally, plaintiffs contended new
evidence showed that defendants’ “puffery” regarding risk management systems was misleading,
but the court found the statements immaterial because they were vague enough that no
reasonable investor would rely on them. The third amended complaint was insufficient and the
court denied leave to amend.
In re Mun. Mortg. & Equity, LLC Sec. & Derivative Litig., 876 F. Supp. 2d 616 (D. Md. 2012).
Investors filed a complaint against the defendant corporation, which was one of the
country’s largest syndicators of low income housing tax credits, and six of its senior officers and
directors. Pursuant to reporting rules for consolidated financial statements, the defendant had
incurred substantial costs and had to restate those statements twice. This led to a reduction of
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dividend payments and delisting from the New York Stock Exchange. The plaintiffs alleged
violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934 and
Sections 11, 12, and 15 of the Securities Act of 1933. The plaintiffs alleged that defendants
omitted information and left investors with no way of knowing that the company faced the task
of consolidating the funds and also significantly understated the abilities of the funds.
Defendants filed motions to dismiss. The court found that although the alleged misstatements
concerned the core operations of the business, it did not necessarily mean that the officers knew
the statements were false when made. Additionally, the defendants made repeated disclosures
about the costs and difficulty of the restatement project tending to negate the inference of
scienter. Because the plaintiffs could not plead primary violations under Section 10(b) and
Rule 10b-5, their Section 20(a) control person liability claims failed. However, the court found
merit to plaintiffs’ alleged violations of Sections 11 and 12 of the Securities Act with regard to
the dividend reinvestment plan registration claim. Therefore, the Section 15 claim for control
person liability based on those primary violations survived the motion. The remaining
Sections 11 and 12 claims, based on the statements related to a secondary public offering were
dismissed, as were the Section 15 claims based on those claims.
Thorpe v. Ameritas Inv. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,021 (E.D.N.C. Sept. 19,
2012).
Plaintiffs trust and trustee brought suit against a registered representative, his employer—
a life insurance company—and his employer’s affiliates. The plaintiffs alleged that the
registered representative encouraged and induced plaintiffs to invest in a number of investment
vehicles, and he had repeatedly assured plaintiffs that they would receive a 5% annual return
with these investment vehicles. The investment vehicles’ performance fell short of these
guarantees. Plaintiffs alleged that the registered representative’s performance guarantees were
misrepresentations that violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of
1934. Plaintiffs also alleged that the employer and affiliates were liable as control persons under
Section 20(a) of the Exchange Act. Defendants moved to dismiss the claims, arguing that
plaintiffs had not sufficiently alleged scienter with respect to the registered representative. The
court held that plaintiffs had sufficiently alleged that defendants had a motive to induce plaintiffs
to invest in these particular securities and that defendants knew that plaintiffs were
unsophisticated investors. The court also held that plaintiffs had sufficiently alleged that the
registered representative had either intentionally or recklessly misrepresented the investments’
guaranteed returns. The court concluded that based on these factual allegations plaintiffs had
sufficiently alleged a violation of Section 10(b) and Rule 10b-5, and the court refused to dismiss
the claim. The court further held, albeit without a detailed explanation, that plaintiffs had
plausibly alleged control person liability under Section 20(a) as to the defendant’s employer and
its affiliates.
In re Massey Energy Co. Sec. Litig., 2012 U.S. Dist. LEXIS 42563 (S.D. W. Va. Mar. 28, 2012).
This civil action arose out of the alleged securities fraud committed by a corporation and
several of its officers and directors. The plaintiffs, on behalf of the putative class, alleged that
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the price of the corporation’s stock was artificially inflated because the corporation and several
of its senior executives and directors misled the market about its safety and compliance record
and its disregard for safety regulatory compliance. Plaintiffs asserted a claim under
Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. In their Section 20(a)
claim, plaintiffs contended that the officer defendants by virtue of their positions, stock
ownership, and actions were controlling persons of the corporation who had the power to, and
did, directly and indirectly, exercise control over the corporation. The officer’s alleged control
included controlling content and dissemination of statements that the plaintiffs alleged were false
and misleading. To state a prima facie case under Section 20(a), a plaintiff must allege: (1) a
predicate violation of Section 10(b); and (2) control by the defendant over the primary violator.
In re Mut. Funds Inv. Litig., 566 F.3d 111, 129–30 (9th Cir. 2009). Because the plaintiffs
sufficiently alleged a primary violation of Section 10(b), and the defendants did not attack the
Section 20(a) claim individually, the court held that the plaintiffs’ Section 20(a) claim survived
the defendant’s motions to dismiss.
Rabbani v. DryShips Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,077 (E.D. Miss. Nov. 6, 2012).
In this class action against the defendant company and several of its senior managers and
its underwriter, on behalf of purchasers of its common stock, the plaintiffs claimed that the
defendants violated Sections 10(a) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, for knowingly or recklessly making false and misleading statements or
omissions about a planned spinoff of a subsidiary of the defendant company, as well as the
defendant company’s ability to comply with existing loan covenants, and its general financial
condition. Further, a sub-class of plaintiffs alleged that the defendants violated Sections 11, 12,
and 15 of the Securities Act of 1933 by making false and misleading statements and omissions in
connection with a securities offering. The defendants moved to dismiss, because the statements
were not actionable, protected by a bespeaks caution doctrine, and fell within the safe harbor
provisions of the Private Securities Litigation Reform Act (“PSLRA”). The defendants also
failed to show that the plaintiffs did not need the heightened pleading requirements of the
PSLRA. The court dismissed the action because the plaintiffs did not state a claim for securities
fraud against the defendants. They further failed to sufficiently allege an actionable
misrepresentation or omission for scienter.
In re BP P.L.C., 843 F. Supp. 2d 712 (S.D. Tex. 2012).
This case also addresses a group of plaintiffs within the securities class action filed again
BP regarding the oil spill in the Gulf of Mexico. The “New York and Ohio Plaintiffs” filed this
consolidated class action complaint against three corporate defendants, and ten individual
defendants. The New York and Ohio Plaintiffs were successful in alleging that two individual
defendants had violated Section 10(b) of the Securities Exchange Act of 1934. Because the
plaintiffs adequately alleged a violation of Section 10(b), the court considered their Section 20(a)
claim against the remaining defendants. Under the control person doctrine, even corporate
officers who did not personally make a representation or play a significant role in the preparation
of a misrepresentation may still be liable under Section 20(a). See In re Enron Corp. Sec.
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Derivative & ERISA Litig., 235 F. Supp. 2d 549, 594–96 (S.D. Tex. 2002). A plaintiff must
plead facts indicating that defendants not directly involved in the making of actionable
misrepresentations nonetheless had the requisite power to directly or indirectly control or
influence corporate policy. G.A. Thompson & Co., 636 F.2d 945, 958 (5th Cir. 1981). The court
reasoned that such a showing could be made by pointing to day-to-day control of a company’s
operations, knowledge of the underlying primary violation by the controlled person, or facts
showing the defendant had the requisite power to influence corporate policies. In this case, the
court dismissed the Section 20(a) claim because the plaintiffs pointed to no specific knowledge
or facts demonstrating such control.
In re BP P.L.C., 852 F. Supp. 2d 767 (S.D. Tex. 2012).
Plaintiffs were members of a consolidated securities class action against BP P.L.C.
following the explosion of the Deep Water Horizon rig, which caused the loss of life and the
greatest oil spill in the nation’s history. The plaintiffs filed a consolidated class action complaint
alleging securities fraud violations against two corporate defendants, and against nine individual
defendants. The plaintiffs specifically alleged that the company violated Section 10(b) of the
Securities Exchange Act of 1934 and Section 20(a) of the Exchange Act by providing investors
with materially false and misleading representations and omissions regarding the safety
procedures of the company. Under Section 20(a) of the Exchange Act, “every person who,
directly or indirectly, controls any person liable under any provision of this chapter or any rule or
regulation thereunder shall also be liable jointly and severally with and to the same extent as
much controlled person to any person to whom such controlled person is liable. . . .” 15 U.S.C.
§ 78t(a). The court dismissed plaintiffs’ Section 20(a) claim because plaintiffs failed to establish
a primary violation under Section 10(b).
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012).
The Securities and Exchange Commission brought this enforcement action against two
officers of an international corporation that provided offshore drilling services and equipment.
The enforcement action arose out of offshore drilling activity in Nigerian waters. To maintain
operations in Nigerian waters, Nigerian law required offshore drilling rig owners to either pay
import duties or obtain a temporary import permit. The SEC alleged that defendants had
authorized a customs agent to bribe Nigerian officials in order to obtain the false documents
necessary for the acquisition of a temporary import permit. Based on this allegation, the SEC
charged one of defendant corporation’s top executives and one of defendant corporation’s local
managers with violations of the Foreign Corrupt Practices Act and a number of securities laws.
Given the defendant executive’s purported control over both defendant corporation and the
defendant local manager, the SEC also sought to hold the defendant executive liable as a control
person under Section 20(a) of the Securities Exchange Act of 1934. Defendant executive moved
to dismiss the complaint. After determining that the SEC had sufficiently alleged that defendant
corporation and local manager had committed primary violations of the securities laws, the court
addressed defendant executive’s motion to dismiss the Section 20(a) control liability claims. The
court held that the complaint sufficiently alleged that defendant executive knew about and
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facilitated the violations of the Foreign Corrupt Practices Act, and that he had the power to
control defendant corporation and defendant local manager and, in fact, exercised that control.
The court also held that defendant executive at all relevant times had the power to reveal what he
knew of defendant corporation and defendant local manager’s actions to defendant corporation’s
audit committee, thereby facilitating an internal investigation that likely would have put an end
to the violations. When these allegations were considered in full, the court held, they suggested
that defendant executive could have prevented both the Foreign Corrupt Practices Act violations
and the securities laws violations. The court held that the complaint had adequately alleged
control liability as to defendant executive, and therefore refused to dismiss the Section 20(a)
claims.
In re Almost Family Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,737 (W.D. Ky. Feb. 9,
2012).
Plaintiffs’ class action alleged that a health care corporation and its senior executives
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit
fraudulent, material misrepresentations in relation to the sale or purchase of securities. Plaintiffs
alleged that defendants’ financial reports to the Securities and Exchange Commission
misrepresented that defendants were abiding by securities laws and regulations. Plaintiffs also
alleged that statements issued by senior executives following publication of news of
investigations into defendants were material misrepresentations. Plaintiffs did not establish that
defendants’ financial reports constituted material misrepresentations because plaintiffs did not
adequately allege that the financial reports were inaccurate regarding the corporation’s financial
condition. Defendants’ certifications of SEC filings asserted nothing more than beliefs that their
financial reports were accurate and that their actions did not violate securities laws. These
certifications and the CEO’s comments defending the legality of the corporation’s practices
against allegations in the news constituted “soft” information which could not form the basis of a
Section 10(b) and Rule 10b-5 claim without showing knowledge of unlawful conduct on the part
of corporate officers. Furthermore, because plaintiffs failed to identify any disclosure of fraud
on behalf of defendants, plaintiffs did not establish loss causation. Plaintiffs also alleged that the
CEO and vice president were liable under Section 20(a) of the Exchange Act, which imposes
liability on control persons. To state a claim under Section 20(a), a complaint must adequately
allege that underlying primary liability exists. Because plaintiffs failed to adequately allege a
primary violation, their control person liability claim also failed.
City of Pontiac Gen. Emples. Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D. Mich. 2012).
Plaintiffs, on behalf of themselves and a class of purchasers of common stock, filed suit
against a medical technology company and two of its officers. Plaintiffs claimed that defendants
committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. They alleged that the defendant corporation achieved earnings growth by cutting
corners on quality and regulatory compliance spending which exposed the corporation to
unnecessary risk and hid millions of dollars in regulatory compliance costs. The defendants
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moved to dismiss. The court granted the motion, holding that because the plaintiffs had failed to
plead a primary violation of Section 10(b), there could be no Section 20(a) violation.
L.A. Mun. Police Emp. Ret. Sys. v. Cooper Indus., 2012 Fed. Sec. L. Rep. (CCH) 97,054 (N.D.
Ohio Oct. 16, 2012).
This is a shareholder derivative action relating to the proposed sale of one of the
defendant’s company to the other defendant corporation. The plaintiffs alleged that the
defendants violation Irish corporate law and provisions of the Securities Exchange Act of 1934.
The plaintiffs alleged that the defendants did not implement a process to obtain a maximum price
for the shareholders, that the consideration paid was unfair to the shareholders, and that the
proxy was misleading. The plaintiffs brought claims under Section 14(a) for alleged
misrepresentations in a proxy statement and Section 20(a) of the Exchange Act for control
person liability. The plaintiffs alleged that the individual defendants acted as control persons by
virtue of their positions as officers and/or directors, and participation in and/or awareness of the
company’s operations and/or intimate knowledge of the false statements contained in the proxy,
and that they had the power to influence and control and did in fact influence and control,
directly and indirectly, the decision-making of the company, including the allegedly false and
misleading statements. The court considered the defendants’ motion to dismiss and found that
the plaintiffs failed to state a claim for an alleged violation of Section 14. The court granted the
defendants’ motion as to the control person liabilities claims for failure to plead a primary
violation.
Garden City Emples. Ret. Sys. v. Anixter Int’l Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,780 (N.D.
Ill. Mar. 29, 2012).
Plaintiffs brought a putative class action on behalf of all persons who acquired the
defendant corporation’s stock between January 2008 and October 2008. Count I of the second
amended complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5. Count II alleged violations of Section 20(a) of the Exchange Act, which
provides that any person who controls any person liable for a securities violation under the
Exchange Act shall also be jointly and severally liable to the same extent. To state a claim under
Section 20(a), a plaintiff must first adequately plead a primary violation of securities laws.
Plaintiffs alleged that defendants engaged in a scheme to deceive and defraud investors of the
true value of the corporation’s stock. Plaintiffs claimed that defendants misled investors about
negative economic trends affecting defendants’ business in statements that defendants made
during the class period. The court held that plaintiffs failed to specify any statements that were
false or misleading and the reasons why the statements were false or misleading as required by
the Private Securities Litigation Reform Act (“PSLRA”). Because plaintiffs also failed to plead
any facts that created a strong inference of scienter as required in a Section 10(b) action, the
court dismissed Count I. Because plaintiffs failed to plead a primary violation of securities laws,
Count II alleging control person liability was dismissed as well.
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Commodities Futures Trading Comm’n v. Sentinel Mgmt. Grp., 2012 U.S. Dist. LEXIS 46198
(N.D. Ill. Mar. 30, 2012).
The Commodities Futures Trading Commission (“CFTC”) alleged violations of the
Commodities Exchange Act (“CEA”) against defendants, an investment advisor group registered
as a Futures Commission Merchant (“FCM”), its CEO, and its vice president. The CFTC alleged
that defendants violated CEA Section 4b(a)(2) by misappropriating investor assets, but because
defendants never solicited or accepted orders for the purchase or sale of futures contracts, the
CFTC could not establish that the alleged fraud was in connection with futures contracts. The
CFTC alleged that defendants failed to segregate investor funds in violation of CEA
Section 4d(a)(2), which applies to FCMs engaged in soliciting or accepting orders for futures
contracts and accepting money to margin, guarantee, or secure resulting trades or contracts.
Because the investment advisor group was not engaged in futures trading, it was not an FCM as
defined by the CEA. The CFTC’s allegations of misappropriating customer funds under
Section 4d(b) failed because defendants did not receive any customer funds as described under
Section 4d(a)(2). The CFTC alleged that defendants, including the CEO as a control person,
filed false Form 1-FRs regarding defendants’ financial condition. To succeed on its claim
against the CEO as a control person under CEA Section 13(b), the CFTC had to establish: (1) a
primary violation of the CEA; (2) that the CEO exercised general control over defendants’
operations; and (3) that the CEO acted in bad faith or knowingly induced the violation. The
evidence showed that defendants did not file false Form 1-FRs and the CFTC could not show
that the CEO acted knowingly, recklessly, or in bad faith. Because the CFTC was unable to
show primary violations of the CEA, defendants’ motion for summary judgment was granted.
Brasher v. Broadwind Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,811 (N.D. Ill. Apr. 19,
2012).
Plaintiffs brought a class action against an energy product manufacturer, several officers
and directors, and the corporation’s primary shareholders for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs alleged that defendants failed to
disclose the impact of demand cuts by the corporation’s largest customers and overstated the
value of the corporation’s good will and intangible assets through fraudulent delay of impairment
testing. Plaintiffs also alleged control person liability under Section 20(a) against primary
shareholders that owned 47.7% of the corporation’s common stock. In order to state a claim
under Section 20(a), plaintiffs must allege three things: (1) a primary securities violation; (2) the
alleged control person exercised general control over the operations of the corporation; and
(3) the alleged control person possessed the power to control the transaction or activity giving
rise to the primary violation. The complaint failed to allege that the primary shareholders
possessed the power or ability to control the content of the corporation’s Securities and
Exchange Commission disclosures or determine the timing of impairment testing of good will
and other intangible assets. Instead, plaintiffs relied on the fact that the primary shareholders
owned 47.7% of the corporation’s stock and general statements contained in the Form 10-K that
they influenced the corporation’s affairs. These facts failed to state with particularity how the
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primary shareholders were in a position to control the conduct that constituted primary securities
violations. The claim against the primary shareholder defendants was dismissed with prejudice.
SEC v. Black, 2012 U.S. Dist. LEXIS 145587 (N.D. Ill. Oct. 9, 2012).
In this case the court considered the plaintiff Securities and Exchange Commission’s
motion for entry of final judgment, injunctive relief, and civil penalties. Previously, an amount
for disgorgement of $3,819,689.50 against the defendants, to be paid to the victim of the fraud,
was agreed upon by the parties, thus the remaining issue for consideration was the imposition of
the civil penalty. The cause of action arose out of the defendants’ participation in a wide-ranging
fraud. The court granted injunctive relief, preventing the defendant and its agents as control
persons under Section 20(a) of the Securities Exchange Act of 1934 from violating Section 13(a)
of the Exchange Act and other sections of the Exchange Act, by failing to file quarterly reports
with the SEC, and any information required to make those reports not misleading, and preventing
the defendant and its agents as control persons under Section 20(a) of the Exchange Act from
violating Section 13(b) of the Exchange Act for failure to make and keep books and records
reflecting the transactions and disposition of the assets of the issuer. The court declined to issue
a third-tier penalty because under the circumstances of the case, where ill-gotten gains were
forfeited or recovered and the fraudulent conduct was criminally punished and fined, civil
sanctions in the form of disgorgement plus payment of compound interest was found to be
sufficient. Therefore, the defendant was ordered to disgorge $3,819,689.50, plus prejudgment
interest of $2,321,220.00.
Ross v. Career Educ. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,068 (N.D. Ill. Oct. 30, 2012).
In a class action, plaintiff investors brought suit against a corporation, its CEO, and its
CFO. Defendant corporation operated for-profit professional schools and colleges. Plaintiffs
alleged that prior to the class period, defendant corporation was having problems with job
placement statistic improprieties. More specifically, defendant corporation faced accusations of
falsifying job reports. In response, defendant corporation hired defendant CEO, announcing that
he would return defendant corporation to compliance. Four years later, internal investigations
revealed that defendant corporation was still engaging in improper job placement reporting
practices. After the release of these investigations, defendant corporation’s stock price
plummeted. Plaintiffs alleged violations of Rule 10b-5 of the Securities Exchange Act of 1934
and control liability under Section 20(a). Defendants moved to dismiss the complaint.
Defendants argued that plaintiffs had failed to sufficiently allege any misleading statements,
scienter, and loss causation. The court disagreed, holding that plaintiffs had sufficiently pled a
Rule 10b-5 claim. The court then turned to the Section 20(a) claims against the CEO and CFO.
Plaintiffs alleged that the CEO was a control person by virtue of his position with defendant
corporation, his ability to control the daily activities of defendant corporation, and his role in
crafting the public disclosures made by defendant corporation. The court held that this was a
sufficient allegation to support a Section 20(a) claim and denied defendants’ motion to dismiss
the Section 20(a) claim as against defendant CEO. However, the court held that plaintiffs failed
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to sufficiently allege scienter with respect to defendant CFO, and dismissed the Section 20(a)
claims against defendant CFO.
IBEW Local 98 Pension Fund v. Best Buy Co., 2012 Fed. Sec. L. Rep. (CCH) 96,779 (D. Minn.
Mar. 20, 2012).
The plaintiffs filed a securities class action on behalf of all persons who purchased or
otherwise acquired the common stock of defendant corporation during the class period. The
defendants were the corporation and three officers and directors. The plaintiffs argued that
defendants made false and misleading statements concerning the company’s financial status,
revenue, and earnings prospects for fiscal year 2011 and devised a scheme to deceive investors
and the market about the company’s true financial condition. The complaint alleged violations
of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934. The defendants
moved to dismiss. With respect to the officers and directors, the court noted that plaintiffs failed
to allege facts sufficient to demonstrate any individual defendants’ acts of fraud. Furthermore,
plaintiffs failed to allege facts that showed any individual defendant possessed scienter.
Regardless of those deficiencies, because the court had denied the plaintiffs’ claims under
Section 10(b) and Rule 10b-5, the plaintiffs’ Section 20(a) claim necessarily failed.
Okla. Firefighters Pension & Ret. Sys. v. Capella Educ. Co., 873 F. Supp. 2d 1070 (D. Minn.
2012).
The plaintiffs alleged the defendant and three officers violated Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934, as they allegedly made materially false and
misleading statements and omissions concerning its enrollment practices, incentive
compensation system, and graduated loan repayment rates. The complaint also claimed the
financial statements did not comply with the Securities and Exchange Commission and GAAP
rules, and that the defendant failed to maintain proper controls over its financial reporting. The
plaintiffs also alleged violations of Section 20(a) of the Exchange Act against the individual
defendants as control persons. The defendants moved to dismiss, arguing that the complaint did
not satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act.
The court found that the plaintiffs failed to make out securities fraud claims, because the
plaintiffs could not show a material omission since they could not demonstrate that had
defendants’ actions been timely disclosed, investors would have made different decisions.
Because plaintiffs failed to state a primary violation of the Exchange Act, the control person
claim was also dismissed. The defendants’ motion to dismiss was granted with prejudice.
Rochester Laborers Pension Fund v. Monsanto Co., 2012 Fed. Sec. L. Rep. (CCH) 96,960
(E.D. Mo. Aug. 1, 2012).
In a class action, plaintiff investors filed suit against a corporation and several of its
managers, alleging violations of Sections 10(b) and 20(a), and Rule 10b-5 of the Securities
Exchange Act of 1934. Plaintiffs alleged that defendant corporation had made material
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misrepresentations about its business, a number of its products, and its earning projections and
financial figures for four of its fiscal years. Defendants moved to dismiss the claims. The court
held that the purported misrepresentations were not actionable because they were protected by
the Private Securities Litigation Reform Act’s safe harbor provision and “bespeaks caution”
doctrine, and that the allegations regarding these statements also failed to meet the heightened
pleading requirements for fraud. The court therefore dismissed these claims. Turning next to the
Section 20(a) claims, the court held that a Section 20(a) claim cannot be sustained without an
adequately pled primary violation of the securities laws. Therefore, the court also dismissed the
Section 20(a) control liability claim.
In re QA3 Fin. Corp., 466 B.R. 142 (Bankr. D. Neb. Jan. 18, 2012).
Claims were filed with FINRA against a broker-dealer and individuals associated with
the broker-dealer for alleged violations of securities and other laws. Shortly thereafter, the
broker-dealer filed for bankruptcy. The debtor broker-dealer filed a motion requesting the court
to extend the automatic stay of proceedings to certain non-debtor individuals, including two
individuals who held management positions with the debtor, who the debtor identified as control
persons. The debtor asserted that it owed a duty of indemnification to the individuals for liability
incurred as a result of being control persons of the debtor. (The individuals and the brokerdealer
had an agreement to this effect.)
In support of its motion to extend the stay to non-debtors, the debtors submitted
statements of claims before FINRA containing allegations against the individuals as control
persons of the broker-dealer. The court granted the debtors’ motion to extend the stay to control
person claims, finding that the debtor and the non-debtor individuals had such an identity of
interest that any judgment against the non-debtors would in effect be a judgment or finding
against the debtor.
An investor with claims pending in arbitration before FINRA filed a motion for
clarification of the court’s order regarding the claims. He argued that his claims were not control
person claims, but instead were based on other forms of liability. The individual forwarded the
court’s order to FINRA to proceed with the arbitration on the claims not subject to the stay order.
The debtor contacted FINRA and expressed disagreement with the investor’s characterization of
the claims and the scope of the court’s order. The court clarified that the FINRA arbitrations
could proceed on any and all claims that did not constitute control person claims under federal
securities law. Emphasizing its limited jurisdiction, the court also left to FINRA the task of
determining what constituted a control person claim.
In re Allstate Life Ins. Co. Litig., 2012 U.S. Dist. LEXIS 72900 (D. Ariz. May 24, 2012).
Plaintiff investors sued defendants alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs allege that defendants made
omissions in their disclosures pertaining to the purchase, redemption, financing, debt servicing,
and security of revenue bonds. The district court held that because the plaintiffs stated a valid
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Rule 10b-5 claim against two of the defendants, and the defendants owned a 50% share in one of
the alleged violators of Rule 10b-5, the plaintiffs adequately pled control person liability against
the two defendants.
In re Apollo Grp. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,924 (D. Ariz. June 22,
2012).
Plaintiffs, purchasers of stock issued by a private education provider, filed a class action
against the private education provider and its officers. The court previously dismissed, with
leave to amend, the plaintiffs’ complaint for failure to state a claim for securities fraud. The
plaintiffs’ amended complaint alleged false and misleading statements in violation of the
Securities Exchange Act of 1934 Section 10(b), Rule 10b-5, and Section 20(a). The plaintiffs
specifically alleged that defendants engaged in unethical marketing and recruiting practices and
made statements that were designed to mislead investors or omit material information from the
investors regarding unethical marketing and recruiting practices. The court found that the
statements were inherently subjective and that the plaintiffs failed to prove scienter because they
could not show that the defendants knew about the misleading marketing practices. The control
person claim under Section 20(a) failed because the plaintiffs could not show primary violations
under Section 10(b) and Rule 10b-5 of the Exchange Act.
Red River Res. v. Marine Sys., 2012 U.S. Dist. LEXIS 90959 (D. Ariz. June 29, 2012).
The plaintiffs alleged that their investments in defendants’ company were fraudulently
induced and that the defendant corporation and its officers, including the CEO, concealed
information, made false statements, and breached the investment agreement. The plaintiffs
brought claims under Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange
Act of 1934, as well as claims under Arizona Revised Statutes Sections 44-1991, 44-2003(A),
statutory control person liability under Section 44-1999(B), and consumer fraud under
Section 44-1521. The defendants moved to dismiss on grounds that there was no personal
jurisdiction over the individual defendants and that the plaintiffs failed to state a claim. The
plaintiffs alleged that by virtue of their positions and power to control public statements, the
individual defendants had power to control the defendant company. The court rejected this
argument because plaintiffs failed to allege that the individual defendants exercised actual power
or control over any controlled person. The fact that a person is a CEO or a high ranking officer
does not create a presumption that he or she is a controlling person. Rather, the court looked at
the participation in day-to-day affairs of the corporation and the power to control the corporate
actions. Therefore, the Section 20(a) claims were dismissed. The Arizona securities law claims
for deceptive schemes or conduct failed, but the claims for misstatements of material facts were
adequately pled. Finally, the Arizona control person claims failed because they were conclusory
and insufficient to state a cause of action for the same reason as the Section 20(a) claims.
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Anderson v. McGrath, 2012 Fed. Sec. L. Rep. (CCH) 97,071 (D. Ariz. Nov. 1, 2012).
Plaintiffs, a group of investors in the defendant company, sued the former officers of the
company along with individuals who sold securities for the company, and five corporate entities.
The plaintiffs alleged violations of Section 10(b), Rule 10b-5, and Sections 14(e) and 20(a) of
the Securities Exchange Act of 1934 as well as breach of fiduciary duties. The plaintiffs alleged
that the defendants failed to disclose material information and sold securities after the defendant
company began contemplating bankruptcy. The plaintiffs alleged certain members of the board
breached their fiduciary duties based on their approval of the new securities offerings despite
knowing of the company’s financial condition. The defendants filed motions to dismiss. The
motions as to the Rule 10b-5 claims against the board member defendants were granted, and the
motions of the officer defendants were granted in part. The Section 20(a) claims failed because
the underlying Section 10(b) claims failed. Finally, the Section 14(e) claims, related to
statements concerning tender offers, were dismissed because they were not adequately pled. The
state law claims were dismissed for lack of personal jurisdiction and lack of standing.
Smilovits v. First Solar, Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,230 (D. Ariz. Dec. 17, 2012).
In a class action, plaintiff investors brought suit against a solar-panel manufacturing
corporation and a number of its officers and directors. Plaintiffs alleged violations of
Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Plaintiffs’
claims were based on allegations that defendants had issued materially false or misleading
statements regarding their products’ cost-per-watt metric and that they had concealed the
existence and severity of known product defects. Defendants moved to dismiss the claims. First,
the court refused to dismiss the Section 10(b) claims, holding that plaintiffs’ allegations
sufficiently pled material misstatements, scienter, and loss causation. The court then addressed
the individual defendants’ motion to dismiss the Section 20(a) control liability claims. The
individual defendants based their motion on their belief that plaintiffs had failed to sufficiently
allege a predicate violation of Section 10(b), and that plaintiffs had failed to demonstrate that the
individual defendants had actual control over the alleged material misstatements not directly
attributed to them. The court noted, however, that plaintiffs had sufficiently pled a primary
violation of Section 10(b). The court also noted that plaintiffs had sufficiently alleged the
individual defendants’ involvement in the decision-making process that generated the
purportedly fraudulent statements. The court concluded that plaintiffs’ allegations were
sufficient to survive a motion to dismiss, and the court therefore refused to dismiss the
Section 20(a) claims.
In re Am. Apparel, Inc. S’holders Litig., 855 F. Supp. 2d 1043 (C.D. Cal. 2012).
Plaintiff investors filed a putative class action suit against defendant corporation and its
officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and
Rule 10b-5. Plaintiffs alleged that false and misleading statements were made by defendants.
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Defendants filed motions to dismiss for failure to state a claim. The district court granted
defendants’ motions and dismissed plaintiffs’ Section 20(a) claim because plaintiff failed to
adequately plead a primary securities violation under Section 10(b) and Rule 10b-5.
Karam v. Corinthian Colleges, Inc., 2012 U.S. Dist. LEXIS 44153 (C.D. Cal. Jan. 30, 2012).
Plaintiff investors filed a putative class action against defendant corporation and its
officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Defendant was
a for-profit education company. Plaintiffs purchased defendant’s securities, and alleged that
during the class period, defendant engaged in a practice of misleading applicants and enrolling
and maintaining as many students as possible without regard to their abilities or academic
progress, in order to maximize its federal funding. Plaintiffs alleged that individual defendants
were aware of the pervasive problems, at defendant company, and therefore they knew that
public statements were materially false and misleading. The court held that because plaintiffs
failed to state a claim under Section 10(b), no primary securities violation was committed.
Because there was no primary securities violation, plaintiffs’ Section 20(a) control person claim
was dismissed.
Scott v. ZST Digital Networks, Inc., 2012 U.S. Dist. LEXIS 19392 (C.D. Cal. Feb. 14, 2012).
Plaintiff investors sued defendant corporation and its officers for violations of
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Plaintiffs alleged that defendants submitted materially false
reports to the Securities and Exchange Commission. Specifically, plaintiffs alleged that
defendant filed different registration statements with the SEC and the Chinese State
Administration of Industry and Commerce. In regard to the Section 15 control person liability
claim, the court granted the defendants’ motions to dismiss because plaintiffs failed to
sufficiently plead a primary securities violation under Section 11 of the Securities Act of 1933.
As for plaintiffs’ control person liability claim, the court dismissed the Section 20(a) claim
against one defendant because plaintiffs failed to adequately plead a primary securities violation
under Section 10(b) of the Exchange Act. However, with respect to a second defendant, his
motion to dismiss was denied because plaintiffs sufficiently pled a primary securities violation
under Section 10(b). This is because the plaintiffs sufficiently pled loss causation and reliance.
Dexia Holdings, Inc. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71374 (C.D. Cal.
Feb. 17, 2012).
Plaintiff investors sued defendant corporation and its subsidiaries and officers for
violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Plaintiffs alleged that
misrepresentations were made in regard to the quality of residential mortgage-backed securities
which plaintiffs purchased. With respect to plaintiffs’ Section 15 control person liability claims,
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the court held that plaintiffs alleged sufficient facts to support a Section 15 claim by listing in the
complaint the defendants’ names, titles, and offering documents that the defendants signed.
Because these facts made it plausible that the defendants were in a position to exercise control
over the fund and its disclosures, the Section 15 claim survived the defendants’ motions to
dismiss.
In re China Educ. Alliance, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,804 (C.D. Cal. Apr. 6,
2012).
Plaintiff filed a putative class action suit against defendants for violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Plaintiff
alleged misrepresentations were made on financial statements filed with the SEC by the
defendant corporation’s audit committee. The issue before the court was whether plaintiff
sufficiently pled that defendants had actual power or control over the corporation so that
plaintiff’s Section 20(a) claim could survive defendants’ motions to dismiss. The court denied
one defendant’s motion to dismiss since plaintiff supported the assertion that the defendant
participated in or controlled the day-to-day operations of the corporation by alleging that
defendant wrote and signed forms on behalf of the corporation’s audit committee. The court
denied a second individual defendant’s motion to dismiss because plaintiff alleged that this
defendant was the chairperson of the corporation’s audit committee—which was sufficient to
establish a prima facie case of control person liability. As for a third individual defendant, the
court granted the dismissal of plaintiff’s Section 20(a) claim since plaintiff merely included a
letter that listed the defendant’s qualifications to serve as a director of the corporation.
Katz v. China Century Dragon Media, Inc., 2012 U.S. Dist. LEXIS 65748 (C.D. Cal. May 7,
2012).
Plaintiff shareholders sued defendant corporation and its officers under Sections 11, 12,
and 15 of the Securities Act of 1933. Plaintiffs alleged false statements were made in various
public filings with the Securities and Exchange Commission in connection with defendants’
public offering. Specifically, plaintiffs sought to impose associate liability on defendant’s
underwriters and auditors. The court denied the defendant’s motion to dismiss, because
plaintiffs sufficiently pled that the SEC filings were false. The court denied defendants’ motions
to dismiss the Section 15 claim, because plaintiffs sufficiently pled that defendants were control
persons. Plaintiffs alleged the individual defendant was the CEO and sole owner of the
corporation who controlled its management and policies, was involved in the structuring and
completion of the public offering, had day-to-day control over the corporation, and designed the
particular reverse merger process by which the corporation was made public. Because plaintiffs
sufficiently pled facts to support the Section 15 control person claim, defendants’ motions to
dismiss were denied.
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In re A-Power Energy Generation Sys. Sec. Litig., 2012 U.S. Dist. LEXIS 79417 (C.D. Cal.
May 31, 2012).
Plaintiff investors filed a class action suit against defendants, a foreign holding
corporation and its officers, for violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Rule 10b-5. Plaintiffs alleged misrepresentations were made by defendants
about a security which plaintiffs purchased. The district court dismissed plaintiffs’ Section 20(a)
control person liability claims. The court reasoned that plaintiffs merely made conclusory
assertions that defendants were control persons, based on defendant officers’ roles as
independent directors of the corporation. Because there was no showing of defendants’ actual
participation in or influence over the corporation’s operation, the Section 20(a) claim was
dismissed.
Mass. Mut. Life Ins. Co. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 121702 (C.D. Cal.
Aug. 17, 2012).
Plaintiff insurance company, which had purchased a number of mortgage-backed
securities, filed suit against the seller of these securities, its underwriters, and a number of
individuals for violations of Section 410(a) of the Massachusetts Uniform Securities Act
(“MUSA”). The complaint included a Section 410(a) control liability claim against an
officer/director of a defendant underwriter’s parent company. Defendant officer/director moved
to dismiss the claim, arguing that he had no formal role at the underwriting subsidiary and that
plaintiff had failed to sufficiently allege that he had actual control over the underwriting
subsidiary. The court first held that plaintiff had sufficiently alleged that the underwriting
subsidiary had committed primary violations of MUSA. In ruling on defendant officer/director’s
motion to dismiss, the court noted several allegations in the complaint. First, the court noted that
defendant officer/director was allegedly a “top officer and director” at the subsidiary’s parent
company. Second, the court noted that defendant officer/director allegedly exercised substantial
influence on the parent company which, in turn, closely supervised the subsidiary’s underwriting
of mortgage-backed securities. Third, the court noted that the underwriting subsidiary’s parent
company operated its subsidiaries as a “collective enterprise” and that defendant officer/director
was an influential participant in the underwriting process for mortgage-backed securities. The
court held that these allegations were sufficient to plead control on the part of defendant
officer/director, and the court therefore denied his motion to dismiss the claims.
In re China Intelligent Lighting & Elecs. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,008 (C.D. Cal.
Sept. 5, 2012).
Plaintiff investors filed suit against a foreign corporation and a number of its officers,
directors, underwriters, and auditors, alleging violations of Sections 11, 12, and 15 of the
Securities Act of 1933. In connection with a public offering in the United States, defendant
foreign corporation made a number of registration filings with the Securities and Exchange
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Commission reflecting defendant foreign corporation’s financial conditions. In that same year,
defendant foreign corporation filed audited statements with regulatory agencies in its home
country. The statements filed in its home country were much less optimistic about the
corporation’s financial condition. Plaintiffs alleged that the statements filed in the United States
were, given the discrepancies, false and misleading. An officer from one of the underwriting
defendants moved to dismiss the Section 15 control liability claims asserted against him.
Plaintiffs pointed to several allegations in support of their argument that this officer controlled
the defendant underwriter. First, plaintiffs pointed to the fact that he was the underwriter’s CEO
and founder, the sole owner of the underwriter’s parent company, and that the officer had
exercised control over the underwriter’s banking operations at the time of the purported
misrepresentations. Plaintiffs also alleged that the underwriter itself had represented to
American regulatory authorities that this officer controlled and managed the policies of the
underwriter and that this officer had been a major shareholder of defendant foreign corporation at
the time of the purported misrepresentations. The court concluded that these allegations were
sufficient to plead control person liability under Section 15 as against the officer. The court
therefore denied his motion to dismiss those claims.
Embraceable You Designs, Inc. v. First Fid. Grp. Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,217
(C.D. Cal. Dec. 3, 2012).
Plaintiff, a corporation that manufactured clothing, brought suit against a private equity
fund, the fund’s managing director, a company affiliated with the fund, the affiliate company’s
manager, a corporation, and the corporation’s president. Plaintiff’s owner had put plaintiff and
plaintiff’s assets up for sale. Defendant president, in tandem with defendant manager, offered to
pay for plaintiff’s assets with two bonds purportedly issued by defendant fund. Plaintiff alleged
that the president and the manager had misrepresented and concealed material facts with regard
to the bonds’ character and validity. In reliance on these misrepresentations and concealments,
plaintiff’s owner closed the deal selling plaintiff’s assets to the president. Subsequently,
plaintiff’s owner discovered that the bonds were worthless and constituted inadequate
compensation for plaintiff’s assets. Plaintiff brought claims under Sections 10(b) and 20(a) and
Rule 10b-5 of the Securities Exchange Act of 1934. The court, on prior motion, had dismissed
all defendants except for the president and the manager. As against these two defendants,
plaintiff moved for summary judgment. Defendants failed to oppose the motion. The court first
granted the motion for summary judgment with respect to the Section 10(b) and Rule 10b-5
claims, holding that plaintiff had sufficiently proved all necessary elements of those claims. The
court then turned to the Section 20(a) control liability claim against the manager. Plaintiff
alleged that the manager controlled the president and had directed the president to perpetrate the
fraud on plaintiff. Plaintiff’s argument was based solely on the manager’s managerial position.
The court acknowledged the manager’s managerial position, but held that managerial position
alone is not dispositive as to an individual’s liability under Section 20(a). The facts of the case,
the court concluded, did not create an appearance of control—it was more accurate to say that
the manager and the president collaborated in perpetrating the fraud on plaintiff. Because
plaintiff’s contentions with regard to the Section 20(a) claim were conclusory and unsupported
by factual allegations, the court refused to grant summary judgment with respect to that claim.
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Alberts v. Razor Audio, Inc., 2012 U.S. Dist. LEXIS 20386 (E.D. Cal. Feb. 16, 2012).
A defendant filed a cross-complaint against cross-defendants, a law firm and three
individuals for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5. Cross-complainant alleged that an individual cross-defendant was the CFO of
several corporations and that he used his control over the corporations to “siphon off” investment
money that should have been used for research and development and allegedly disregarded
corporate governance rules such as holding board meetings regularly.
Cross-defendant filed a motion to dismiss. Though the court dismissed the underlying
violations alleged in the cross-complaint, in dismissing the Section 20(a) claim against the
individual cross-defendant, the court focused on the substantive issue of control. The court held
that alleging that a defendant held an executive position within a company was not sufficient to
adequately allege control person liability. The court noted that the controlling person must have
acted in bad faith and directly or indirectly induced the conduct constituting a violation or a
cause of action.
MVP Asset Mgmt. (USA) LLC v. Vestbirk, 2012 Fed. Sec. L. Rep. (CCH) 96,938 (E.D. Cal.
July 11, 2012).
Plaintiffs alleged violations of the Securities Exchange Act of 1934 under Section 10(b)
and control person liability under Section 20(a). The defendants moved to dismiss, arguing that
Section 10(b) of the Exchange Act did not have an extraterritorial reach, thus the plaintiffs’
claims were barred because they were based on offshore transactions, and the Section 20(a)
claim fell within the underlying Section 10(b) claim. The court stated that the focus of the
Exchange Act was not upon the place where the deception originated, rather upon purchasers or
sales of the securities in the United States. The court held that the defendants’ claims regarding
the transactions were insufficient to establish the existence of domestic transactions, thus the
dismissal was warranted. Since the plaintiffs could not properly plead primary violations of the
Exchange Act, the Section 20(a) claims were also dismissed. The court denied the motion to
dismiss on the plaintiffs’ remaining claims of collusion for purposes of asserting federal
jurisdiction.
Wozniak v. Align Tech., 850 F. Supp. 2d 1029 (N.D. Cal. 2012).
Plaintiff investors filed suit against defendant corporation under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Plaintiffs alleged that defendant disseminated materially
false and misleading statements and concealed material adverse facts regarding the corporation’s
growth prospects, business, and product. Defendant filed a motion to dismiss, claiming that
plaintiff had not adequately pled a primary securities violation. The court granted defendant’s
motion to dismiss because plaintiff failed to sufficiently plead a primary securities violation
which is required in order to establish Section 20(a) liability.
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Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 Fed. Sec. L. Rep. (CCH)
96,757 (N.D. Cal. Mar. 2, 2012).
Plaintiff investors filed a class action suit against defendant corporation and its officers
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that
defendants made a number of false and misleading statements concerning defendant
corporation’s financial forecasts and pricing strategy. The court dismissed plaintiffs’
Section 20(a) control person liability claim because plaintiffs failed to sufficiently plead an
underlying securities violation under Section 10(b) of the Exchange Act.
Police Ret. Sys. v. Intuitive Surgical, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,832 (N.D. Cal.
May 22, 2012).
Plaintiff investors filed a class action suit against defendant corporation and its officers
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that 31
false and misleading statements were made in the corporation’s Form 10-K annual report or
during “analyst calls.” The court granted defendants’ motions to dismiss the Section 20(a)
control person liability claim because plaintiffs failed to plead a violation of a primary securities
claim under Section 10(b).
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,945
(N.D. Cal. July 23, 2012).
This securities fraud class action was brought by purchasers of defendants’ common
stock, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5. The plaintiffs also alleged violations of Section 20(a) of the Exchange Act. The
plaintiffs alleged that defendants made false and misleading statements regarding future growth
prospects and insufficient disclosures of the defendants’ adoption of new accounting practices.
Specifically, the plaintiffs alleged that defendant withheld information that it lacked salespeople
to sell its products, and that it withheld information regarding slumping sales at major customers,
compatibility issues with its products, bugs in its system, pricing pressures from competitors, and
below target sales at a customer. The court considered the defendants’ motion to dismiss. The
court found that the alleged misstatements were either forward-looking or “mere puffery” and
thus there were not actionable under the Private Securities Litigation Reform Act safe harbor
provision. The plaintiffs also failed to show that the statements were false and misleading when
made. Because the plaintiffs failed to plead a primary violation, the control person claims also
failed. The defendants’ motion to dismiss was therefore granted.
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Bonato v. Yahoo Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,968 (N.D. Cal. Aug. 10, 2012).
In a putative class action, plaintiff investors filed suit against a corporation and a number
of its executives, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934. Plaintiffs alleged that defendants issued materially false and misleading statements
concerning defendant corporation’s investment in a foreign company. Defendants moved to
dismiss the claims. The court first addressed the Section 10(b) primary violation claims. The
court held that plaintiffs had not sufficiently alleged that defendants’ statements were either false
or otherwise misleading, or that the statements gave rise to a duty to correct or update. The
court, therefore, granted the motion to dismiss the Section 10(b) claims. The court also
dismissed the Section 20(a) control liability claims, holding that a Section 20(a) claim cannot be
sustained where there has not been a sufficiently pled primary violation of the securities laws.
Curry v. Hansen Med. Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,972 (N.D. Cal. Aug. 10, 2012).
Plaintiff shareholders filed suit against a corporation and a number of its former
executives, alleging that defendants had encouraged and induced them to buy defendant
corporation’s stock at artificially inflated prices by intentionally misrepresenting defendant
corporation’s sales performance and its revenue recognition practices. Plaintiffs brought claims
under Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. Notably,
plaintiffs also brought a Section 20(a) control liability claim against defendant corporation itself.
Defendants moved to dismiss the claims. The court, after determining that plaintiffs had
adequately pled primary violations of the securities laws under Rule 10b-5, turned to the issue of
control liability under Section 20(a). The court first addressed the individual defendants’ motion
to dismiss the control liability claims. The court held that plaintiffs had sufficiently alleged that
each individual defendant exercised actual control over defendant corporation by virtue of their
supervisory involvement in defendant corporation and their involvement in the every day
operations of defendant corporation. The court, therefore, denied the individual movants’
motion to dismiss. The court then turned to defendant corporation’s motion to dismiss the
control liability claims. The court granted defendant corporation’s motion, noting that a
corporation is a fictitious entity and cannot, under the law, control those who act on its behalf.
Cho v. UCBH Holdings, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,996 (N.D. Cal. Aug. 29, 2012).
Plaintiff investors filed suit against a corporation and a number of its directors and
officers for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934,
and also brought control liability claims under Section 20(a) of the Exchange Act. Plaintiffs’
claims were based on alleged material misrepresentations concerning defendant corporation’s
allowance and provision for loan loss and its financial reporting controls. Defendants moved to
dismiss the claims. After determining that plaintiffs had sufficiently alleged a primary violation
of securities laws under Section 10(b), the court addressed the control liability claims under
Section 20(a). The court addressed these claims with respect to each individual defendant in
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turn. The court held that plaintiffs’ allegations of control over defendant corporation and over
the alleged fraud were sufficient with respect to all individual defendants except for one officer
and one director. With respect to the one officer, the court noted that plaintiffs had based their
control liability claims solely on his position with defendant corporation and that plaintiffs had
failed to plead any facts demonstrating his role in the fraud. With respect to the one director, the
court noted that plaintiffs had failed to allege that the director’s control over defendant
corporation was contemporaneous with the alleged fraud. Therefore, the court denied the motion
to dismiss the Section 20(a) claims pertaining to all individual defendants except for the one
officer and one director mentioned above.
In re Diamond Foods Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,216 (N.D. Cal.
Nov. 30, 2012).
This putative class action arose from allegations of false and misleading statements.
Plaintiffs were investors who purchased securities of the defendant corporation. Plaintiffs
brought claims against the defendant corporation, as well as individual board members and
officers and the outside auditor, alleging that the defendants deliberately understated commodity
costs, and improperly accounted for payments made to suppliers to increase apparent profits and
maintain higher share prices. The court considered the defendants’ motion to dismiss. The
outside auditor’s motion was granted, but the remaining defendants’ motions were denied.
Plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934 were sufficiently
pled because the complaint raised a strong inference of scienter. As to the individual defendants,
plaintiffs successfully pled scienter by alleging that one defendant was directly involved in
making accounting decisions, and that the other had actual knowledge of the business at issue.
Finally, the plaintiffs’ control person claims under Section 20(a) of the Exchange Act were
adequately pled because the individual defendants were actively involved in the day-to-day
operations of the defendant corporation, and were senior executives or board members.
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 Fed. Sec. L. Rep. (CCH)
97,220 (N.D. Cal. Dec. 5, 2012).
In a putative class action, plaintiff pension funds brought suit against a corporation, its
CEO, and its CFO. Plaintiffs alleged that defendant corporation’s stock price was artificially
inflated due to defendants’ materially false and misleading statements regarding defendant
corporation’s pricing strategy and sales force integration endeavor. Plaintiffs further alleged that
subsequent statements by defendants revealed the fraud, and consequently the corporation’s
stock price plummeted. Plaintiffs brought claims under Sections 10(b), 20(a), and Rule 10b-5 of
the Securities Exchange Act of 1934. Defendants moved to dismiss the complaint. The court
held that plaintiffs had failed to sufficiently allege falsity and scienter with respect to the
statements regarding sales force integration endeavors. Instead, the allegations merely
demonstrated that defendant corporation had been initially optimistic about the future success of
the sales force integration effort, but that the endeavors did not go as smoothly as initially hoped.
The court similarly held that plaintiffs failed to sufficiently allege falsity and loss causation with
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espect to the statements regarding pricing strategy. For these reasons, the court granted
dismissal of plaintiffs’ Section 10(b) claims. Given that plaintiffs had failed to sufficiently
allege a predicate violation of Section 10(b), the court also dismissed the Section 20(a) control
liability claims.
Mallen v. Alpha Tech Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012).
Plaintiff investors filed a class action suit against defendant corporation and its officers
for violations of Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Plaintiffs alleged false statements were made and
material information was omitted by defendants in order to inflate the corporation’s price so it
could profit financially. The defendants filed motions to dismiss claiming that plaintiffs could
not sufficiently plead primary securities violations under Sections 11 of the Securities Act and
Section 10(b) of the Exchange Act. The court granted defendants’ motions to dismiss plaintiffs’
control person liability claims because plaintiffs failed to plead a primary violation of the
Securities Act or the Exchange Act.
In re MGM Mirage Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,787 (D. Nev. Mar. 26, 2012).
Plaintiffs, investors in the securities of defendants between August 2, 2007 and March 5,
2009, filed a class action against defendants, a corporation and its officers and directors, alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged
that some of the officers and directors made materially false and misleading statements about the
company’s liquidity and revenues, causing them to purchase stock for artificially inflated prices
while corporate insiders sold close to $90 million in personally-held stock. After the truth of the
company’s financial situation became known, the stock price significantly dropped, causing
losses to investors.
Defendants filed a motion to dismiss, claiming that plaintiffs failed to allege a false or
misleading statement, the required strong inference of scienter, and loss causation. Since no
primary violation was properly pled, defendants moved to dismiss plaintiffs’ Section 20(a) claim.
The court held that plaintiffs failed to adequately plead an underlying claim, and accordingly, it
dismissed plaintiffs’ Section 20(a) claim.
Baroi v. Platinum Condo. Dev., LLC v. Marcus Hotels, Inc., 2012 U.S. Dist. LEXIS 95724 (D.
Nev. July 10, 2012).
Plaintiffs purchased condominiums in defendants’ housing development. Defendants
were a condominium development company, a management company, and a hotel company.
The plaintiffs alleged violations of the Nevada Securities (Uniform Act) laws, including Nevada
control person liability claims, under Nevada Revised Statutes Sections 90.460, 90.660, and
90.660(4). There was a dispute in this case over whether selling condominium units with rental
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agreements constituted securities. Plaintiffs moved for summary judgment on this and other
issues. The court granted the motion, holding that an interest in a common interest community,
combined with a rental agreement, was a security. The control person claim was also decided in
the plaintiffs’ favor on summary judgment based on the fact that one defendant owned over 10%
of the various corporate defendants, and eventually owned 100% of the other defendants. Thus,
the defendant was in a position to influence and make important decisions on the others’ behalf;
thus, he was a control person under NRS Section 90.660(4).
Elliot v. China Green Agrics., Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,076 (D. Nev. Nov. 1,
2012).
Defendant, a United States corporation headquartered in China, completed an alternative
public offering to become a public company in the United States. In connection with its
secondary offering, the defendant filed prospectuses and registration statements with the
Securities and Exchange Commission. These statements were underwritten by the defendant
underwriter. The plaintiff, purchasers of the securities, filed a class action under Sections 10(b),
15, and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933 against the defendant company as well as individual officers, and against
the underwriter defendant. The defendants filed a motion to dismiss for failure to state a claim
upon which relief could be granted. The Section 11 claims were dismissed because the lead
plaintiffs failed to allege facts showing that the particular shares could be traced back to the
public offering at issue. Similarly, the Section 15 control person liability claims were dismissed
because the plaintiffs failed to plead a primary violation under Section 11. The Section 10(b)
claims survived dismissal because the plaintiffs sufficiently pled scienter and material
representation. Finally, the Section 20(a) claims survived dismissal because the plaintiffs
sufficiently alleged primary violations under Section 10(b), and because the plaintiffs sufficiently
alleged control as to the top directors and officers of the defendant company, because they signed
the registration statements at issue and made statements during public conference calls and
presentations. Moreover, by their position as directors and officers, the individual defendants
had the power to issue false statements. Therefore, the motion to dismiss as to that claim was
denied.
King Cnty. Wash. v. Merrill Lynch & Co., 2012 U.S. Dist. LEXIS 87734 (W.D. Wash. June 25,
2012).
Plaintiff King County, Washington, brought a claim against its broker-dealer and
registered representative for losses which arose out of a purchase of asset-backed commercial
paper, the vast majority of which consisted of subprime mortgage-backed securities. The
plaintiff alleged breach of contract and violations of Washington State Securities Act
Sections 21.20.430(3) for control person liability, and 21.20.010(2) and (3), including alleged
misstatements or omissions in connection with the offer, sale, or purchase of securities, fraud or
deceit. As to the control person claims, plaintiff argued that several entities related to the
corporate defendant controlled other entities directly responsible for the alleged violations.
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Defendants filed a motion to dismiss. The court granted the motion with respect to the breach of
contract claim, but denied the motion for control person liability because plaintiff’s cause of
action for primary violations of the Washington State Securities Act, upon which the control
person claims were based, survived in whole or in part.
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).
Plaintiff investors filed a class action against defendant municipal bond funds, fund
managers, and trustees under Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs
alleged that defendants misrepresented or failed to disclose the nature and degree of risk
associated with extremely risky investment strategies. Defendants filed motions to dismiss. In
denying the defendants’ motion to dismiss plaintiffs’ Section 15 control person liability claims,
the court reasoned that the plaintiffs successfully pled primary violations of the Securities Act.
Additionally, the court held the plaintiffs sufficiently demonstrated that each of the moving
defendants exerted sufficient control by alleging: (1) the defendant officers oversaw the
preparation and content of the fund offering statements; and (2) the defendant trustees had at
least indirect control over the subject of the primary violation since they had authority to sign or
not sign the registration statements at issue.
Wolfe v. AspenBio Pharma, Inc., 2012 U.S. Dist. LEXIS 130490 (D. Colo. Sept. 13, 2012).
In a putative class action, plaintiff investors brought suit against a corporation and several
of its officers alleging that the corporation had issued materially false and misleading statements
about its progress in developing a new product. Plaintiffs claimed that because of the purported
misrepresentations, they bought stock in defendant corporation at artificially high prices. When
pessimistic reports surfaced regarding the product’s development, defendant corporation’s stock
price plummeted. Plaintiffs’ complaint alleged violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934 and control person liability under Section 20(a) of the
Exchange Act. Defendants moved to dismiss the complaint. The court held that plaintiffs had
failed to sufficiently allege that the statements at issue were false or misleading. The court
therefore held that plaintiffs had failed to plead Section 10(b) and Rule 10b-5 claims. Since a
Section 20(a) claim is actionable only when there is a primary violation of a securities law, the
court also dismissed the Section 20(a) claim.
Touchstone Grp., LLC v. Rink, 2012 Fed. Sec. L. Rep. (CCH) 97,241 (D. Colo. Dec. 21, 2012).
In a prior litigation, the court had entered summary judgment against a corporation for its
perpetration of a Ponzi scheme. Under the prior judgment, defendant corporation was found
liable for violations of various securities laws. In this case, a class action, plaintiff investors
brought suit against a number of the corporation’s officers and affiliates for their alleged
participation in the scheme. Plaintiffs alleged that defendant officers had made materially false
statements to investors, had otherwise participated in the fraud, and had received fraudulently
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transferred assets from the corporation. Under Section 20(a) of the Securities Exchange Act of
1934, plaintiffs brought control liability claims against the CFO, the headhunter who had placed
defendant CFO with the Ponzi-scheme-perpetrating corporation, the general counsel, and the
controller. Defendant officers moved to dismiss the control liability claims, arguing that
plaintiffs had failed to sufficiently allege that they each had control over the corporation. The
court held that the CFO and the general counsel were both chief executives who had either
personally prepared or ultimately controlled the actionable misstatements issued by the
corporation. For this reason, the court refused to dismiss the Section 20(a) claims as against the
CFO and the general counsel. The court also held that plaintiffs had sufficiently stated a claim
for vicarious liability as against the headhunter based on defendant CFO’s alleged violation of
Section 20(a). Lastly, the court held that plaintiffs failed to sufficiently allege a control liability
claim against the controller. The court noted that even if the controller had assisted in the
preparation of the actionable misstatements, he did so at the direction of the CFO. While the
facts sufficiently demonstrated that the CFO and the general counsel wielded the power to guide
the management and policies of the Ponzi-scheme-perpetrating corporation, the facts did not
sufficiently demonstrate that this power also rested in the hands of the controller. For this
reason, the court dismissed the Section 20(a) claims as against the controller.
Prissert v. Emcore Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,047 (D.N.M. Sept. 28, 2012).
Plaintiff investors brought suit against a corporation and its current and former executives
alleging violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities Exchange Act of
1934. Plaintiffs alleged that defendant corporation’s announcements regarding contracts with
particular customers were materially false and misleading. Plaintiffs further argued that these
alleged misrepresentations created an artificially inflated stock price, which deflated thereafter
when two independent reports painted a bleak picture of defendant corporation’s future.
Defendants moved to dismiss. The court first addressed plaintiffs’ Section 10(b) and Rule 10b-5
claims. The court first determined that plaintiffs’ highly generalized allegations were
insufficient to show that defendants had the necessary scienter. The court also determined that
plaintiffs failed to plead loss causation. Plaintiffs’ loss causation argument hinged on the fact
that publication of the pessimistic independent reports coincided with defendant corporation’s
deflating stock price. The court noted, however, that the independent reports made no mention
of the alleged misrepresentations. The complaint, therefore, failed to allege that the
misrepresentations were disclosed to the public, a key element of loss causation. The court
granted defendants’ motion to dismiss the Section 10(b) and Rule 10b-5 claims. Since plaintiffs
failed to plead a primary violation of the securities laws, the court also dismissed the
Section 20(a) control liability claims.
In re Thornburg Mortg. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,218 (D.N.M.
Nov. 26, 2012).
The court in this case considered the plaintiffs’ motion for final approval of proposed
settlement, plan of allocation, and certification of class for settlement purposes, as well as
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attorneys’ fees. The underlying complaint involved four public offerings that the plaintiffs
alleged were made pursuant to false or misleading offering documents. Plaintiffs were
purchasers of defendant’s stock during the class period at allegedly inflated prices. Defendant
was a publicly-traded residential mortgage lender, and individual defendants included board
members and officers, as well as underwriter defendants. The plaintiffs alleged claims under
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) under the
Securities Exchange Act of 1934, and Rule 10b-5. The defendants had moved to dismiss and the
court had granted in part, denied in part, and reserved judgment on that motion, ruling that the
Rule 10b-5 claim survived only as to one defendant, and that the plaintiffs successfully alleged a
claim under Section 20(a) of the Exchange Act against that defendant because he was the chief
executive officer and chief operating officer of the defendant company at the time the statements
at issue were made. As to the other individual defendants, the court found that the plaintiffs
failed to allege sufficient facts for control person liability, as the misleading acts or omissions did
not occur at a time when those individual defendants were in control of the defendant company.
Finally, the court found that the former chief financial officer when the statements at issue were
made could be liable as a control person on the face of the complaint. Plaintiffs subsequently
dismissed the defendant mortgage lender and its current and former officers and other affiliated
parties, and filed a stipulation and agreement of settlement.
Cather v. Isom, 2012 U.S. Dist. LEXIS 1687 (D. Utah Jan. 5, 2012).
Investor brought this action against two individual defendants alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiff had invested
$60,000 with one investor, who then passed the money along to another investor. The first
investor made misrepresentations to the plaintiff regarding the investments, which led to plaintiff
filing this suit. Plaintiff pursued two Section 10(b) theories against the second investor:
(1) primary liability; and (2) control person liability, whereby a secondary actor can be liable for
the misrepresentations of a primary actor if the secondary controlled the primary’s actions. To
establish control person liability, the plaintiff must show (1) a primary violation of Section 10(b);
and (2) control over the primary violator by the alleged controlling person. Maher v. Durango
Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). The court granted the second investor’s
motion for summary judgment because it found there had been no showing that the first investor
committed a primary violation.
Kinnett v. Strayer Educ., Inc., 2012 U.S. Dist. LEXIS 37737 (M.D. Fla. Jan. 3, 2012).
Investors filed a class action suit against defendant corporation under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Plaintiffs alleged defendant made
false and misleading statements and failed to disclose adverse facts about the corporation’s
growth, which deceived the investing public and artificially inflated the price of defendant’s
stock. Defendant filed a motion to dismiss claiming that plaintiffs failed to adequately plead
their claims. The court granted defendant’s motion because plaintiffs failed to adequately plead
violations of Section 10(b) of the Exchange Act and Rule 10b-5. Because there was no primary
securities violation, the Section 20(a) control person liability claim was dismissed.
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McGee v. S-Bay Dev. LLC, 2012 Fed. Sec. L. Rep (CCH) 96,751 (M.D. Fla. Mar. 8, 2012).
Investors filed suit against defendant property owner and developer for fraud and
misrepresentations under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and
Rule 10b-5. Defendants filed motions to dismiss the complaint, including the Section 20(a)
control person liability claim, which was granted by the court because plaintiffs did not allege
sufficient facts for their Section 10(b) or Rule 10b-5 claims. Because there was no primary
securities violation, the plaintiffs’ Section 20(a) control person claim was dismissed.
City of St. Clair Shores Gen. Emples. Ret. Sys. v. Lender Processing Servs., Inc., 2012 Fed. Sec.
L. Rep (CCH) 96,790 (M.D. Fla. Mar. 30, 2012).
Investors filed a class action suit against defendant corporation and its officers under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that
defendants engaged in a fraudulent scheme, causing plaintiffs to suffer millions of dollars in
losses. Defendants filed motions to dismiss, claiming that plaintiffs’ complaint failed to
adequately plead violations of the Exchange Act. The court granted the motions to dismiss
because plaintiffs failed to adequately plead a Section 10(b) violation. Because there was no
primary violation of the Exchange Act, the plaintiffs’ claim under Section 20(a) was also
dismissed.
Meyer v. St. Joe Co., 2012 U.S. Dist. LEXIS 3861 (N.D. Fla. Jan. 23, 2012).
Investors filed a purported class action suit against defendant corporation and its officers
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5.
Plaintiffs alleged that defendants intentionally deceived investors about the value of certain
properties. Defendants filed motions to dismiss, claiming that plaintiffs failed to sufficiently
plead an underlying securities violation. The court granted the motions to dismiss because
plaintiffs’ claims were insufficient since they failed to allege that defendants acted with the
requisite scienter. Because there was no primary securities violation, the plaintiffs’ control
person liability claim under Section 20(a) was dismissed.
In re Jiangbo Pharm., Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,958 (S.D. Fla. Aug. 1,
2012).
In a putative class action, plaintiffs alleged that defendant corporation’s press releases
overstated cash balances and failed to disclose related-party transactions, regulatory
investigations, and other material information. Plaintiffs alleged that defendant corporation
made these misrepresentations in order to sustain an artificially high market price. Plaintiffs
brought claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as
well as control liability claims under Section 20(a) of the Exchange Act, against defendant
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corporation, its CFO, and others. Defendant CFO moved to dismiss the claims against him. The
court held that plaintiffs failed to sufficiently allege a strong inference of scienter on the part of
defendant CFO. The court also held that plaintiffs failed to sufficiently allege falsity with
respect to a number of the purported misrepresentations. Based on these failings in the
allegations, the court dismissed the Section 10(b) claims as against defendant CFO. The court
then proceeded to dismiss the Section 20(a) claims, noting plaintiffs’ failure to establish a
primary violation of the securities laws.
N. Atl. Sec., LLC v. Me. Office of Sec., 2012 Me. Super. LEXIS 111 (Me. Super. July 10, 2012).
In this case the defendant sought review of a decision of the securities administrator of
the Maine Office of Securities, concluding that the defendant committed unlawful, dishonest, or
unethical practices. The defendant is a Maine broker-dealer and investment advisor. The events
in question arose in dealings with a client, the mother-in-law of a registered representative of the
defendant. The registered representative borrowed money from the mother-in-law, and did not
repay most of it, made a loan to his son, and asked to borrow money from the mother-in-law’s
loan account because of alleged financial difficulties in part due to margin calls on his personal
brokerage account. The state alleged violations of the Maine Uniform Securities Act, 32 M.R.S.
§ 16412, which prohibits a registered representative from borrowing money from a client. The
defendant also argued that the court had abused its discretion because the alleged victim of the
conduct was a supportive relative. The administrator found that the individual defendants were
control persons under Section 16412, who may be disciplined as well as those directly engaging
in the prohibited conduct. The court therefore affirmed the administrator’s findings.
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Jan. 26, 2012).
Investors sued defendants, hedge funds, their general partner, layers of the partners’
parents, and their auditor, for various violations of securities laws. Plaintiffs specifically alleged,
among other things, primary violations of state securities laws against the general partner and
“controlling person” liability against one of the partner’s parent corporations. The parent
corporation argued that it could not be held liable for any state securities law violation to the
extent it is based strictly on controlling person liability. The parties agreed that because each
state’s control person provision is modeled after Section 20(a) of the Securities Exchange Act of
1934, federal decisional law interpreting Section 20(a) offered persuasive guidance as to what is
required for control person liability. The agreed upon standard for liability was stated in
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 85 (1st Cir. 2002). In that case the First Circuit stated
that to meet the control element, the alleged controlling person must not only have the general
power to control the company, but must also actually exercise control over the company. Id.
The court noted that although the question of control is not ordinarily resolved summarily at the
pleading stage, the plaintiffs’ allegations fell well short of showing that the parent corporation
exerted actual control over the general partner. The plaintiffs only relied on the parent
corporation’s status as a parent corporation, the listing of the parent corporation as a control
person on the general partner’s Securities and Exchange Commission form, and some overlap of
directors between the parent corporations and the general partner. The court held that these facts
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only showed some potential to control the general partner, which was not sufficient. The court
stated that in order to satisfy the standard of liability the plaintiffs had to show facts from which
it might reasonably be inferred that the parent corporation actively participated in the decisionmaking
processes of the general partner. See Aldridge, 284 F.3d at 85. In granting the
defendants’ motion to dismiss this claim, the court held that plaintiffs failed to state any of these
facts.
3. Aiding & Abetting
H.3
Berman v. Morgan Keegan & Co., 455 F. App’x 92 (2d Cir. 2012).
Appellants, investors, sued appellee, a broker-dealer, for aiding and abetting a
corporation’s fraud, conversion, and breach of fiduciary duty. The appellants alleged that the
corporation, under the guise of a tax deferral transaction, took the owners’ securities and
purported to “loan” them 90% of the securities value. Instead, the firm allegedly sold the
securities and conveyed 90% of the proceeds to the owners in the form of a sham loan, with the
result that the owners owed back taxes and penalties. The district court dismissed the appellants’
complaint because it failed to plead fraud with sufficient particularity under Rule 9(b) of the
Federal Rules of Civil Procedure. Specifically, the complaint failed to allege a strong inference
that the aider and abettor had actual knowledge of the primary offender’s wrongdoing. On
appeal, appellants made the following four arguments: (1) that the presence of a document in the
broker-dealer’s account files describing how the corporation marketed the 90% loan program
establishes that broker-dealer knew that corporation’s customers’ collateral was supposed to be
hedged and not sold; (2) that the broker-dealer was obligated by “Know Your Customer Rules”
to closely monitor the corporation’s operations; thus one can infer that it did so; (3) that the
broker-dealer assisted the corporation’s sale of appellants’ collateral before the corporation was
authorized to do so under the Master Loan Financing and Security Agreements, and therefore
must have known of the corporation’s fraud; and (4) that one can infer from broker-dealer’s
entering into a lease agreement with the corporation that broker-dealer was aware of the
corporation’s fraud. The Second Circuit was not persuaded by any of the appellants’ arguments,
stating that, at most, the arguments created an inference that the broker-dealer should have
known of the fraud. The Second Circuit further affirmed the district court’s dismissal of the
complaint for failure to allege that the broker-dealer provided substantial assistance to the
corporation’s fraudulent scheme. The Second Circuit stated that “[s]ubstantial assistance exists
where: (1) a defendant affirmatively assist, helps conceal, or by virtue of failing to act when
required to so enables the fraud to proceed; and (2) the actions of the aider/abettor proximately
caused the harm on which the primary liability is predicated.” UniCredito Italiano SpA v.
JPMorgan Chase Bank, 288 F. Supp. 2d 485, 502 (S.D.N.Y. 2003). Appellants’ complaint only
alleged that the broker-dealer executed securities transactions on the corporation’s behalf, which
the Second Circuit does not consider substantial assistance. Therefore, the court affirmed the
district court’s dismissal of the appellants’ claims for failure to state a claim under Rule 9(b).
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Meridian Horizon Fund, LP v. KPMG, 2012 U.S. App. LEXIS 140431 (2d Cir. July 10, 2012).
Plaintiff-appellant, an investor who invested in funds that fed into the fraudulent Madoff
investment scheme, appealed from a judgment dismissing its federal securities law claims and
common law claims for fraud, negligence, breach of fiduciary duty, and aiding and abetting the
fiduciary breaches, against appellee fund auditors. The Second Circuit affirmed the dismissal. A
plaintiff alleging a claim for aiding and abetting a breach of fiduciary duty must show: (1) a
breach by a fiduciary of obligations to another; (2) that the defendant knowingly induced or
participated in the breach; and (3) that plaintiff suffered damages as a result of the breach.
Kaufman v. Cohen, 307 A.D.2d 113 (App. Div. 1st Dept. 2003). Although a plaintiff is not
required to allege that the aider and abettor had an intent to harm, there must be an allegation that
said defendant had actual knowledge of the breach of duty. Id. To satisfy the knowing
participation element, a plaintiff must show that the defendant provided substantial assistance to
the primary violator, which means more than just performing routine business services of the
alleged fraudster. Id. The plaintiff’s allegation did not meet this demanding standard. The court
reasoned that the risks present in the investment were not only plainly disclosed to the plaintiff
and the broker-dealers offering the materials, but also to the investors and auditors of Madoff’s
feeder funds, and the SEC, none of whom discovered the Madoff scheme. As such, the appellate
court agreed with the District Court’s opinion that “the more compelling inference as to why
Madoff’s fraud went undetected for two decades was his proficiency in covering up his scheme
and deceiving the SEC and other financial professionals.” Meridian Horizon Fund, LP v.
Tremont Group Holdings, Inc., 747 F. Supp. 2d 406, 413 (S.D.N.Y. 2010). As such, the
plaintiffs failed to plead sufficient factual matter to show aiding and abetting of the alleged
breaches of fiduciary duty.
SEC v. Apuzzo, 2012 U.S. App. LEXIS 16510 (2d Cir. Aug. 8, 2012).
The Securities and Exchange Commission alleged that defendant aided and abetted
securities laws violations in his role in a fraudulent accounting scheme. In order for defendant to
be liable as an aider and abettor in a civil enforcement action, the SEC must prove: (1) the
existence of a securities law violation by the primary (as opposed to the aiding and abetting)
party; (2) knowledge of this violation on the part of the aider and abettor; and (3) substantial
assistance of the aider and abettor in achievement of the primary violation. SEC v. Dibella,
587 F.3d 553, 566 (2d Cir. 2009). The district court granted defendant’s motion to dismiss.
Specifically, the district court held that the substantial assistance component required that the
aider and abettor proximately cause the harm on which the primary violation was predicated, and
the complaint did not plausibly allege such proximate causation. The appellate court reversed
the decision of the district court, and held that to satisfy the “substantial assistance” component
of aiding and abetting, the SEC must show that the defendant “in some sort associated himself
with the venture, that he participated in it as in something that he wished to bring about, and that
he sought by his action to make it succeed.” U.S. v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938).
Here, the defendant was the chief financial officer of a manufacturing corporation and entered
into a series of fraudulent “sale-lease back” transactions. These transactions were designed to
allow a third-party lessor to “recognize revenue prematurely and to inflate the profit generated
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from third-party lessor’s sales.” This practice was prohibited under the generally accepted
accounting principles (“GAAP”). Under the fraudulent sale-lease back transactions, the
defendant executed various agreements that disguised the third-party lessor’s continuing risks
and financial obligations, and also approved inflated invoices from his corporation that were
designed to conceal the third-party lessor’s indemnification payments to the defendant’s
company. The Second Circuit concluded that the complaint in this case plausibly alleged the
defendant provided substantial assistance to the primary violator in carrying out the fraud and
therefore the court reversed the district court’s opinion. As such, the case was remanded.
SEC v. Goble, 682 F.3d 934 (11th Cir. 2012).
The Securities and Exchange Commission brought an enforcement action against
defendant, a corporate board member, for aiding and abetting the corporation’s violation of the
Customer Protection Rule at Section 15(c)(3) of the Securities Exchange Act of 1934 and
Rule 15(c)(3)-3 thereunder. The SEC also alleged that defendant aided and abetted the
corporation’s violation of the Exchange Act’s books and records requirements found in
Section 17(a) and Rule 17a-3 thereunder. The district court concluded that the defendant aided
and abetted these violations. On appeal, defendant argued that he could not be liable for aiding
and abetting the violations of the Customer Protection Rule and the books and records
requirements because there was no underlying securities fraud. The Eleventh Circuit affirmed
the district court, holding that the imposition of aiding and abetting under Section 20(e) of the
Exchange Act is proper when the following elements are satisfied: (1) there is a primary
violation of the securities law; (2) the aider and abettor had knowledge of the primary violations;
and (3) the aider and abettor provided substantial assistance in the commission of the violation.
Thus, the court upheld the district court’s ruling because a primary securities fraud violation is
not an element of an aiding and abetting claim.
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SEC v. Grendys, 840 F. Supp. 2d 36 (D.D.C. 2012).
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The Securities and Exchange Commission brought an action against the owner of a
corporation that sold frozen chicken commodities. The corporation sold commodities to and
through a food service distribution company that later was acquired by a publicly-traded
corporation. The SEC’s complaint alleges three violations of securities law by defendant:
(1) aiding and abetting violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5; (2) aiding and abetting violation of Section 13(a) of the Exchange Act; and
(3) aiding and abetting violation of Sections 13(b)(2)(A)–(B) and 13(b)(5) and Exchange Act
Rule 13(b)2-1. Specifically, the SEC alleges defendant aided and abetted a scheme to materially
inflate the operating income recorded by the distributor in its financial statements, which were
included in the parent corporation’s SEC filings and other public statements. The defendant
moved for summary judgment. In this circuit, to prove aiding and abetting, the SEC must show:
(1) another party has committed a securities law violation; (2) the accused aider and abettor has a
general awareness that his role was part of an overall activity that was improper; and (3) the
accused aider and abettor knowingly and substantially assisted the principal violation. Investors
Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980). Defendant argued that with respect
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to the second element, the SEC must prove defendant had actual knowledge of the primary
violation. The court rejected this argument. Defendant also contended that the Exchange Act
provides only for aiding and abetting a primary violation, rather than aiding and abetting another
party’s aiding and abetting of a primary violation. The defendant argued the SEC only alleged
that the defendant aided and abetted the distributor’s conduct and not the parent corporation’s
primary violations of the Exchange Act. However, the court read the complaint as alleging that
defendant was liable for aiding and abetting the parent company’s violations by helping the
distributor to conceal a fraudulent scheme. The court further noted that the SEC need not allege
that the defendant directly aided and abetted the primary violations because the statute only
requires substantial assistance. The court held that a reasonable trier of fact could conclude that
the defendant knew that the distributor was filing misleading documents because of his position
as principal contact for the distributor, among other things. On the issue of substantial
assistance, defendant argued that he did not have a motive to assist the primary violations. The
court noted that it was unnecessary for the SEC or the court to speculate as to the defendant’s
potential motivation for aiding and abetting the scheme. The court dismissed the defendant’s
motion holding that the SEC had met its burden that defendant knew he was aiding and abetting
primary violations of the Exchange Act.
SEC v. Familant, 2012 U.S. Dist. LEXIS 179007 (D.D.C. Dec. 19, 2012).
In this civil enforcement action, the Securities and Exchange Commission alleged that a
senior vice president of defendant cell phone retailer ran a scheme to conceal the retailer’s
deteriorating financial state—specifically, that the corporation directed its employees to issue
unearned memos of credit to the retailer, which used sham credits to pad its financial reports, and
then, acting through the vice president, repaid the president’s company through a stream of
hidden disbursements that ranged from inflated contract prices to outlays for fictitious repairs.
The SEC brought five counts of alleged violations of Sections 10(b) and 13 of the Securities
Exchange Act of 1934, and for aiding and abetting the Rule 10b-5 claims. Defendant moved to
dismiss the complaint for failure to state a claim. Three principal elements are required to
establish aiding and abetting liability: “(1) that a principal committed a primary violation;
(2) that the aider and abettor provided substantial assistance to the primary violator; and (3) that
the aider and abettor had the necessary ‘scienter’—i.e., that she rendered such assistance
knowingly or recklessly.” Graham v. SEC, 222 F.3d 994, 1000 (D.C. Cir. 2000). “Drawing
guidance from the well-developed law of aiding and abetting liability in criminal cases,” the
Second Circuit set forth a combined test for substantial assistance in scienter; “the government—
in addition to proving the primary violation occurred and that the defendant had knowledge of
it—must also prove ‘that he in some sort associated himself with the venture, that the defendant
participated in something that he wished to bring about, and that he sought to buy his action to
make it succeed.’” SEC v. Apuzzo, 689 F.3d 204, 212 (2d Cir. 2012). The court ruled that the
SEC sufficiently stated a claim for relief to survive a motion to dismiss as it relates to violations
of Section 10(b) and Rules 10b-5(a) and (c). Therefore, the court also held that the aiding and
abetting claim survived as well. The motion to dismiss was denied.
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In re Novell, Inc. S’holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).
Investors brought a class action against a corporation and its former directors and a
related corporation. The causes of action arose out of the corporation’s merger with the related
corporation. Plaintiffs claimed that the directors breached their fiduciary duties of care and
loyalty by failing to maximize shareholder value through the merger process. They also alleged
that the related corporation aided and abetted the breaches. The related corporation moved to
dismiss. In order to survive the motion to dismiss, the complaint must allege facts that satisfy
the four elements of an aiding and abetting claim: (1) the existence of a fiduciary relationship;
(2) a breach of the fiduciary’s duty; (3) knowing participation in that breach by the defendants;
and (4) damages proximately caused by the breach. Malpiede v. Townson, 780 A.2d 1075, 1096
(Del. 2001). Knowing participation requires that the third party: (1) act with the knowledge that
the conduct advocated or assisted constitute such a breach; (2) the third party conspires with the
board; or (3) the third party agrees with the board to the fiduciary breach. In dismissing the
plaintiffs’ claim, the court held that the plaintiffs’ arguments that the related corporation knew of
a board member’s conflicts did not sufficiently prove that the related corporation knowingly
participated in the alleged breach. The court also noted that plaintiffs failed to prove a primary
breach, and therefore the related corporation could not be found to have aided and abetted in that
breach.
Poptech L.P. v. Stewardship Inv. Advisors, LLC, 849 F. Supp. 2d 249 (D. Conn. 2012).
Investors brought suit against various defendants, including a broker-dealer, the CFO of
the broker-dealer, a fund, and an independent manager of the fund. Plaintiffs alleged, among
other things, that the individual defendants aided and abetted securities violations. The two
incidental defendants challenged the aiding and abetting claim on the merits. Connecticut
General Statute § 36b-29 creates liability for anyone who materially assists in a violation of the
securities laws. In order for conduct to be considered material assistance, it must be proven that
the aider or abettor materially assisted the primary violator: (1) in the offer or sale; and (2) in the
violation by which the primary violator accomplished the offer or sale. In addition to the
foregoing elements of proof, the buyer must also prove that the aider and abettor knew or should
have known of the untruth or omission. If the buyer meets this burden, the burden of proof
shifts, so that the defendant then bears the burden of persuading the fact finder that it did not
know, and in the exercise of reasonable care could not have known, of the untruth or omission.
The court denied the CFO’s motion to dismiss because it was sufficiently pled that he offered
material assistance in violation of the securities laws. In granting the independent manager’s
motion to dismiss, the court focused on the manager’s limited position. It noted that the
manager’s role was essentially limited to evaluating whether transactions between the brokerdealer
and the fund were fair, and the evaluations occurred only after investors had become
members of the fund. Plaintiffs argued that the manager was not disinterested and that he never
engaged in any independent valuation or investigation of any transaction between the brokerdealer
and the fund and never challenged or voiced any objection to any questionable
transaction. Even taking plaintiffs’ claim that the manager was not a disinterested independent
manager as true, the court granted the motion to dismiss because the plaintiffs failed to satisfy
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the burden of alleging that the manager assisted the other defendants in the securities fraud
violation or that, even if he did, the manager knew or should have known of the alleged
misrepresentations and omissions.
Short v. Conn. Cmty. Bank, N.A., 2012 U.S. Dist. LEXIS 42617 (D. Conn. Mar. 28, 2012).
This action arose out of the Ponzi scheme perpetrated by Bernard L. Madoff through
Bernard L. Madoff Investment Securities, LLC (“BLMIS”). The plaintiffs, two custodial
account holders, commenced this action against defendant bank, raising numerous claims,
including aiding and abetting breach of fiduciary duty and fraud. The defendant acted as the
intermediary custodian in an arrangement between a consulting services company and BLMIS.
Plaintiffs were clients of the pension and retirement plan consulting services company at the time
it entered into the agreement with BLMIS. The defendant bank filed a motion for summary
judgment on all of plaintiffs’ claim. With regards to the aiding and abetting claim, the bank
argued that summary judgment in its favor was appropriate because: (1) the bank lacked
knowledge of any underlying tortious conduct by the consulting services company and BLMIS;
and (2) the bank did not provide substantial assistance to any such tortious conduct. In order to
show aiding and abetting liability in Connecticut, a plaintiff must show: (1) the party whom the
defendant aids performed a wrongful act that caused an injury; (2) the defendant was generally
aware of his role as part of an overall illegal or tortious activity at the time that he provides the
assistance; and (3) the defendant knowingly and substantially assisted the principal violation.
Efthimiou v. Smith, 846 A.2d 222, 226 (Conn. 2004). In order to be generally aware, an aider or
abettor must have actual knowledge of the underlying tort or act with reckless indifference to the
possibility that the underlying tort is occurring. In granting the bank’s motion for summary
judgment on this claim, the court noted that the record contained no specific evidence that
established that the bank was generally aware that BLMIS was a fraud. The plaintiffs relied only
on evidence that the bank failed to audit or verify BLMIS’s reported assets, promulgated
inaccurate records, and did not become suspicious when BLMIS refused the bank’s electronic
access to its account and insisted that the bank have no contact with the account’s clients.
Evidence provided in the record created a genuine issue of fact as to the bank’s negligence, but
the court held that mere negligence is not sufficient for aiding and abetting liability purposes.
Therefore, the court granted the defendant’s motion for summary judgment.
SEC v. Ehrenkrantz King Nussbaum, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,761 (E.D.N.Y.
Mar. 15, 2012).
The Securities and Exchange Commission filed an action against a broker-dealer and a
related corporation for alleged market timing violations. The related corporation provided
services to the broker-dealer, including locating professional investors and money managers who
engaged in market timing, recruiting those investors to become the broker-dealer’s clients, and
facilitating those investors’ market timing once they became the broker-dealer’s clients. The
related corporation also provided back-office support for the processing of these market timing
trades. The SEC voluntarily dismissed the claims against the broker-dealer and the related
corporation but filed a motion for summary judgment in support of its claims against the related
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corporation’s CEO. The SEC alleged that the CEO violated Section 17(a) of the Securities Act
of 1933, Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC
specifically alleged that the CEO employed methods to place market timing trades that would
otherwise have been prohibited by the fund companies and that he systematically used multiple
mirror accounts. The court found that the CEO’s practices were used with the intent to deceive
the fund companies. The court also found sufficient evidence of the SEC’s claim against the
CEO for aiding and abetting violations of Section 15(c)(1). Section 15(c)(1) of the Exchange
Act prohibits brokers and dealers from using manipulative, deceptive, or other fraudulent devices
or contrivances in connection with securities transactions. The court found that the SEC could
maintain its aiding and abetting claim against the CEO by establishing: (1) the existence of a
primary violation of this section; (2) that the aider and abettor had knowledge of the primary
violation; and (3) that the aider and abettor knowingly and substantially participated in the
wrongdoing. The court found that the SEC established that the CEO had actual knowledge of
the primary violation and that he provided substantial assistance in carrying out that violation,
and therefore granted the SEC’s motion for summary judgment on the aiding and abetting claim.
The court, however, denied the SEC’s motion for summary judgment for the claim that the CEO
violated Section 15(b)(7) and Rule 15b-7-1 of the Exchange Act because questions of fact still
existed regarding the CEO’s knowledge of any primary violation.
Barbara v. Marinemax, Inc., 2012 U.S. Dist. LEXIS 171975 (E.D.N.Y. Dec. 4, 2012).
This case arose from plaintiffs’ sale of a boat business to defendants for cash and stock.
The defendants refused to remove a restrictive legend from the stock certificates resulting in a
long delay before plaintiffs could sell the stock and thus realize the value of the sale. The
plaintiffs’ complaint set forth twelve claims for relief, including aiding and abetting breach of
fiduciary duty. Under Delaware law, “a claim for aiding and abetting requires the following
three elements: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty,
and (3) a non-participation in that breach by the defendant.” In re Santa Fe Pac. Corp. S’holder
Litig., 669 A.2d 59, 72 (Del. 1995). Similarly, under New York law, to state a claim for aiding
and abetting a breach of fiduciary claim, a plaintiff must allege that there was “a breach by a
fiduciary of obligations to” the plaintiff. Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d Cir.
2006). As to the underlying breach of fiduciary duty claim, the plaintiffs alleged that the breach
of fiduciary duty was premised on insider trading, also known as a Brophy claim. The court
determined that plaintiffs could not bring this claim because it was derivative in nature. As such,
the breach of fiduciary claim failed as a matter of law. Consequently, the district court also ruled
that the plaintiffs were unable to state a claim for aiding and abetting breach of that fiduciary
duty. See Schandler v. N.Y. Life Ins. Co., 2011 U.S. Dist. LEXIS 46322 (S.D.N.Y. Apr. 26,
2011).
In re Refco Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 41298 (S.D.N.Y. Jan. 17, 2012).
The special master recommended that a broker-dealer’s attorneys’ motion to dismiss be
granted in part as to plaintiffs’ claims that the attorneys aided and abetted a fraud in connection
with the broker-dealer’s financial condition. The court granted dismissal in part because the
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claims sought recovery of assets placed with the broker-dealer before the date of the attorneys’
wrongdoing. The plaintiffs alleged aiding and abetting fraud, breach of fiduciary duty, and
conversion. In New York, to establish a claim of aiding and abetting fraud, a plaintiff must
allege: (1) the existence of a violation by the primary wrongdoing; (2) knowledge of this
violation by the aider and abettor; and (3) proof that the aider and abettor substantially assisted in
the primary wrong. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). The special master
found that the plaintiffs adequately alleged that the defendants had knowledge of the primary
fraud. He relied on, among other things, the defendants’ work on the broker-dealer’s
repatriation, specifically that the defendants oversaw virtually all aspects of the broker-dealer’s
business plan, and the defendants’ knowledge of the broker-dealer’s propensity to siphon assets
to fund their operations. The special master also found that the defendants substantially assisted
the primary violation because they were responsible for not only reviewing public documents
regarding the questionable transactions, but also for issuing opinions regarding transactions that
misrepresented the broker-dealer’s financial status. The plaintiffs also adequately alleged that
there was reasonable reliance on these misrepresentations. However, because it was not clear if
the defendants proximately cause some of the damages. Therefore, the motion to dismiss was
denied. Plaintiffs also asserted a claim for aiding and abetting breach of fiduciary duty.
Specifically, the plaintiffs claimed that the broker-dealer breached fiduciary duties by causing
customer assets to be converted and used in furtherance of their fraudulent scheme. The
defendants allegedly assisted this breach by, among other things, advising the broker-dealer in
connection with its financial affairs. In dismissing this claim, the special master found the
plaintiffs could not show the defendants knew the wrongdoing was a breach of fiduciary duty.
The plaintiffs also alleged that the broker-dealer converted customer assets, and that the
defendants aided and abetted the conversion. The special master dismissed plaintiffs’ claims
because they could not adequately allege knowledge. Although the plaintiffs alleged that the
defendants knew that customer assets were being used for the broker-dealer, they could not
allege defendants’ knowledge that the transfer of funds was a conversion since it was not pled
that the defendants knew the transactions were unauthorized. For the foregoing reasons, the
special master dismissed the plaintiffs’ aiding and abetting, breach of fiduciary duty claim, and
(plaintiff’s) aiding and abetting conversion claim with prejudice.
SEC v. Juno Mother Earth Asset Mgmt., 2012 Fed. Sec. L. Rep. (CCH) 96,748 (S.D.N.Y.
Mar. 2, 2012).
The Securities and Exchange Commission brought an action against defendants, a
registered investment advisor (RIA), its portfolio manager, and CEO. The SEC alleged that the
portfolio manager and CEO aided and abetted the RIA’s violation of Section 206(4) of the
Investment Advisers Act of 1940 and associated Rules 206(4)-2 and 206(4)-4, and Section 203A
of the Advisers Act. Defendants moved to dismiss these claims for failure to state a claim under
Federal Rule of Civil Procedure 12b-6. With regards to plaintiff’s Section 206(4) and
Rule 206(4)-2 claims, the defendants argued that the plaintiff made only conclusory allegations
regarding the mental states of the individual defendants, and that those allegations are
insufficient to state a claim for aiding and abetting. The court noted that to satisfy a claim of
aiding and abetting, the complaint need not allege the aider and abettor actually knew about the
principal violation of the Advisers Act. Rather, it suffices to allege that the aider and abettor
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ecklessly disregarded the violation. See SEC v. Landberg, 2011 U.S. Dist. LEXIS 127827, at
*22–23 (S.D.N.Y. Oct. 26, 2011). Therefore, the court denied the motion to dismiss this claim
because the plaintiff pleaded sufficient facts to support a reasonable inference that defendants
knew or recklessly disregarded the violation. With regards to the plaintiff’s claim under
Rule 206(4)-4, the court found that the defendants’ failure to disclose the financial condition of
the RIA to investors was a violation of Section 206(4). Defendants argued that the Section 203A
aiding and abetting claim failed to state a claim because it did not plausibly allege that
defendants knew of or recklessly disregarded the RIA’s violation. In denying the defendants’
motion to dismiss this claim, the court held that the complaint’s allegations created a reasonable
inference that the individual defendant knew of or disregarded the alleged violations. Therefore,
the court denied defendants’ motions to dismiss claims for aiding and abetting.
Dodona I, LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012).
Plaintiff, a hedge fund, brought suit on behalf of a putative class of investors in two
securities offerings of collateralized debt obligation (CDO) led by defendants’ broker-dealer
subsidiary. Plaintiff alleges various violations of securities laws, common law fraud, aiding and
abetting fraud, fraudulent concealment, and unjust enrichment. The claims arose out of
defendants’ involvement in the subprime mortgage market. After several years in the market, the
defendants were aware of the increased risks in subprime lending, and had recognized a
corresponding need to reduce their long-term exposure. The defendants decided to reduce their
overall exposure given the uncertainty of the future direction of the housing market and the
increased volatility of the mortgage-related product markets. The downturn of the housing
market led to the liquidation of the CDO securities, which the hedge fund had to sell at a loss.
Plaintiff alleged that the defendants created the CDOs as part of a scheme to decrease their
subprime mortgage exposure at the expense of its investors by shorting those same CDOs. The
plaintiff also alleged that the defendants failed to disclose this strategy and that they did not
reasonably believe that the CDOs would be profitable for investors. The plaintiff alleged that the
defendants aided and abetted common law fraud because the broker-dealer subsidiary could not
have perpetrated the fraud without the substantial assistance of the other defendants. Defendants
moved to dismiss the complaint. The court noted that the plaintiff’s complaint adequately pled
that the broker-dealer subsidiary committed an underlying fraud because the defendants had
knowledge of facts or access to information contradicting their public statements. The court also
found that the defendants’ employees had actual knowledge of the alleged fraud and enabled or
substantially assisted it. The knowledge of these employees, the court noted, could be imputed
to defendants. Because the court found a primary violation of common law fraud, that
defendants substantially assisted or enabled that alleged fraud, and had knowledge of the fraud,
the defendants’ motion to dismiss the claim was denied.
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012).
Investors filed a putative class action against defendants, a broker-dealer and a
corporation, for violations arising out of a merger agreement between the two defendants.
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Plaintiffs alleged that the corporation aided and abetted the broker-dealer’s breach of fiduciary
duty by negotiating and finalizing the merger even though the corporation knew that the brokerdealer
had not performed due diligence. Because the corporation was incorporated in Bermuda,
the court applied Bermuda law to the analysis of the aiding and abetting claim. The plaintiffs
conceded that the claim was precluded by the elements of the Securities Litigation Uniform
Standards Act of 1998, but they argued that the claim was preserved by the “Delaware carveout”
exception. 15 U.S.C. § 78bb. The court dismissed the claim because the Delaware carveout
exception applies only to claims based upon the law of the state in which the issuers
incorporated, and the publicly-traded corporation was not incorporated under the laws of any
state.
King Cnty. v. IKB Deutsche Industriebank AG, 863 F. Supp. 2d 288 (S.D.N.Y. 2012).
Investors brought an action against various corporations for negligence, negligent
misrepresentation, breach of fiduciary duty, and aiding and abetting those violations. The court
dismissed plaintiffs’ claims of aiding and abetting negligence and negligent misrepresentation
because no cause of action for aiding and abetting negligence or negligent misrepresentation
exists in New York. With regards to the plaintiffs’ aiding and abetting a breach of fiduciary duty
claim, the court noted that New York does recognize a cause of action for this claim where:
(1) one breached a fiduciary duty owed to another; (2) the defendant knowingly induced or
participated in the breach; and (3) the plaintiff suffered damage as a result of the breach. Design
Strategy, Inc. v. Davis, 469 F.3d 284, 303 (2d Cir. 2006). The court dismissed plaintiffs’ claim
for aiding and abetting because it found no primary breach of fiduciary duty claim.
SEC v. Gruss, 859 F. Supp. 2d 653 (S.D.N.Y. 2012).
The Securities and Exchange Commission brought suit against defendant, a former CFO
of a hedge fund, alleging aiding and abetting violations of Sections 206(1) & (2) of the
Investment Advisers Act of 1940. The SEC specifically alleged that defendant violated these
sections by approving unauthorized transfers and withdrawals of clients’ money, and improper
interfund transfers. Defendant filed a motion to dismiss the SEC’s complaint for failure to state
a claim under Federal Rule of Civil Procedure 12(b)(6) and for failure to set forth a plausible
cause of action pursuant to Federal Rules of Civil Procedure 8(a) and 9(b). The defendant
argued that the SEC’s complaint failed under Rule 12(b)(6) because Section 206 of the
Investment Advisers Act, by its terms, could not be applied extraterritorially. The court denied
the motion to dismiss on these grounds because it found that the Investment Advisers Act did
have extraterritorial authority. The defendant also attacked the adequacy of the SEC’s complaint
under Rule 8(a), arguing that the claims were implausible because of inconsistencies in the
complaint. The court dismissed defendant’s motion on these grounds, finding that the material
inconsistencies pointed out by the defendant were not sufficiently persuasive to undermine the
SEC’s claims to the point of implausibility. The court also found that the SEC’s complaint was
adequate because Rule 8’s liberal standard only requires the complaint give the defendant fair
notice of what the plaintiff’s claim is and the grounds upon which it rests. Lastly, defendant
argued that the SEC failed to allege sufficient facts under Rule 9(b) to give rise to a strong
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inference of fraudulent intent. Specifically, defendant maintained that the SEC failed to allege
facts sufficient to demonstrate that he acted recklessly to satisfy the requisite knowledge to be an
aider or abettor. The court found, however, that the complaint need only plead facts that give
rise to a strong inference of either fraudulent intent or negligence by the defendant. It noted that
Rule 9(b) does not require that a complaint plead fraud with the detail of a desk calendar or a
street map. Nor should the word “particularity” be used as a talisman to dismiss any but a finely
detailed fraud allegation brought in the federal court. For the foregoing reasons, the court denied
defendant’s motion to dismiss the complaint.
SEC v. Mudd, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10, 2012).
The Securities and Exchange Commission brought multiple claims against three
defendants for allegedly misleading investors concerning Federal National Mortgage
Associations’ level of exposure to risky subprime and reduced documentation “Alt-A” loans. Of
interest, the SEC charged all the defendants with aiding and abetting violations of Section 13(a)
of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13. Defendants
moved to dismiss. The court stated that to state a claim under Section 20(e), the SEC “must
prove: ‘(1) the existence of a securities law violation by the primary (as opposed to the aiding
and abetting) party; (2) “knowledge” of this violation on the party of the aider and abettor; and
(3) “substantial assistance by the aider and abettor in the achievement of the primary violation.”
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009). The court held that the SEC had adequately
alleged that FNMA and one of the defendants committed the primary securities violation by
materially misstating FNMA’s subprime and exposure, and that the remaining defendants had
actual knowledge of this violation—thus, the knowledge requirement was met. As to
“substantial assistance,” the court noted that the SEC plausibly alleged that all three individual
defendants consciously assisted the venture to misstate the risk exposures in an active way—they
received and reviewed FNMA’s periodic filings, drafted FNMA’s first definition of subprime,
certified all FNMA’s 10-K’s and 10-Q’s during the relevant period and spoke to investors and
repeated the misleading disclosures while emphasizing that FNMA’s subprime exposure was
immaterial. As such, the court held that the SEC had alleged facts sufficient to meet the
“substantial assistance” requirement as well. The defendants’ motion to dismiss was denied.
Fragin v. Mezei, 2012 U.S. Dist. LEXIS 119064 (S.D.N.Y. Aug. 22, 2012).
Plaintiffs brought suit in their capacity as trustees for the trusts of decedent’s five
children. Claims were brought against the defendant, a former family friend of the family and
investment advisor, and related companies that were allegedly controlled by the defendant.
Plaintiffs contended that the trusts invested $800,000 in notes based on misrepresentations and
material omissions by the defendant. The defendant, aided by his son-in-law, used the funds in a
different, unauthorized manner, resulting in a loss. Additionally, the notes were not properly
registered. Plaintiffs allege, among other things, that federal securities laws were violated.
Defendants moved for summary judgment. Specifically, the son-in-law defendant moved for
summary judgment as to the aiding and abetting claims for the unlawful and undisclosed
diversion of the trust funds. Under New York law, a claim for aiding and abetting requires:
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(1) the existence of wrongful conduct by the primary wrongdoer; (2) knowledge of the wrongful
conduct on the part of the defendant; and (3) substantial assistance of the defendant in achieving
the wrongdoing. Kromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001). In
support of his motion for summary judgment, the son-in-law argued that there was nothing in the
record to conclude that he knew of the defendants’ alleged torts. The plaintiffs provided no
factual basis to conclude that the son-in-law knew what was said or not said between the
defendants and plaintiffs. As such, the son-in-law’s motion for summary judgment was granted.
Banco Indus. de Venez. v. CDW Direct, L.L.C., 2012 U.S. Dist. LEXIS 125277 (S.D.N.Y.
Sept. 4, 2012).
Plaintiff bank brought a claim for negligence, aiding and abetting breach of fiduciary
duty, and unjust enrichment against defendant computer information technology vendor alleging
that the defendant sold merchandise to a faithless employee who purported to be acting on behalf
of the plaintiff. The plaintiff sought to recover the costs of the merchandise that it claimed it
never received. To establish a claim for aiding and abetting a breach of fiduciary duty under
New York law the plaintiff must accurately plead: “(1) the existence of a violation by the
primary wrongdoer; (2) knowledge of the violation by the aider and abettor; and (3) proof that
the aider and abettor substantially assisted the primary wrongdoer.” In re Rafco Sec. Litig.,
759 F. Supp. 2d 301, 333 (S.D.N.Y. 2010). The court found that the plaintiff had not pled
sufficient facts to establish either that the defendant had knowledge that the employee’s wrongful
conduct was occurring or that the defendant substantially assisted the employee’s breach of
fiduciary duty. Either actual knowledge or “conscience avoidance may satisfy the knowledge
prong of an aiding and abetting charge.” Rafco, 759 F. Supp. 2d at 334. “The burden of
demonstrating actual knowledge, although not insurmountable, is nevertheless a heavy one.”
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349, 367 (S.D.N.Y.
2007). Conscience avoidance involves a culpable state of mind whereas constructive knowledge
imputes a state of mind on a theory of negligence. The court reasoned that the plaintiff here
relied on conclusory and sparse allegations that the defendant knew or should have known about
the primary breach of duty. As for substantial assistance, “substantial assistance occurs when a
defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby
enabling the primary wrong to occur.” Rafco, 759 F. Supp. 2d at 336. An action of an alleged
aider and abettor does not constitute substantial assistance unless the defendant owes a fiduciary
duty directly to the plaintiff. The court reasoned that the mere fact that the participant in the
breach of fiduciary duty used the defendant’s regular business operation did not rise to the level
of substantial assistance. The court granted defendant’s motion to dismiss.
SEC v. Alternative Green Technologies, Inc., 2012 U.S. Dist. LEXIS 142154 (S.D.N.Y. Sept. 24,
2012).
The Securities and Exchange Commission brought an enforcement action arising out of
the alleged fraudulent issuance of purportedly unrestricted shares of the corporation. The
complaint alleged that the moving defendants, a corporation and its director, aided and abetted
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c)
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promulgated thereunder, in addition to other violations of the Exchange Act. Specifically, the
SEC alleged the individual defendant and his company aided and abetted violations of
Section 10(b) as they knowingly provided substantial assistance to defendant corporation in
“obtaining and furnishing false documents (including a sham assignment of debt and a fabricated
and back dated corporate resolution and convertible note), to support a legal opinion letter that
was provided to the corporation’s transfer agent so that the transfer agent would issue millions of
shares of purportedly unrestricted stock of the corporation in an unregistered offering.” The
defendants moved to dismiss on the ground that the claim brought by the SEC failed to
adequately allege any of the three requirements for aiding and abetting: (1) that the corporation
committed a primary violation of Section 10(b) and Rule 10b-5; (2) that the individual
defendants had “actual knowledge” of that primary violation; or (3) that the individual
defendants substantially assisted the violation. The court analyzed all three of these
requirements and held that the SEC had adequately alleged a primary violation by the
corporation, that both of the individual defendants had actual knowledge of the fraud, and
provided substantial assistance in the fraud, thereby stating a claim that they aided and abetted
the violation of Section 10(b). The motion to dismiss was denied.
In re Lehman Bros. Sec. Litig., 2012 U.S. Dist. LEXIS 148177 (S.D.N.Y. Oct. 15, 2012).
Eight consolidated securities actions were brought by seven California-based public
entities and a California-based insurance company against Lehman Brothers after Lehman’s
collapse and subsequent bankruptcy. All of the securities and most of the other cases brought in
or removed to federal courts were consolidated before the S.D.N.Y. for pretrial purposes. They
asserted claims against Lehman’s former officers, directors, and auditors under the Securities Act
of 1933, the Securities Exchange Act of 1934, and California state law.
Plaintiffs collectively made twenty-one separate purchases of defendant broker-dealer’s
securities in fifteen different offerings during the period of October 25, 2004 to March 31, 2008.
Count Ten of their claim for relief sought recovery from officers and non-officer directors of the
broker-dealer on a theory of aiding and abetting the alleged common law fraud under California
law. The non-officer directors allegedly aided and abetted the violation of the officer defendants
by “intentionally allowing and/or recklessly failing to detect or deter the officer defendants’
misleading statements.” California recognizes aiding and abetting liability where plaintiff
establishes (1) a primary fraud, and (2) the alleged aider and abettor’s actual knowledge of, and
substantial assistance to, the successful consummation thereof. See Fortaleza v. PNC Fin. Servs.
Grp., Inc., 642 F. Supp. 2d 1012, 1017 (N.D. Cal. 2009). Absent a sufficient claim for primary
fraud, a claim for aiding and abetting fraud must fail without regard to whether the remaining
elements are satisfied. Here, the aiding and abetting claims against the individual defendants—
both the officers and the non-officer directors—rest on the assertions that the officers aided the
fraud committed by other officers and that the non-officer directors aided the fraud committed by
all of the officers. However, the amended complaint did not adequately state a claim for fraud
against any of the officer defendants. Accordingly, the aiding and abetting claim was dismissed.
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SEC v. Espuelas, 2012 U.S. Dist. LEXIS 154465 (S.D.N.Y. Oct. 26, 2012).
The Securities and Exchange Commission sued various former executives of a
corporation for accounting fraud. Pending in the case at hand was the defendant’s motion for
summary judgment as to the remaining claims against her for aiding and abetting the
corporation’s violations of Sections 13(a) and 13(a)(2)(A) of the Securities Exchange Act of
1934 and Exchange Act Rules 12b-20, 13a-1, and 13a-13, and for directly violating Exchange
Act Rule 13b-2-1. The individual defendant in the case was once the director of business
development for the corporation. The SEC alleged she aided and abetted the corporation’s
misstatements of its financial condition. Section 13(a) requires issuers of securities to file
information, documents, and annual and quarterly reports as required by the SEC. Rules 13a-1
and 13a-13 require issuers to file annually and quarterly reports, respectively. 17 C.F.R.
§§ 240.1, 13a-1, 240.13a-13. “To state a claim that defendants aided and abetted violations of
the Exchange Act, the SEC must allege: (1) a primary violation of the Exchange Act; (2) actual
knowledge of the violation by the aider and abettor; and (3) that the aider and abettor
substantially assisted the primary violation.” SEC v. Espuelas (Espuelas 1), 579 F. Supp. 2d at
583–84; see also SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012). “These three requirements
cannot be considered in isolation from one another. Satisfaction of the knowledge requirement
will depend on the theory of primary liability, and there may be a nexus between the degree of
knowledge and the requirement that the alleged aider and abettor render substantial assistance.”
SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009). Plaintiff conceded that there was a genuine
issue of material fact as to the existence of the primary violation, insofar as the SEC’s theory is
that these were contingent transactions. As for the knowledge requirement, the SEC failed to
establish a genuine issue of material fact with regard to whether the individual defendant knew
of the facts that made the recognition of revenue inappropriate. Due to the SEC’s failure to
demonstrate a genuine issue of material fact as to the knowledge requirement, the court granted
the defendant’s motion for summary judgment. Specifically, the court relied on the fact that the
defendant was not a certified public accountant and had little accounting expertise and, thus, was
not aware of the facts that made recognition of the revenue in question improper.
Star Int’l Co. v. Fed. Reserve Bank of N.Y., 2012 U.S. Dist. LEXIS 165289 (S.D.N.Y. Nov. 19,
2012).
This case arose from the federal government’s rescue of American International Group,
Inc. (“AIG”) during the financial meltdown of 2008. Plaintiff, a major stockholder in AIG,
challenged, directly and derivatively on AIG’s behalf, various actions taken by the Federal
Reserve Bank of New York (“FRBNY”) in connection with that rescue. In particular, the
complaint claims that FRBNY required, induced, or aided and abetted breaches of fiduciary duty
by AIG’s directors. Under Delaware law, “corporate directors have an unyielding fiduciary duty
to protect the interests of the corporation and to act in the best interests of the shareholders.” In
re Alloy, Inc., C.A., 2011 Del. Ch. LEXIS 159, at *22 (Del. Ch. Oct. 13, 2011). A third party
may be liable for aiding and abetting a breach of a corporate fiduciary as a duty to the
stockholders if the third party knowingly participates in the breach. To survive a motion to
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dismiss, the complaint must allege facts that satisfy the four elements of an aiding and abetting
claim: (1) the existence of a fiduciary relationship; (2) a breach of the fiduciary’s duty;
(3) knowing participation in that breach by the defendants; and (4) damages proximately caused
by the breach. Malpiede v. Townsend, 780 A.2d 1075, 1096 (Del. 2001). The breaches of duty
that the plaintiff asserts were committed by AIG’s directors and aided by FRBNY are the same
ones that the plaintiff asserted in its fiduciary duty claims brought directly against FRBNY. The
court stated that the goal of rescuing is to “preserve the stability of the banking system, to
minimize the losses to the public, and to reduce the possibility of grave national and international
financial repercussions.” In re Franklin Nat’l Bank Sec. Litig., 478 F. Supp. at 217–19. The
threat that a federal reserve bank would be derivatively liable for corporate directors’ alleged
breaches of fiduciary duty in accepting such aid could deter the bank from furnishing this aid. A
potential for vicarious or secondary liability for such a breach would stand as an obstacle to, and
impede and burden, the implementation of federal policy by a federal instrumentality. See
McCullough, 17 U.S. at 436. Accordingly, the court determined that the plaintiff’s aiding and
abetting claims against FRBNY, must be dismissed.
SEC v. Greenstone Holdings, Inc., 2012 SEC LEXIS 3639 (S.D.N.Y. 2012).
The federal district court granted the Securities and Exchange Commission’s partial
summary judgment against an attorney holding her liable for aiding and abetting securities fraud
by issuing a false legal opinion that certain of her co-defendants used to illegally obtain more
than six million shares of unrestricted stock of a large public company. Among other things, the
attorney falsely prepared promissory notes, note holders, and communications with those
holders, none of which actually existed. The court held the attorney liable for aiding and
abetting securities fraud under Section 10(b) of the Securities Exchange Act of 1934, but denied
the summary judgment against the attorney for primary liability under Section 10(b). The court
also reserved decision on the SEC’s claim that the attorney violated Section 5 of the Securities
Act of 1933.
In re Commodity Exch. Inc., 2012 U.S. Dist. LEXIS 181487 (S.D.N.Y. Dec. 21, 2012).
Plaintiffs filed a consolidated class action complaint claiming that the defendant bank
violated Sections 9(a) and 22(a) of the Commodity Exchange Act, 7 U.S.C. §§ 13a, 25a, and
Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. The complaint alleged that the
defendants violated these Acts by combining, conspiring, and agreeing to manipulate the prices
of silver futures and silver options contracts traded on the Commodity Exchange Inc.
Defendants filed a motion to dismiss. Section 22 of the Commodity Exchange Act creates
liability for any person “who willfully aids, abets, counsels, induces, or procures the commission
of a violation” of the Act. 7 U.S.C. § 25a(l). In order to state a claim under this section, a
plaintiff must show that a “defendant (1) had knowledge of the principal’s intent to violate the
Commodity Exchange Act; (2) intended to further that violation; and (3) committed some act in
furtherance of the principal’s objective.” Platinum & Paladium, 828 F. Supp. 2d at 599. As a
matter of law, where a complaint fails to allege the requisite intent of any primary act to
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manipulate a market, that complaint also fails to state a claim for aiding and abetting liability of
the Commodity Exchange Act. Id. Plaintiffs failed to state a claim for market manipulation by
the principal and, thus, also failed to state that defendants knowingly aided and abetted a market
manipulation. The plaintiffs’ claim also failed to state a claim for aiding and abetting liability
because the complaint did not identify the person alleged to be involved in knowingly aiding and
abetting the alleged manipulation of silver future prices on the COMEX market. Lastly, the
complaint made no reference to specific communications between the defendants to manipulate
the market, thus plaintiffs’ aiding and abetting liability claim was dismissed.
Zazzali v. Hirschler Fleischer, P.C., 2012 U.S. Dist. LEXIS 118090 (D. Del. Aug. 21, 2012).
Defendant and related entities, all of whom are Idaho real estate investment entities, filed
bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware
beginning on November 6, 2008. The bankruptcy court confirmed the Chapter 11 Plan of
Liquidation. The plan created two trusts: the defendants’ estate litigation trust and the
defendants’ private actions trust. From 2004 to 2008 the defendant and its affiliates presented to
the world an illusion of a monolith of wealth, competence, and power. However, facts came to
light in the fall of 2008 when the world learned that the defendant was running an elaborate
Ponzi scheme. Various creditors filed claims against the bankruptcy estate, including claims for
aiding and abetting fraud, aiding and abetting breaches of fiduciary duties and breaches of trust.
The defendant filed motions to dismiss. With respect to the aiding and abetting claims, the
parties disputed which state law was to govern the claims. The trustees contended that it was
unclear which law would govern as there were investors who were defrauded throughout the
United States; however, in its brief, the trustee analyzed the claim exclusively under Delaware
law. Defendant asserted that the claim for aiding and abetting fraud would be governed by
Delaware, Idaho, or Virginia law to the extent that the states recognize a cause of action for
aiding and abetting fraud. The court deferred making a decision as to the matter of the choice of
law until there was a development for a more complete factual record. See Graboff v. The Coller
Firm, 2010 U.S. Dist. LEXIS 118732, 2010 WL 4456923, at *8 (E.D. Pa. Nov. 8, 2010). In
order to state a claim for aiding and abetting fraud under either Idaho or Delaware law, the
plaintiff must allege that the defendant had knowledge of the underlying fraud. The court
determined here that the plaintiff had failed to plead facts giving rise to an inference that the
defendant had knowledge of the fraudulent scheme. As such, the motion to dismiss was granted
as to this claim. Along these same lines, allegations of aiding and abetting of breaches of
fiduciary duties and breaches of trust both failed for failure to state a claim. Both counts of the
complaint failed to allege knowing participation in the breach of fiduciary duty. As such, the
defendants’ motion to dismiss was granted as to those claims.
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012).
The Securities and Exchange Commission filed this enforcement action against the
former and current officers of an international provider of offshore drilling services and
equipment. To operate drilling rigs offshore in Nigeria, the Nigerian laws require that the owner
of the rig to either pay permanent import duties or obtain a temporary import permit (“TIP”).
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The SEC alleged two officers of the corporation violated the Foreign Corrupt Practices Act, and
federal securities laws by allegedly making bribes to obtain TIPs and TIP extensions in order to
avoid paying permanent import duties. Specifically, the individual defendants are alleged to
have made numerous “special handling” and “procurement” payments to Nigerian government
officials, which were, in essence, bribes to obtain false paperwork necessary to secure TIPs or to
obtain discretionary TIP extensions. Furthermore, through this conduct, the individual
defendants allegedly aided and abetted the international corporation’s violations of Section 30(a)
of the Securities Exchange Act of 1934, and violation of Section 20(e) of the Exchange Act.
Defendants argued that these aiding and abetting claims should be dismissed because no
plausible allegations have been made that a primary violation was committed. “Aiding and
abetting liability consists of: (1) existence of a securities violation by a primary wrongdoer;
(2) knowledge of the violation by the aider and abettor; and (3) proof that the aider and abettor
substantially assisted in the primary violation.” SEC v. Treadway, 430 F. Supp. 2d 293, 336
(S.D.N.Y. 2006). In order to plead substantial assistance, the plaintiff must allege facts sufficient
to show that defendant “in some sort associated himself with the venture, that he participated in
it as in something that he wished to bring about, and that he sought by his action to make it
succeed.” SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012). “A high degree of knowledge may
lessen the SEC’s burden in proving substantial assistance.” Id. at 215. The court determined
that the SEC had properly stated a primary FCPA violation based on the payments made to
obtain TIPs based on false paperwork. Additionally, the individual defendants repeatedly
approved the “special handling” fee to customs agents, despite knowing the fee was associated
with false paperwork. Defendants ensured that the customs agent was paid his fee, which, in
turn, ensured that the bribes reached the appropriate foreign official. This conduct constituted
substantial assistance under aiding and abetting law. Defendants’ motion to dismiss was
therefore denied.
In re Nat’l Century Fin. Enters., Inc., 846 F. Supp. 2d 828 (S.D. Ohio 2012).
Institutional investors brought an action against a financial corporation and a brokerdealer,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934, blue sky
laws of various states, and various tort claims, arising from the investors’ purchase of nearly
$2 billion in the corporation’s notes. The plaintiffs alleged that the corporation committed a
multibillion-dollar fraud on investors by “purchasing” accounts receivables that were worthless
or non-existent and that the broker-dealer knew or should have known of the material aspects of
the corporation’s fraud. Plaintiffs argued that the broker-dealer assisted the corporation by
bringing the corporation’s notes to the market despite knowing of the misrepresentations the
corporation made to its investors regarding its operations. Plaintiffs brought claims against the
broker-dealer of aiding and abetting fraud and aiding and abetting breach of fiduciary duty. The
defendants moved for summary judgment. The broker-dealer argued that aiding and abetting
breach of fiduciary duty claims are precluded by New York’s Martin Act, N.Y. Gen. Bus. Law
§ 352 et seq. The court disagreed as New York’s highest court held that the Martin Act does not
preempt common law causes of action arising out of securities transactions. Assured Guar. Ltd.
v. J.P. Morgan Inv. Mgmt. Inc., 962 N.E.2d 765 (N.Y. 2011). In order to state a claim for aiding
and abetting breach of fiduciary duty the plaintiffs must prove: (1) a breach by a fiduciary of
obligations to another; (2) that the defendants knowingly induced or participated in the breach;
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and (3) that plaintiffs suffered damages as a result of the breach. Plaintiffs alleged that the
corporation’s officers owed a fiduciary duty to creditors not to waste corporate assets. In
granting summary judgment on this claim for the broker-dealer, the court noted that the
corporation did not owe a fiduciary duty to its creditors. The broker-dealer also moved for
summary judgment on plaintiffs’ claim of aiding and abetting fraud. Under New York law, a
claim for aiding and abetting fraud require: (1) the existence of a fraudulent scheme; (2) the
defendants’ actual knowledge of the fraud; and (3) the defendants’ substantial assistance to the
fraudulent scheme. Oster v. Kirschner, 905 N.Y.S.2d 69, 72 (App. Div. 2010). Although it was
undisputed that the corporation conducted a fraudulent scheme, the broker-dealer argued that it
did not substantially assist the fraud. Substantial assistance exists where: (1) a defendant
affirmatively assists, helps, conceals, or by virtue of failing to act when required to do so enables
the fraud to proceed; and (2) the actions of the aider/abettor proximately caused the harm on
which the primary liability is predicated. Stanfield Offshore Leveraged Assets v. Metro. Life Ins.
Co., 883 N.Y.S.2d 486, 489 (App. Div. 2009). Although the broker-dealer contended that it
performed routine banking functions for the corporation, the court held the assistance it provided
to the corporation was more than ministerial because it served as the primary marketer and
solicitor of the corporation’s notes. Therefore, the court denied the defendants’ motion for
summary judgment, holding that the broker-dealer was critical to the success of the corporation’s
fraudulent scheme and a proximate cause of the injury to the investors.
In re Nat’l Century Fin. Enters., Inc. v. Touche, LLP, 2012 U.S. Dist. LEXIS 154042 (S.D. Ohio
Oct. 26, 2012).
A limited partnership that makes private equity investments for its limited partner
investors brought an action against defendant securities bank for fraud in connection with a
failed $12 million equity investment. The investment at issue was the purchase of preferred
stock in a corporation where the defendant acted as a co-placement agent on a stock offering and,
according to plaintiff, should have told plaintiff that the corporation they were investing in was
not operating its business in a manner consistent with what was represented to the plaintiff.
Specifically, plaintiff alleged that the bank aided and abetted the corporation’s fraud against the
plaintiff. Though the bank was based in New York, its alleged assistance in the fraud came in its
role as a conduit for an Ohio company to convey false information to the plaintiff. Thus, the
court determined that Ohio law would govern. The plaintiff alleged that the bank allegedly aided
the corporation’s fraud in several ways: (1) it introduced the plaintiff to the potential investment
opportunity; (2) it sent the plaintiff a private placement memorandum; (3) it arranged for the
plaintiff to receive data, and offering materials; (4) it answered the plaintiff’s questions about the
investment; and (5) it set up the site visit. Until recently, Ohio state courts repeatedly expressed
doubt about whether a claim for aiding and abetting tortious conduct was cognizable. See
Andonian v. A.C.&S., Inc., 97 Ohio App. 3d 572, 574 (Ohio Ct. App. 1994). Some courts in
Ohio have flatly refused to recognize such a claim. The court also noted that federal court
decisions have reflected this uncertainty. The Sixth Circuit twice noted that it was unclear
whether Ohio would recognize a claim for aiding and abetting tortious conduct. See Aetna Cas.
& Sur. Co. v. Leahey Constr. Co., 219 F.3d 519, 533 (6th Cir. 2000). However, the Ohio
Supreme Court recently settled this issue by holding that Ohio does not recognize the cause of
action under RESTATEMENTS (SECOND) OF TORTS, § 876 for aiding and abetting tortious conduct.
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DeVries Dairy, L.L.C. v. White Eagle Coop. Ass’n, Inc., 132 Ohio St. 3d 516, 517 (Ohio 2012).
Given that under Ohio law aiding and abetting tortious conduct is not cognizable, the court
granted summary judgment as to the aiding and abetting claim.
In re Rough Rice Commodity Litig., 2012 U.S. Dist. LEXIS 17773 (N.D. Ill. Feb. 9, 2012).
Traders brought a class action against a registered commodity broker and several of its
employees. The plaintiffs alleged that all defendants were liable for aiding and abetting the
manipulation of rice futures and options prices under Section 13(a) of the Commodity Exchange
Act. Specifically, plaintiffs alleged that the defendants impacted the rough rice futures and
options contract prices through the unlawful portion of their trades and positions. Section 13(a)
of the Act creates liability for any person who willfully aids, abets, counsels, commands,
induces, or procures the commission of a violation of any provisions of the chapter. Because the
court determined that the plaintiffs could not sustain a claim for price manipulation under the
Act, the claim for aiding and abetting others in committing the violations failed. The court noted
that this claim would fail based on the pleadings as well. To state a claim for aiding and abetting
liability a plaintiff must allege that the defendant: (1) had knowledge of the principal’s intent to
commit a violation of the CEA; (2) had the intent to further that violation; and (3) committed
some act in furtherance of the principal’s objective. The court held that plaintiffs’ allegations
that certain defendants allowed others to place trades for an account without a power of attorney
authorization and allowed them to repeatedly violate the board of trade’s position limits did not
constitute acts in furtherance of the principal’s objective. Therefore, the court granted the
defendant’s motion to dismiss the aiding and abetting claim without prejudice.
U.S. Commodity Futures Trading Comm’n v. Sarvey, 2012 U.S. Dist. LEXIS 16881 (N.D. Ill.
Feb. 10, 2012).
The United States Commodity Futures Trading Commission (“CFTC”) sued defendants,
two former traders at the Chicago Board of Trade, in an enforcement action for violations of
Commodity Exchange Act and various CFTC regulations. Because the primary day trader died
prior to the trial, the claims against the remaining trader only alleged aiding and abetting the
primary trader’s scheme. Sections 4b(a)(2)(C)(i) and (iii) of the Act prohibit any person from
cheating, defrauding, or deceiving another person in connection with orders for futures contracts.
According to the CFTC, the two traders arranged a trade between themselves at a below-market
price, and as a result, the primary trader’s clients lost more than $2 million while the second
trader netted over $1.6 million. To be guilty of aiding and abetting this violation the second
trader must have known of the primary trader’s objective in the scheme and had a desire to help
him attain it. The court found that the second trader clearly had a financial motive for the illegal
trades. The nature of the timing and the structure of the trades themselves also clearly indicate
that the trader was working with the primary trader to achieve this violation. The trader also
knew these were customer sales and the trade was not made anywhere close to the prevailing
market price. The court noted that the factor that truly showed the trader’s scienter was the
nature and timing of the contract’s sale at a below-market price. There was no economic
justification for the contract sale, and the second trade was made so quickly after the first trade
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that it was clearly prearranged. This trade was purely a vehicle to compensate the primary trader
for his involvement in the scheme. For the foregoing reasons, the court granted the CFTC’s
motion for summary judgment and permanently enjoined the trader from: (1) violating the Act
or any CFTC regulations; and (2) trading commodity futures directly or indirectly for himself,
others, or acting in any capacity that requires registration with the CFTC. The court also ordered
the trader to disgorge his $1,652,187.50 in profits from the trade and pay a civil monetary
penalty, plus post-judgment interest.
SEC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 57579 (N.D. Ill. Mar. 30, 2012).
The Securities and Exchange Commission brought suit against defendants, the CEO and
a vice president of a registered investment adviser (RIA), claiming various securities violations.
The SEC alleged that the CEO and vice president aided and abetted violations of Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1), (2), & (4) of the
Investment Advisers Act of 1940 by making misrepresentations to investors. Specifically, the
SEC alleged that the CEO personally, indicated that the RIA operated much like a money market
fund in that its investments were relatively low-risk. The CEO misrepresented the risk
associated with the investment strategy in four ways, including the extensive use of leverage;
proper segregation of assets, commingled interest from its house and client accounts; and
investments in below grade securities. The SEC alleged that the vice president knowingly
utilized portions of loans collateralized by investor securities to generate returns for the RIA’s
house portfolio, pooled the interest generated by the RIA’s portfolios, and then redistributed it
across the portfolios. The vice president admitted that the RIA conducted these practices. The
SEC filed a motion for summary judgment against both the CEO and the vice president, and the
CEO filed a cross-motion for summary judgment. In affirming the SEC’s motion for summary
judgment against the vice president, the court noted that the vice president was the head trader,
had knowledge of the RIA’s trading practices and was charged with the primary responsibility of
implementing those practices. The vice president’s scienter was also established by his actions
because he was aware of the RIA’s use of client assets. The SEC also established that the vice
president substantially assisted the primary violation because, as head trader, the vice president
implemented the RIA’s fraudulent trading practices on a daily basis. Therefore, the court held
that the vice president aided and abetted violations of Section 10(b) of the Exchange Act and
Sections 206(1), 206(2), and 206(3) of the Investment Advisers Act and granted the SEC’s
motion. The court, however, dismissed the SEC’s motion for summary judgment against the
CEO and the CEO’ counter motion. The SEC was unable to conclusively establish primary
violations of Section 10(b), Rule 10b-5 and Sections 206(1) & (2) against the CEO, and the CEO
failed to establish the absence of such violations. The court dismissed the motion for summary
judgment with regards to the violation of Section 206(4) of the Investment Advisers Act because
the evidence was not clear enough to establish that the CEO acted with scienter.
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CFTC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 109747 (N.D. Ill. Aug. 6, 2012).
The CFTC brought various claims against several officers and employees of defendant
corporation, an investment group registered as both an investment advisor with the SEC and as a
Futures Commission Merchant (FCM) with the CFTC. The defendant corporation’s business
strategy relied on recruiting FCM’s to invest their excess margin funds with the defendant.
Troubles began in 2007 when a broker who had held over $1 billion in outstanding reverse repos
with the defendant began to redeem them. The following month, another broker with
$600 million in outstanding reverse repos followed suit. At first, the corporation paid these
brokers with money obtained from the nightly BONY loans. By August 13, 2007, the
corporation lacked the capital to meet its clients’ redemption orders. BONY sent the defendants’
chief executive officer a letter notifying him that the corporation had defaulted on the loan
agreement, and that it had the right to sell the securities that the corporation had pledged as
collateral. The corporation filed for Chapter 11 bankruptcy the same day. In April 2008 the
CFTC filed a complaint alleging that the corporation, its CEO, and its vice president violated
various sections of the Commodities Exchange Act (CEA). The CFTC alleged that the vice
president was liable under Section 4d(b) for aiding and abetting the corporation by drawing upon
the overnight BONY loan to benefit the house portfolio. Under Section 13(a) of the CEA, a
person who willfully aids and abets someone in an unlawful venture is liable as a principal.
7 U.S.C. § 13c(a). Liability for aiding and abetting under the CEA requires knowledge of the
principal’s objective and desire to attain that objective. Bosco v. Serhant, 836 F.2d 271, 279 (7th
Cir. 1987). The CFTC argued that the vice president was liable under Section 13(a) because he
was in charge of the corporation’s customer and house portfolios, and that he therefore possessed
the requisite knowledge and design to further the illegal scheme. While the vice president’s
authority within defendant corporation may lead to an inference of his knowledge and design to
further the defendant corporation’s goal of misusing his clients’ assets, the CFTC failed to
demonstrate that the vice president had actual knowledge with respect to the transactions. The
vice president filed a cross-motion for summary judgment, asserting that he did not control,
maintain, or otherwise service the BONY loan. The court reasoned that even if the vice
president supported his contention, he had failed to establish that he lacked the knowledge of the
allegedly improper use of the BONY loan, or that he lacked the authority to right the ship.
Furthermore, the court reasoned the nature of the vice president’s position casted doubt on his
claim that he was unaware that the securities in the house portfolio were insufficient to
collateralize the BONY loan. Thus, because these general issues of material fact existed with
respect to the vice president’s mental state, the CFTC and the vice president’s respective motions
for summary judgment were denied.
Gondeck v. A Clear Title & Escrow Exch., LLC, 2012 U.S. Dist. LEXIS 151210 (N.D. Ill.
Oct. 22, 2012).
Plaintiffs alleged that they were the victims of a fraudulent real estate scheme involving
the misappropriation of funds they deposited into an escrow account the defendant maintained at
a bank. Among other things, the complaint stated a cause of action for common law fraud and
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aiding and abetting the fraud. Defendant filed a motion to dismiss. Aiding and abetting is a
viable theory of fraud liability under Illinois law. See Hefferman v. Bass, 467 F.3d 596, 601 (7th
Cir. Ill. 2006). The elements of common law fraud are: “(1) a false statement of material fact;
(2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement
induce the plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and
(5) plaintiff’s damages resulting from reliance on the statement.” Connick v. Suzuki Motor Co.,
174 Ill. 2d 482 (Ill. 1996). “Under Illinois law, to state a claim for aiding and abetting one must
allege: (1) the party whom defendant aids performed a wrongful act causing injury; (2) the
defendant was aware of his role when he provided the assistance; and (3) the defendant
knowingly and substantially assisted the violation.” Hefferman, 467 F.3d at 601. A fraud claim
premised on the aiding and abetting liability must satisfy the heightened pleading standards of
Rule 9(b). Rule 9(b) requires that “facts such as the identity of the person making the
misrepresentation, the time, place, and content of the misrepresentation, and the method by
which the misrepresentation was communicated to the plaintiff be alleged in detail.” With
respect to the defendant’s liability for aiding and abetting the fraud, the complaint here alleged
that the defendant was aware of the false statements and misappropriation of the plaintiff’s
funds, yet failed to take any action to stop the fraud. The complaint further alleged that
defendant was a managing partner, and an inference may be drawn that the defendant would
benefit from keeping plaintiffs in the dark about the fraudulent scheme. Moreover, the complaint
adequately pled that the defendant owed plaintiff a fiduciary duty. Those allegations were
sufficient to state a fraud claim against the defendant on an aiding and abetting theory. See
Lerner v. Fleet, N.A., 459 F.3d 273, 295 (2d Cir. 2006) (holding in a common law fraud case that
“the mere inaction of an alleged aider and abettor constitutes substantial assistance . . . if the
defendant owes a fiduciary duty directly to the plaintiff”).
SEC v. Wealth Mgmt., LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,814 (E.D. Wis. Apr. 24, 2012).
The district court granted the Securities and Exchange Commission’s motion for
summary judgment in a complaint alleging violations of Sections 206(1), (2), (4), of the
Investment Advisers Act of 1940 as well as Rule (4)-8 thereunder, and Section 10(b) and
Section 17(a) of the Securities Exchange Act of 1934. The SEC brought these charges against
defendant, the founder and chairman of a broker-dealer. The court granted summary judgment to
the SEC on the ground that defendant was the ringleader of the broker-dealer’s fraudulent
activities, he was aware that his conduct was illegal, and he was instrumental in the brokerdealer’s
violation of the Exchange Act and Investment Advisers Act. The court also noted that
the defendant was aware of the applicable disclosure requirements and knew that failing to
disclose his fee arrangement and the inappropriateness of the investments was improper.
Accordingly, the district court found the defendant liable for all alleged violations and for aiding
and abetting those violations.
SEC v. True N. Fin. Corp., 2012 U.S. Dist. LEXIS 161044 (D. Minn. Nov. 9, 2012).
The Securities and Exchange Commission alleged violations of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 in the offer and sale of
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interests in a capital fund, which was an unregistered investment pool. The SEC alleged that the
defendants engaged in written and oral misrepresentations to investors and registered
representatives from March 2008 to December 2009. Additionally, the SEC asserted aiding and
abetting liability against the fund management company and its president. The fund
management company moved for summary judgment on grounds that it could not be secondarily
liable because no primary violations occurred and because the SEC could not prove that the fund
management company was aware of the primary actor, the president’s role in the fraudulent
scheme. The fund management company further asserted that it was entitled to summary
judgment on the aiding and abetting claim because the president “who owned and controlled the
fund management company” was unaware of the purported fraudulent scheme and that assertions
of the fund management company’s negligence are insufficient for aiding and abetting liability.
The Eighth Circuit has a three-prong approach to determining liability for aiding and abetting the
commission of securities violations. Camp v. Dema, 948 F.2d 455, 459 (8th Cir. 1991). First,
the court asks whether a primary party has committed a securities law violation. Camp, 948 F.2d
at 459. Second, the court assesses the aider and abettor’s “knowledge” of the violation. Id.
Third, the court evaluates whether the aider and abettor substantially assisted the primary
violator in committing the violation. Id. Knowledge and substantial assistance are inverse
related, “where there is a minimal showing of substantial assistance, a greater showing of
scienter is required.” Id. The “exact level” of knowledge is fact-dependent, but negligence is
insufficient. In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 893 (8th Cir. 2002). An aider and
abettor can also be found secondarily liable if that party was aware of the primary violator’s
“illegal” scheme. K&S P’ship v. Cont’l Bank, N.A., 952 F.2d 971, 977 (8th Cir. 1991).
Additionally, issuer-entities may be liable for fraudulent statements made by analysts. See In re
Novarre Corp. Sec. Litig., 229 F.3d 735, 743 (8th Cir. 2002). The court determined that the fund
management company could potentially be primarily liable for statements regarding various
categories of information sent to investors and potential investors because the fund management
company appeared to have had ultimate authority over the contents of these documents.
Consequently, the court denied the fund management company and the president’s respective
motions for summary judgment on the aiding and abetting liability claims as well as the primary
alleged violation.
Facciola v. Greenberg Traurig LLP, 2012 U.S. Dist. LEXIS 36228 (D. Ariz. Mar. 19, 2012).
Investors brought suit against a mortgage lender, a related corporation, and the two
corporations’ legal counsel, alleging that the corporations’ counsel aided and abetted securities
violations under Arizona law and common law. The related corporation’s legal counsel moved
to dismiss the aiding and abetting claims. To state a claim for aiding and abetting fraud, a
plaintiff must plead (1) a primary violation has occurred; (2) defendant’s knowledge or duty of
inquiry with regard to the primary violation; and (3) the defendant substantially assisted or
encouraged the primary actor’s violation. Wells Fargo Bank v. Ariz. Laborers, Teamsters &
Cement Masons, 38 P.3d 12, 23 (2002). Defendant argued that under Arizona’s aiding and
abetting law the plaintiffs must show that a defendant provided substantial assistance in the
fraudulent sales of securities, and not just in the fraudulent scheme. The court noted, however,
that the Arizona Supreme Court defined substantial assistance as a necessary contribution to the
underlying fraudulent scheme by the person charged. Because the primary securities fraud in
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this case was a fraudulent scheme perpetrated by the corporations, and the legal counsel assisted
the corporations by continually providing advice and assistance, the court denied the motion to
dismiss the aiding and abetting claim under Arizona law. The legal counsel also moved to
dismiss the plaintiffs’ aiding and abetting claim under common law, alleging that only Arizona’s
securities fraud statutes provide a form of aiding and abetting liability. In denying the motion to
dismiss plaintiffs’ claims for aiding and abetting, the court noted that claims for common law
aiding and abetting and statutory aiding and abetting are distinct. Grand v. Nacchio (Grand II),
236 P.3d 398, 401 (2010).
Dexia Holdings, Inc. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71374 (C.D. Cal.
Feb. 17, 2012).
Investors brought an action against a home loan corporation for aiding and abetting
common law fraud with regard to residential mortgage-backed securities. In New York, an
aiding and abetting claim requires: (1) actual knowledge and (2) substantial participation.
Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006). Substantial participation must be
pled with particularity, while actual knowledge may be averred generally. Plaintiffs alleged
aiding and abetting against the same defendants whom they accused of primary fraud violations.
While it is possible that a defendant might commit certain primary violations while aiding and
abetting others, plaintiffs did not explain how that theory applied in the case. The court also
noted that the charge required a pleading of substantial assistance with the actual fraud alleged.
In this case, that would mean that a defendant must have assisted with the allegedly false
statements that formed the basis of the complaint. The court held that assistance with
underwriting the corporation generally does not suffice. The court dismissed the cause of action
for aiding and abetting without prejudice, and leave to amend, noting that plaintiffs must explain
which defendant substantially assisted with each false statement and how the defendant
substantially assisted the dissemination of the false statement.
Thrivent Fin. for Lutherans v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71376 (C.D. Cal.
Feb. 17, 2012).
Investors brought an action against a home loan corporation, its subsidiaries, and its
depositors, alleging aiding and abetting fraudulent misrepresentations regarding certain
residential mortgage-backed securities. The claims in this case were analyzed under relevant
state law only. In Minnesota, an aiding and abetting claim requires a plaintiff to show: (1) a
primary violation; (2) actual knowledge of the primary violation; and (3) substantial assistance.
Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn. 1999). Substantial
assistance must be pled with particularity, while actual knowledge may be alleged generally.
Plaintiffs’ allegations referred to false statements and offering documents distributed by the
corporation. They do not allege, however, that the aiding and abetting defendants assisted with
creating or disseminating these offering documents. Rather, they alleged that those defendants
were involved in underwriting loans, setting underwriting standards, choosing which loans to
securitize, failing to transfer title properly, and failing to properly service the offerings. In
dismissing the cause of action, the court noted that the touchstone of a fraud claim is not the
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underlying action but the misrepresentation of that action. In this case, the court found that
plaintiffs did not allege with particularity that the corporation or other defendants substantially
participated in the creation of the offering documents or in the alleged misrepresentations
therein. Therefore, the court granted defendants’ motion to dismiss plaintiffs’ claim for aiding
and abetting.
SEC v. Wilde, 2012 U.S. Dist. LEXIS 183252 (C.D. Cal. Dec. 17, 2012).
The Securities and Exchange Commission brought this civil enforcement action alleging
that beginning in April 2008 defendant, through his company, raised over $11 million for
investors by falsely promising exceedingly high returns from two prime bank or high yield
investment schemes. The defendants promoted the investment schemes by misleading the
investors regarding the nature of their investments, resulting in a near total loss of the investors’
money. The SEC filed a motion for summary judgment which the defendants opposed.
Specifically, the SEC alleged various defendants aided and abetted violations of Section 10(b)
and Rule 10b-5. Section 20(e) of the Securities Exchange Act of 1934 allows the SEC to bring
civil actions against the aiders and abettors of securities fraud. 15 U.S.C. § 78t(e). The SEC
may bring such an action against “any person that knowingly provides substantial assistance” to
a primary violator of the securities laws. SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012).
Specifically, the SEC must show: (1) the existence of a violation of the primary party; (2) the
knowledge by the aider and abettor of the primary violation and of his own role in furthering it;
and (3) substantial assistance in the commission of the primary violation. SEC v. Fehn, 97 F.3d
1276, 1288 (9th Cir. 1996). The court determined that the SEC was successful in establishing
the first element—the existence of a primary violation (Section 10(b)/Rule 10b-5) by other
defendants through the promotion of the bank guarantee program. As to the second and third
elements, undisputed evidence demonstrated that the individual defendants, knowing of the
primary violation and their respective roles in the fraudulent scheme, substantially assisted in it.
Accordingly, the court entered summary judgment against these individual defendants on the
claim for aiding and abetting the Section 10(b) and Rule 10b-5 violation.
SEC v. Dafoitis, 874 F. Supp. 2d 870 (N.D. Cal. 2012).
The Securities and Exchange Commission alleged various securities violations, including
aiding and abetting alleged violations of Section 10(b), Rule 10b-5, and Rule 206(4)-8 of the
Investment Advisers Act of 1940 against defendant, an executive of a broker-dealer subsidiary,
based upon his management of an ultra-short bond fund. The SEC alleged that the defendant
misstated and amended information regarding the bond fund. As to the aiding and abetting
claims, the defendant moved for summary judgment, arguing that the claims failed because
defendant’s alleged scienter cannot be used to satisfy the requirements for both the primary
violation and his purported secondary liability for the same violation. The court agreed with the
defendant’s argument, stating that the defendant was the only natural person put forward as
having scienter. Even though there was previously another defendant in the action, the SEC did
not argue or point to evidence in the summary judgment record that he had scienter for the
primary violations alleged. Instead, the SEC repeatedly argued that its aiding and abetting theory
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was premised on defendant supplying the necessary scienter for the primary violation. In
granting summary judgment as to the aiding and abetting claims, the court held that aiding and
abetting requires proving a primary violation by someone else and that person would need to
have scienter, which the SEC failed to prove.
SEC v. Sells, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal. Aug. 10, 2012).
The Securities and Exchange Commission alleged that two defendants, the vice president
of sales at a medical supplies company and the former senior vice president of commercial
operations for the same company, violated the Securities Act of 1933 and the Securities
Exchange Act of 1934. Both defendants filed a motion to dismiss the claims. The corporation’s
primary product was a robotic catheter system which is sold to hospitals for use in cardiac
surgical procedures. Under the corporation’s announced policy, revenue could be recognized as
a sale only after the catheter unit was installed at the customer’s location and training of the
customer on the unit was complete. Upon joining the corporation, both defendants were
informed of the policy. However, the defendants completed a series of transactions that did not
conform to these revenue recording procedures. As a result of these improperly recorded
transactions, the corporation filed a flawed prospectus supplement as part of an offer to sell
common stock. The corporation then had to file restated financial statements for the fiscal years
when both defendants worked for the corporation. The restatement disclosed that revenue from
more than twenty sales transactions had been improperly reported. The SEC brought a variety of
claims for relief against both defendants. The SEC alleged that the senior vice president violated
Section 10(b) of the Exchange Act and Rule 10b-5(b) and that the senior vice president provided
substantial assistance to the corporation’s Rule 10b-5(b) violations. The senior vice president
argued that he could not be held liable for aiding and abetting the corporation’s violations of
Section 10(b) and Rule 10b-5(b) because the SEC had not alleged a primary violation by the
corporation. The senior vice president pointed out that for the corporation to be liable for
Rule 10b-5(b) violations, it must have acted with scienter in disseminating false information, and
here the corporation allegedly did not know the falsity of the financial statement that it issued.
He argued that his scienter cannot be imputed to the corporation, for the proposition that only the
knowledge of the corporate officer who makes the alleged false and misleading statements can
be imputed to the corporation. The court rejected this argument citing that the Ninth Circuit,
while not foreclosing the possibility of imputing collective scienter to a corporation, limited that
theory to circumstances in which a company’s public statements were so important and so
dramatically false that they would not create a strong inference that at least some corporate
officials knew of the falsity upon publication. Here, the court reasoned that the theory of
collective scienter was not at issue nor was the SEC subject to the heightened pleading standard
required by the PSLRA. As such, the senior vice president’s knowledge could be imputed to the
corporation by application of the doctrine of respondeat superior. See, e.g., Hollinger v. Titan
Capital Corp., 914 F.2d 1564, 1578 (9th Cir. 1990). Thus, the court concluded that the SEC had
alleged a primary Rule 10b-5(b) violation against the corporation, and the aiding and abetting
claim was valid.
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Nova Leasing, LLC v. Sun River Energy, Inc., 2012 U.S. Dist. LEXIS 124061 (D. Colo. Aug. 31,
2012).
Plaintiff asserted various claims against individual defendant who was the principal of
two corporate defendants. Plaintiff’s claims against these defendants hinged on its allegation
that the individual defendant in his role as principal, improperly sought to prevent the plaintiff
from selling stock it owned in the company. Plaintiff alleged that the individual defendant’s
actions artificially inflated the price of the company shares, thereby financially benefitting him,
and both corporate defendants by preventing dilution of their beneficial ownership interests in
the company. Defendants moved to dismiss the claim for aiding and abetting securities fraud
under the Colorado Securities Act. The defendants’ primary argument was that plaintiff failed to
allege that they “provided substantial assistance in connection with the alleged securities fraud.”
The court disagreed with the defendants’ assessment of the plaintiff’s allegation. Pursuant to the
Colorado Securities Act, “any person who knows that another person . . . is engaged in conduct
which constitutes a violation of Section 11-51-501 and who gives substantial assistance to such
conduct is jointly and severally liable to the same extent as such other person.” COLO. REV.
STAT. § 51-604(5)(c) (emphasis added). In its complaint the plaintiff alleged that the individual
defendant and the corporate defendants rendered substantial assistance to the conduct of the
company, including causing or assisting the company to make materially false or misleading
statements, and failing to disclosure material facts necessary to make the company’s statements
not false or misleading. The court agreed with the plaintiff that it had adequately alleged
defendant’s liability based on the actions of the individual defendant as their agent. “The general
rule that a principal is liable for the fraud and misrepresentations of his agent while acting within
the scope of his authority or employment is fully applicable to corporations. . . .” Kerbs v. Fall
River Indus., Inc., 502 F.2d 731, 740–41 (10th Cir. 1974). In the instant case, plaintiff alleged
that the individual defendant was a principal of the defendant corporations and a managing
member as well. Accordingly, the court ruled, that plaintiff’s aiding and abetting securities fraud
claim was well pled.
Groom v. Bank of Am., 2012 U.S. Dist. LEXIS 2374 (M.D. Fla. Jan. 9, 2012).
Investors brought a mass action against the banks where Louis J. Perlman a Ponzi scheme
perpetrator, maintained accounts. Plaintiffs asserted that the banks aided and abetted breach of
fiduciary duty, fraud, and Florida securities laws. Under Florida law, a cause of action for aiding
and abetting a breach of fiduciary duty requires: (1) a fiduciary duty on the part of the
wrongdoer; (2) a breach of fiduciary duty; (3) knowledge of the breach by the alleged aider and
abettor; and (4) the aider and abettor’s substantial assistance or encouragement of the
wrongdoing. S&B/Bibb Hines PB 3 Joint Venture v. Progress Energy Fla., Inc., 365 F. App’x
202, 207 (11th Cir. 2010). Plaintiffs argued that Perlman was a fiduciary with respect to funds
the investors deposited in the accounts offered by Perlman’s corporation. Although the plaintiffs
were arguably in a fiduciary relationship with Perlman with respect to the investment accounts,
the plaintiffs were unable to show that the banks had knowledge of that relationship. The
plaintiffs only conclusively stated that the banks “knew, or had ample reason to know that the
plaintiffs’ employee investment savings accounts’ funds were intended by plaintiffs to be treated
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as trust funds” and that the banks “had notice of the fiduciary nature” of their relationship with
Perlman. These conclusions, the court found, were devoid of factual support and therefore not
entitled to an assumption of truth. The plaintiffs also failed to prove that the banks provided
substantial assistance to Perlman’s breach of fiduciary duty. The only contention plaintiffs made
was that the defendant banks failed to adhere to the customary and accepted standard of care and
failed to monitor incoming deposits and wires entrusted to them. The court noted, however, that
an allegation of the failure to act, absent a duty to act, is not substantial assistance. The
plaintiffs’ claims regarding the banks’ aiding and abetting fraud also failed because plaintiffs
could not prove the banks’ knowledge or substantial assistance. Plaintiffs’ claims regarding
aiding and abetting violation of the Florida Securities and Investor Protection Act failed because
they could not establish that the banks personally participated or aided the sales of investments.
Accordingly, the court granted defendants’ motion to dismiss the aiding and abetting claim
without prejudice.
Gault v. SRI Surgical Express, Inc., 2012 U.S. Dist. LEXIS 151409 (N.D. Fla. Oct. 22, 2012).
Plaintiff initiated action on behalf of himself and other public shareholders of the
defendant corporation against the corporation and its board of directors and an acquisition
company, a wholly-owned subsidiary of the defendant. Plaintiff alleged that the defendant
directors breached their fiduciary duties and violated Section 14(e) of the Securities Exchange
Act of 1934 by “attempting to sell defendant corporation to acquisition company by means of an
unfair practice and for an unfair price during a recent merger.” The complaint also included a
claim against the subsidiary for aiding and abetting breaches of fiduciary duties. Claims
involving internal affairs of corporations, such as the breach of fiduciary duties, are subject to the
laws of the state of incorporation. Chatlos Found., Inc. v. D’Arata, 882 So. 2d 1021, 1023 (Fla.
5th D.C.A. 2004). Thus, because the defendant is a Florida corporation, the court will analyze
the alleged breach of fiduciary duty claim in accordance with Florida law. “Under Florida law a
claim for aiding and abetting a breach of fiduciary duty requires: (1) a fiduciary duty on the part
of the primary wrongdoer; (2) a breach of the fiduciary duty; (3) knowledge of the breach by the
alleged aider and abettor; and (4) the aider and abettor’s substantial assistance or encouragement
in the wrongdoing.” Court Appointed Receiver of Lancer Offshore, Inc. v. Citco Grp. Ltd.,
2008 U.S. Dist. LEXIS 25740, *5 (S.D. Fla. Mar. 31, 2008). The plaintiff here failed to allege
sufficient facts to establish the subsidiary substantially assisted or encouraged the alleged breach
of fiduciary duty. The complaint only contained conclusory allegations that the subsidiary
colluded in or aided and abetted in the director defendants’ fiduciary duties. In the absence of
any facts establishing that the former subsidiary substantially assisted in or encouraged defendant
directors’ fiduciary claim, the court dismissed the complaint without prejudice.
SEC v. BankAtlantic Bancorp, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,901 (S.D. Fla. May 29,
2012).
The Securities and Exchange Commission filed an action against defendants, a
corporation and its CEO, alleging multiple violations of the Securities Exchange Act of 1934.
Specifically, the SEC alleged that defendant CEO aided and abetted the corporation’s securities
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fraud, recordkeeping and control violations, and reporting violations. The CEO brought a
motion to dismiss the complaint for failure to state a claim pursuant to Federal Rules of Civil
Procedure 9(b) and 12(b)(6). A claim for aiding and abetting a securities violation requires that:
(1) another party was the primary violator; (2) the accused party had a general awareness that his
role was part of an overall activity that was improper; and (3) the accused knowingly and
substantially assisted the violation. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045
(11th Cir. 1986). Applying these standards, the court dismissed the SEC’s control violations
claim against the CEO for lack of a primary violation. The court denied his motion to dismiss
the SEC’s claim of aiding and abetting the corporation’s securities fraud violations,
recordkeeping violations, and reporting violations. With regard to the securities fraud violation,
the court found that the SEC sufficiently stated a claim for a primary violation and included
allegations that the defendant made misrepresentations in earnings calls and signed public filings
containing misrepresentations. The court noted that these allegations against the CEO defendant
alleged with sufficient factual detail that defendant had a general awareness that he was part of
an improper and illegal practice, and that he knowingly or recklessly provided substantial
assistance in those alleged violations. With regard to the recordkeeping violation, the court
found that the SEC sufficiently alleged a primary violation and included allegations that the
defendant was subjectively aware of the primary violation and knowingly provided substantial
assistance in avoiding reclassifying and recording certain loans. Finally, the court found that the
SEC sufficiently alleged a primary reporting violation that included allegations that the
defendant provided substantial assistance and certified the filing of the corporation’s 10-Q that
allegedly contained material misrepresentations or omissions of material fact. Thus, the court
denied defendant’s motion to dismiss in part and granted in part.
Lamm v. State St. Bank & Trust Co., 2012 U.S. Dist. LEXIS 135008 (S.D. Fla. Aug. 21, 2012).
Plaintiff investor brought a claim for aiding and abetting breach of fiduciary duty against
defendant bank. Plaintiff had hired a registered representative and entrusted him with a
significant portion of his assets. Plaintiff established two custody accounts for the holding and
disposition of the assets, and defendant eventually took over both accounts. Without the
plaintiff’s consent, the registered representative replaced the plaintiff’s conservative investments
with riskier securities. Upon the registered representative’s instructions, the bank disbursed the
funds from plaintiff’s account to effectuate the transactions. The court granted the bank’s
motion to dismiss the aiding and abetting breach of the fiduciary duty. Under Florida law, in
order to establish aiding and abetting, the plaintiff must establish that the aider and abettor had
knowledge of the underlying breach of fiduciary duty for fraud, and that the aider and abettor
substantially assisted or encouraged commission of the breach or fraud. In re Caribbean K Line,
Ltd., 288 B.R. 908, 919 (S.D. Fla. 2002). “In order for a claim to survive a motion to dismiss,
the plaintiff must allege the defendant had actual knowledge of the underlying wrongdoing.”
Lawrence v. Bank of Am., N.A., 2010 U.S. Dist. LEXIS 89539 (M.D. Fla. Aug. 30, 2010). Here,
the defendant bank did not disregard any obvious “red flags” in executing the transaction,
because the transactions were routine and typical, and thus the plaintiff failed to plead facts to
establish the knowledge prong for an aiding and abetting claim. Moreover, the court reasoned,
plaintiff could not meet the substantial assistance prong because the bank had no duty to disclose
the alleged irregularities in the transactions.
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In re Detling, Release No. 66161, 2012 SEC LEXIS 142 (Jan. 17, 2012).
The Securities and Exchange Commission instituted public administrative proceedings
against the general counsel of a corporation. The SEC’s complaint alleged, among other things,
that the attorney made material misrepresentations and omissions in connection with the
corporation’s bond transactions. The attorney failed to disclose key participants to the
transaction, that the corporation had been indicted for financial fraud in late 2005, and that he
was in the process of negotiating a plea agreement for the corporation. In addition, the attorney
failed to disclose material information about a $200,000 loan to the corporation from a company
that was partially owned by the attorney, in order to facilitate the closing of the transaction. His
failure to disclose details about the criminal proceeding and the loan rendered certain statements
in the bond’s Official Statement materially misleading. By reviewing the Official Statement,
which was distributed to investors in connection with the transaction, and failing to correct the
misstatements and omissions therein, the attorney aided and abetted the violations of the
corporation. Without admitting or denying the allegations, the attorney consented to the SEC’s
findings and agreed to a suspension from appearing or practicing before the SEC for at least five
years.
In re Brown, Release Nos. 66469 & 3376, 2012 SEC LEXIS 636 (Feb. 27, 2012).
Defendants, registered representatives, appealed the decision of an administrative law
judge. The ALJ found that the defendants aided and abetted and caused the broker-dealer’s
failure to keep accurate books and records in violation of Section 17(a) of the Securities
Exchange Act of 1934 and Rule 17a-3 thereunder. The provisions include the requirement that
the records be accurate, which applies regardless of whether the information itself is mandated.
An individual can cause a broker-dealer’s violation of the provision if he is responsible for an act
or omission that he knew or should have known would have contributed to the violation. To
establish an aiding and abetting claim of a books and records violation, the ALJ must find that:
(1) a violation of the books and records provisions occurred; (2) the respondent substantially
assisted the violation; and (3) the respondent provided that assistance with the requisite scienter.
See In re vFinance Invs., Inc., Release No. 62448, 2010 SEC LEXIS 2216 (July 2, 2010).
Scienter may be satisfied by evidence that the respondent knew of, or recklessly disregarded, the
wrongdoing and his or her role in furthering it. Here, the broker-dealer committed a primary
violation of the books and records provisions by maintaining new account forms that falsely
indicated that registered representative “A,” and not registered representative “B,” was the
associated person responsible for the accounts. The broker-dealer made these representations to
conceal that registered representative “B” was prohibited from selling variable annuities to new,
elderly customers. The two registered representatives substantially and knowingly assisted these
violations by having registered representative “A” sign the customers’ new account forms. As a
result, the ALJ issued an opinion and order, finding it in the public interest to bar the registered
representatives from association for two years; to impose a cease and desist order on registered
representative “A” and “B”; and to impose civil penalties of $560,000 for registered
representative “B,” $310,000 for “A,” and $255,000 for “C.”
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In re Chiu, Release Nos. 6647 & 3367, 2012 SEC LEXIS 639 (Feb. 27, 2012).
The Securities and Exchange Commission instituted public administrative proceedings
against an audit partner of a major public accounting firm. Without admitting or denying the
allegations, the partner consented to the SEC’s findings that he aided and abetted the
corporation’s fraudulent scheme. The SEC found the corporation’s senior management and
some directors engaged in a complex scheme to overstate the corporation’s revenues and
earnings and artificially inflate its stock price. This resulted in the corporation’s reported
financial statements being materially false and misleading. The scheme was concealed with
forged sales and shipping documents, as well as through the circular transfer of cash among and
between the corporation, its primary manufacturer, and its purported distributor. The
corporation’s executives sought to recognize revenue on what were actually fictitious year-end
sales. The SEC alleged that based on the facts presented to the partner, he knew it was improper
for the corporation to recognize the revenue. Specifically, he knew that the sales failed to meet
requirements under the Generally Accepted Accounting Principles. The SEC also alleged that
during the audits of the consulting firm’s financial statements, the partner failed to object to the
firm’s issuance of multiple consents to the reissuance of its audit opinion. The partner agreed to
a suspension from appearing or practicing before the Commission as an accountant for a period
of at least five years.
In re MidSouth Capital, Inc., Release Nos. 66828, 3398, & 30038, 2012 SEC LEXIS 1254
(Apr. 18, 2012).
The Securities and Exchange Commission instituted public administrative and cease-anddesist
proceedings against a registered broker-dealer and its former CEO and chief financial
officer. The respondents submitted an offer of settlement in anticipation of the institution of the
proceedings, which the SEC accepted. Without admitting or denying the allegations, the
respondents consented to findings that the former CEO willfully aided and abetted and caused
the registered broker-dealer’s violations of Sections 15(c)(3), and 17(a)(1) of the Securities
Exchange Act of 1934 and Rules 15(c)(3)-1, 17(a)-11, 17(a)-3 thereunder. The registered
broker-dealer, for several years, continued to effect transactions and securities on multiple
occasions when it did not have the required net capital. The broker-dealer continued these
improper transactions even after the SEC and Financial Industry Regulatory Authority
(“FINRA”) notified the broker-dealer that it should cease effecting transactions while not in net
capital compliance. The broker-dealer also failed to file the requisite notifications of its net
capital deficiencies with FINRA and the SEC. The CEO aided and abetted these violations
because he was aware of and had primary responsibility to address the broker-dealer’s net capital
obligations, remedy past deficiencies, and ensure future compliance. FINRA had sent three
deficiency notifications directly to the CEO. Notwithstanding this knowledge and the notices
from the SEC and FINRA, the CEO intentionally, or with severe recklessness, permitted and
caused the broker-dealer to fail to keep accurate books and records, provide appropriate
Rule 17(a)-11 notifications, and failed to cease to effect transactions while not in net capital
compliance. Thus, the CEO willfully aided and abetted the broker-dealer’s net capital violations.
The CEO consented to cease and desist from willfully aiding and abetting and causing any
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violations and any future violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and
Rules 15(c)(3)-1, 17(a)-11, and 17(a)-3 thereunder. The CEO consented to a bar from
association and from participating with a registered investment company or affiliated person of
such investment adviser for a period of six months.
In re Montford & Co., 2012 SEC LEXIS 1264, SEC Initial Decision Release No. 457 (Apr. 20,
2012).
In this Initial Decision, the Securities and Exchange Commission charged that a
registered investment adviser (RIA) violated Section 204 of the Investment Advisers Act of 1940
and Rule 204-1(a)(2) thereunder. The SEC also charged that the registered investment advisers’
founder was guilty of aiding and abetting these violations. Taken together, Section 204 of the
Investment Advisers Act and the instructions on the Form ADV require RIA to update their
Form ADV annually, and to amend Part 2 of the Form ADV promptly, if information therein
becomes materially inaccurate. The RIA violated Section 204 because it failed to correct the
representations in Part 2 of its 2009 Form ADV filing when the form became materially
inaccurate. To establish aiding and abetting liability, the SEC must prove: (1) a securities law
violation by a primary wrongdoer; (2) knowledge of the violation by the persons sought to be
charged; and (3) proof that the persons sought to be charged substantially assisted in the primary
wrongdoing. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983), citing IIT, an International
Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). The founder was held to have
aided and abetted the RIA’s primary violations of Section 204 and Rule 204-1(a)(2) because he
knew, or was reckless in not knowing, that the RIA was in violation with respect to its
Form ADV filings and, as the person in control who supervised the filings, he provided
substantial assistance in the commission of the violations. As a result of this Initial Decision, the
founder of the RIA was barred from association and ordered to cease and desist from committing
or causing any violations, and any future violations of Sections 204, 206-1, 206-2, and 207 and
Rule 204-1(a)(2) of the Investment Advisers Act. The founder was also ordered to pay
prejudgment interest and a civil penalty of $150,000.
In re Adams, Release Nos. 9324 & 67019, 2012 SEC LEXIS 1564 (May 18, 2012).
The Securities and Exchange Commission issued an order instituting proceedings and
entered a final judgment by default against defendant, formerly the president, chairman,
principal, and registered representative of a registered broker-dealer. The SEC’s complaint
alleged that defendant manipulated stock prices by posting increasing, fictitious quotations for
the stock on the OTC bulletin board and falsely creating the appearance of active trading in the
stock. Defendant also instructed registered representatives of the broker-dealer to use fraudulent
sales practices to inflate the market price and demand for the stock and to sell the stock to
customers at inflated prices. Defendant, with the consent of other broker-dealer management,
paid additional undisclosed compensation to registered representatives in connection with their
sales of the stock. The registered representatives used a variety of deceptive and fraudulent sales
practices to induce customers to purchase the securities at inflated prices. Because of the above
actions, the SEC charged that defendant violated, and as a principal of the broker-dealer caused
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others to violate Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and the antifraud
provisions, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC also
claimed that defendant, as a principal of the broker-dealer and a participant in its manipulative,
deceptive, and fraudulent practices, aided and abetted and caused the firm’s violation of
Section 15(c)(1) and Rules 15c1-2 and 15c1-8 of the Exchange Act. Defendant was barred from
association with any registered broker-dealer.
In re Quantek Asset Mgmt., Release Nos. 9326, 3408, & 30085, 2012 SEC LEXIS 1654
(May 29, 2012).
The Securities and Exchange Commission instituted administrative proceedings against a
hedge fund adviser, its principal, and its former director of operations. In anticipation of the
institution of those proceedings, the parties submitted an offer of settlement, which the SEC
accepted. Without admitting or denying the allegations, the respondents consented to the SEC
findings that through a pattern of misrepresentations and misstatements provided to investors, the
respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and
Sections 206(4) and 204 of the Investment Advisers Act of 1940. The SEC alleged that
respondents made a number of misrepresentations to its investors, including investment
strategies and misrepresentations regarding the fund’s loan agreements. The principal was the
founder and managing principal of the hedge fund adviser as well as portfolio manager of its
funds. He knew about the hedge fund adviser’s regulatory compliance obligations and undertook
to provide compliance staff for the firm. However, he assigned compliance staff that did not
have the necessary training, experience, and time to perform the required advisory compliance
functions. Therefore, he willfully aided and abetted and caused the hedge fund adviser’s to
violate Section 206(4) and Rule 206(4)-7 thereunder. The SEC also found that the director of
operations and the principal aided and abetted Section 206(4) of the Advisers Act and
Rule 206(4)-8 thereunder by making untrue statements of material fact on various forms sent to
investors. Also, the director of operations and the principal willfully aided and abetted and
caused the hedge fund adviser’s violations of Section 204 of the Investment Advisers Act and
Rule 204-2(a)(7) by failing to maintain certain books and records regarding the fund’s related
party loans. As a result, the principal and director of operations were barred from association for
at least five and one years, respectively. The respondents consented to the following sanctions:
the principal was to pay disgorgement of $2.5 million; the principal was to pay a civil penalty of
$150,000; and the director of operations was to pay a civil penalty of $50,000.
In re Leaddog Capital Mkts., LLC, 2012 SEC LEXIS 2918 (Sept. 14, 2012).
An Administrative Law Judge concluded that respondents violated the antifraud
provisions of the securities laws by making material misrepresentations and omissions to
investors and potential investors in a hedge fund. The Order Instituting Proceedings (“OIP”)
charges that the two individual respondents aided and abetted and “caused” the violations by the
investment company respondent of Section 17(a) of the Securities Act of 1933, Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934, and Investment Advisers Act of 1940
Section 206(4) and Rule 206(4)-8. The ALJ found that respondents established a hedge fund in
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late 2007 and provided materials to investors and potential investors containing incomplete or
false representations to one of the individual respondent’s disciplinary history, the liquidity of
the fund’s investments, and related party transactions. The initial decision ordered respondents
to cease and desist from violations of the antifraud provisions and jointly and severally, to
disgorge ill-gotten gains and pay civil money penalties. The ALJ also imposed a bar from
association with any broker-dealer, investment advisor, and investment company. Additionally,
the Order permanently bars one respondent the privilege of appearing or practicing before the
commission as an attorney.
In re Premo, 2012 SEC LEXIS 4036 (Dec. 26, 2012).
The Securities and Exchange Commission alleged that an individual: (1) engaged in
fraudulent and deceitful conduct that willfully violated Sections 206(1) and (2) of the Investment
Advisers Act of 1940; (2) provided knowing and substantial assistance that willfully aided and
abetted and caused an investment management company to violate Sections 206(1) and (2) of the
Advisors Act; and (3) willfully aided and abetted the fund’s violation of the Investment
Company Act, Rule 22c-1(a). The SEC alleged that the individual was acting both as an
investment advisor and as a person associated with an investment advisor, and that she violated
the Advisers Act Sections 206(1) and (2) by failing to disclose the information regarding the risk
of a subprime, short-term bond fund to the fund’s valuation committee, who was responsible for
ensuring compliance with internal procedures when she recommended the investment company
invest in the fund. The Administrative Law Judge found that the individual did not commit
willful violations of Sections 206(1) and (2) of the Advisors Act because she was not an
“investment advisor” under the language of the Act. However, the ALJ did find that the
individual willfully aided and abetted and caused the violations of the Act. The SEC met the
minimum requirements by proving that: (1) an independent securities law violation was
committed by a third party; (2) the person who aided and abetted the violation, knew that his or
her role was part of an overall activity that was improper; and (3) the aider and abettor
knowingly and substantially assisted the conduct that constituted the violation. See Woods v.
Barnett Bank, 765 F.2d 1004, 1009 (11th Cir. 1985). The individual was subsequently ordered
to cease and desist from aiding and abetting and causing future violations of the Act and was
barred for five years from associating or serving as an employee in the investment industry.
H.3
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Ct. 2012).
H.3
Investors sued hedge funds, their general partner, and their auditor, for various violations
of securities laws. The action arose in the aftermath of the criminal conduct of Bernard Madoff.
The plaintiffs alleged that they lost millions of dollars when they invested in two of Madoff’s
feeder funds. The complaint alleged that the fund’s general partner and its parent corporation
aided and abetted a breach of fiduciary duty through mismanagement of the fund partnerships.
The court dismissed the breach of fiduciary duty cause of action because a claim for deficient
management of a fund is “a paradigmatic derivative claim” under Delaware law. The complaint
also alleged that the general partner’s parent corporation and the hedge fund’s auditor aided and
abetted fraud. Under Massachusetts law, a defendant may be held liable for aiding and abetting a
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tort committed by another upon proof that the defendant provided substantial assistance or
encouragement to the other party. Go-Best Assets Ltd. v. Citizens Bank of Mass., 947 N.E.2d
581 (Mass. App. Ct. 2011). The court denied the auditor’s motion to dismiss because it had
already concluded that the complaint stated a claim for fraud, and held it properly pled a claim
for aiding and abetting fraud. The court dismissed the claim against the parent corporation
because the plaintiffs did not provide sufficient information to establish substantial assistance.
The court noted that the factual allegations made by the plaintiffs show only common stock
ownership and a modest overlap of senior executives and company directors, which was not
enough.
In re Celera Corp. S’holder Litig., 2012 Del. Ch. LEXIS 66 (Del. Ch. Mar. 23, 2012).
H.3
This class action was before the court on an application for the approval of settlement of
the class’s claims for, among other things, breaches of fiduciary duty in connection with the
merger of two publicly-traded Delaware corporations. The target’s largest stockholder, which
acquired the vast majority of its shares after the challenged transaction was announced,
strenuously objects to the proposed settlement. The stockholder objects to the settlement
because, among other things, the settlement undervalues valuable claims for money damages
against some of the defendants that would be released upon signing the settlement. One of these
valuable claims is against the target’s financial advisor for aiding and abetting the board’s
breaches of fiduciary duty. A third party may be liable for aiding and abetting a breach of a
corporate fiduciary’s duty to the stockholders if the party knowingly participates in the breach.
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001). The court noted that the claim was
viable even though the plaintiffs could only allege that the board breached its duty of care. The
plaintiff asserted that the financial advisor knew its financial analysis of the corporation was
questionable. To support that assertion, the plaintiff relied on three e-mails written by the leader
of the financial advisor’s transaction team. The court, however, held that the information in
these e-mails could equally reflect no more than an internal debate within the financial advisor
about the proper approach to employ in conducting an expert financial analysis. Therefore, the
court held that the claim for aiding and abetting a breach of fiduciary duty was not valuable
enough to discredit the proposed settlement.
Frank v. Elgamal, 2012 Del. Ch. LEXIS 62 (Del. Ch. Mar. 30, 2012).
Investors brought a class action suit against defendants, a company, its board of directors,
and purchasing entities, alleging that the board and the company’s control group breached their
fiduciary duties during a merger transaction. Plaintiffs also alleged that the purchasing entities
aided and abetted the breach. First, plaintiffs alleged the purchasing entities were intimately
involved in the negotiations and structuring of the merger and understood that the control group
and the minority shareholders were competing for the purchasing entities’ consideration.
Second, the plaintiffs alleged the purchasing entities demanded deal protection measures and
enticed the corporation’s management to enter into a deal with them through equity offerings and
lucrative salaries and bonuses. To state a claim that the purchasing entities aided and abetted
breach of fiduciary duty, the plaintiffs must show: (1) the existence of a fiduciary relationship;
(2) a breach of the fiduciary’s duty; (3) knowing participation in that breach by the purchasing
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entities; and (4) damages proximately caused by the breach. Malpiede v. Townson, 780 A.2d
1075, 1096 (Del. 2001). The court held that neither of the plaintiffs’ arguments suggested that
the merger was anything other than an arm’s-length transaction. Specifically, the court noted
that the first argument failed because the plaintiffs did not show that the entities attempted to
exploit the competition between the control group and minority shareholders. With regards to
the plaintiffs’ second argument, the court noted that nearly every third-party bidder seeks deal
protection devices when bargaining at arm’s length. Therefore, the court granted defendant’s
motion to dismiss the cause of action for aiding and abetting a breach of fiduciary duty.
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012).
Plaintiffs, judgment creditors, filed suit against defendants, a manager and related
entities, for various claims related to defendants’ alleged participation in a scheme to dissolve a
company after siphoning off its assets. Plaintiffs alleged that the manager aided and abetted the
company directors’ alleged breaches of fiduciary duty in unlawfully dissolving the company and
engaging in a series of self-dealing and interested transactions to the detriment of the creditors.
Defendants filed a motion to dismiss, claiming that the court lacked jurisdiction and that
plaintiffs failed to state a claim. The court denied the defendants’ motion to dismiss as to the
aiding and abetting claim concluding without analysis that plaintiffs adequately pled a claim for
aiding and abetting the directors’ breaches of fiduciary duty. Turning to the conspiracy claim,
the court noted that aiding and abetting a breach of fiduciary duty will satisfy the first two
elements required to plead conspiracy. Here, the court noted that plaintiffs could show (1) a
fiduciary relationship, (2) a breach of that relationship, (3) that the alleged aider and abettor
knowingly participated in the fiduciary breach of duty, and (4) damages proximately caused by
the breach. At issue was whether the alleged aider and abettor knowingly participated in the
breach. The court rejected the argument that, because only the directors had authority to affect
the dissolution, there could be no aiding and abetting liability. The court noted that the
complaint sufficiently alleged that there were a series of self-dealing and interested transactions.
Here, plaintiffs only need to allege facts permitting an inference that defendants knowingly
assisted in giving preferential treatment. Because plaintiffs met this standard, this showing of
aiding and abetting liability was sufficient to meet the first two elements for conspiracy.
Additionally, the court rejected defendants’ claim that the claims for civil conspiracy were
redundant or duplicative of the aiding and abetting claim. Defendants’ motion to dismiss the
civil conspiracy and aiding and abetting claims were therefore denied.
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 Del. Ch. LEXIS 287 (Del. Ch.
Dec. 20, 2012).
Plaintiffs, insurance carriers, were limited partners of a Delaware limited partnership.
That partnership invested in another fund, which invested substantially all of its investment
capital in Madoff’s investment firm. The plaintiffs opted out of a settlement and filed an action
against the limited partnership, two related entities, and various officers, directors, and managers,
alleging, among other things, aiding and abetting a breach of fiduciary duty. Defendant filed a
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motion to dismiss. The elements for aiding and abetting a breach of fiduciary duty under
Delaware law are: “(1) the existence of a fiduciary relationship; (2) the fiduciary breached its
duty; (3) a defendant who is not a fiduciary, knowingly participated in a breach; and (4) damages
to the plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary.” Globis
Partners, L.P. v. Plumtree Software, Inc., 2007 Del. Ch. LEXIS 169 (Del. Ch. Nov. 30, 2007).
Defendant contended that its partner did not have actual knowledge of or knowingly participate
in the breach. Plaintiffs alleged that the partner was an agent for the investment firm and, thus,
knowledge could be imputed to the principal. The court agreed, stating that, “Under Delaware
law, the ‘knowledge’ of an agent acquired while acting within the scope of his or her authority is
imputed to the principal.” In this case, [the partner] should be considered [the partnership’s]
agent and the agent’s knowledge can be imputed to the partnership. The court therefore denied
defendants’ motion to dismiss as to the aiding and abetting claim.
Tong v. Dunn, 2012 NCBC 16 (N.C. Super. Ct. 2012).
Investors filed an action for monetary relief against a corporation, five of its directors,
and a second corporation. The investors asserted claims for breach of fiduciary duty against the
individual defendants and claims against the corporate defendants for aiding and abetting the
breach. Plaintiffs alleged that the board members placed their own interests ahead of the
common shareholders when negotiating and planning the sale of the corporation. Both parties
disputed whether North Carolina recognized the claim assessed, but they conceded that the
central terms of aiding and abetting breach of fiduciary duty are articulated by the North
Carolina Court of Appeal. To establish a claim for aiding and abetting a breach of fiduciary
duty, plaintiffs must show: (1) violation of a fiduciary duty by the primary party; (2) knowledge
of the violation by the aiding and abetting party; and (3) substantial assistance by the aider and
abettor in achieving the primary violation. Blow v. Shaughnessy, 364 S.E.2d 444 (N.C. Ct. App.
1988). In granting the defendants’ motion to dismiss, the court noted that the conduct of a
corporate officer, within the scope of employment, cannot expose the corporation itself to aider
and abettor liability because of the intercorporate immunity doctrine. The court noted that
Delaware also adopts the general principle that a corporation’s directors and officers are all part
of a single legal entity and, therefore, cannot conspire with each other because it takes at least
two people or entities to carry out a conspiracy. Therefore, the court held that the board
members’ actions cannot give rise to aider and abettor liability under these circumstances
because of the board members’ relationship with the corporation.
H.3
4. Conspiracy
H.4
Armstrong v. SEC, 476 F. App’x 864 (D.C. Cir. 2012).
In 2006, petitioner pled guilty to conspiring to commit securities and wire fraud. He was
sentenced to five years in prison, three years of supervised release, and ordered to pay
$80,000,001 in restitution. Two years later, petitioner entered into a civil consent judgment with
the Securities and Exchange Commission which permanently enjoined him from violating
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 17(a) of the
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Securities Act of 1933. Soon after the consent judgment was finalized, the SEC initiated an
administrative proceeding to impose a bar on petitioner associating with any investment adviser,
which was granted by an administrative law judge. Petitioner appealed this administrative
action. Pursuant to the Investment Advisers Act of 1940, the SEC must show that petitioner had
been convicted of any felony involving the purchase or sale of any security within ten years of
the commencement of the proceedings, or was enjoined from any action, conduct, or practice
specified in the statute. Petitioner attempted to collaterally attack his underlying conviction by
arguing that the convicting court lacked jurisdiction; however, the court determined he had not
previously raised this issue. Before imposing an associational bar, the SEC must determine that
it would serve the public interest. Petitioner argued that because he would receive credit towards
the amount from payments made by third parties, the SEC improperly relied on the $80 million
he owed in restitution in evaluating both the egregiousness of his conduct and the likelihood that
his job would present opportunities for future violations. The court found that the SEC did not
abuse its discretion when it evaluated the debt as it presently stood and determined that this debt,
combined with petitioner’s occupation as a securities and commodities trader, would present him
with motive and opportunity to violate the law again. The court noted the SEC’s suggestion that
if the district court credited payments by other parties against the restitution petitioner was
ordered to pay, he could file an application to lift the associational bar.
U.S. v. Hagen, 468 F. App’x 373 (4th Cir. 2012).
In 2009, defendant was convicted of conspiracy to commit securities fraud, mail fraud,
wire fraud, and money laundering. The convictions arose out of defendant’s role in a “pumpand-dump”
securities fraud scheme, in which he and his co-conspirators acquired control of a
corporation and made successful attempts to artificially increase its stock price before selling
their shares at this elevated price and gaining proceeds of approximately $27 million. The
promotional campaign to “pump” up the stock price consisted of creating websites that
fraudulently touted the corporation’s business prospects and misrepresented the corporation’s
financial condition. In the months prior to the promotional campaign, no shares of the
corporation had been traded. During the “pump” phase of the scheme, trading skyrocketed to
500,000 shares a day and the price increased to $10 per share. Over the next ten months, the
conspirators sold approximately 19 million shares to the public. After this “dump” phase was
complete, the share price dropped to $1 and below. The defendant appealed the conviction
asserting that the district court erred in calculating the loss attributable to the conduct for which
he was convicted. The district court applied a 22-level upward adjustment to defendant’s
sentence based on a finding that the loss resulting from the fraud was over $20 million. In
accordance with the U.S. SENTENCING GUIDELINES MANUAL § 2B1.1(b)(1), for a defendant
convicted of fraud the offense level should be adjusted upward to varying degrees depending on
the amount of “loss.” District courts are instructed to apply either “actual loss” or “intended
loss,” whichever is greater. If the “actual loss” or “intended loss” cannot be reasonably
determined, then courts are to use the gain that resulted from the offense as an alternative
measure of loss. The district court used this alternative measure in finding the loss was
$27.6 million. The appellate court found that the district court did not err in declining to
aggregate the amount the investors lost from the residual value of their shares or in applying the
22-level enhancement called for by USSG § 2B1.1(b)(1)(L).
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Tucker v. Soy Capital Bank & Trust Co., 974 N.E.2d 820 (7th Cir. 2012).
Plaintiffs sued defendant custodian bank under multiple theories for losses they sustained
as a result of an alleged Ponzi scheme by the owner of a fund in which plaintiffs had invested
their individual retirement accounts. Among the claims, plaintiffs alleged civil conspiracy. The
custodian bank moved for dismissal for failure to state a claim of action as to all of the claims
and the trial court granted defendant’s motion with prejudice. Plaintiffs appealed. Civil
conspiracy is defined as “a combination of two or more persons for the purpose of accomplishing
by concerted action either an unlawful purpose or a lawful purpose by unlawful means.” In
order to state a claim for civil conspiracy, plaintiffs must allege an agreement and a tortious act
committed in furtherance of that agreement. As civil conspiracy is an intentional tort, proof that
a defendant knowingly and voluntarily participates in a common scheme to commit an unlawful
act or a lawful act in an unlawful manner is required. The appellate court found that plaintiffs’
complaint failed to state a cause of action for civil conspiracy as plaintiffs do not allege any
agreement between the defendants and plaintiffs failed to set forth a tortious act by the moving
defendant. The circuit court did not err in dismissing plaintiffs’ civil conspiracy claim for failure
to state a claim.
U.S. v. Sklena, 692 F.3d 725 (7th Cir. 2012).
Defendant challenges his conviction for wire fraud, commodities fraud, and noncompetitive
futures trading. Defendant and his alleged co-conspirator were floor brokers at the
Chicago Board of Trade and traded in five-year treasury note futures. In April 2004 a significant
drop in the price of the futures contracts triggered stop-loss sell orders for co-conspirator’s
clients. By the time co-conspirator acted to execute the stop-loss orders, the price had already
rebounded. Although the price had rebounded, co-conspirator sold the contracts to defendant for
the bottom-of-the-market price that triggered the stop-loss orders, resulting in the loss of more
than $2 million to co-conspirator’s clients. Moments later, defendant re-sold a portion of the
contracts to co-conspirator, again at a price near the bottom-of-the-market price. Both defendant
and co-conspirator held in their personal accounts futures contracts that they acquired at a price
significantly below the market price and then sold the contracts on the open market for the then
prevailing price, realizing significant profits. Defendant was convicted on seven counts.
Defendant appealed on the grounds that the government’s evidence was insufficient to sustain
his conviction. The Seventh Circuit rejected defendant’s argument holding that while the
government did not present strong evidence that defendant either knew or consciously avoided
knowledge that the contracts he purchased and re-sold belonged to co-conspirator’s customers,
defendant’s conviction can be sustained under the Pinkerton theory. Pinkerton v. U.S., 328 U.S.
640, 66 S. Ct. 1180, 90 L. Ed. 1489 (1946). The Pinkerton theory provides that a conspirator can
be liable for foreseeable crimes committed by a co-conspirator and, therefore, even if defendant
did not know the contracts belonged to co-conspirator’s customers, it was foreseeable by
defendant that they were. Defendant’s conviction was overturned on other grounds.
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In re Nat’l Century Fin. Enters., 846 F.Supp.2d 828 (S.D. Ohio 2012).
Plaintiffs lost over $2 billion in a large-scale securities fraud committed by an issuer of
notes. Plaintiffs purchased notes directly from defendant, which served as the initial purchaser
and placement agent for the issuer. The plaintiffs alleged violation of state and federal securities
laws, including conspiring to commit such violations that defendant conspired with the issuer of
notes to defraud them. The defendant moved for summary judgment. New York does not
recognize civil conspiracy as an independent cause of action; however, a plaintiff may advance a
theory of civil conspiracy to connect the actions of a defendant to the actions of another party in
committing an actionable tort. Therefore, to bring a claim of civil conspiracy plaintiff must
prove the primary tort plus the four elements of conspiracy: (1) an agreement between two or
more parties; (2) an overt act in furtherance of the agreement; (3) the parties’ intentional
participation in furtherance of a plan or purpose; and (4) resulting damage or injury. Defendant
argued that their employees, to whom the evidence regarding knowledge of the fraud related, did
not begin working for defendant until years after the issuer’s fraud began. Just because their
employees were latecomers, the court found this did not mean their employees did not join the
conspiracy. The court found that if their employees obtained knowledge of the scheme, tacitly
agreed to it, and committed an overt act in furtherance of the conspiracy, then defendant would
be liable at a minimum for the injury done by the conspiracy after the employees joined. The
court found that the plaintiffs submitted sufficient evidence to create a genuine issue of fact as to
whether the issuer and investment banks had a tacit understanding to defraud investors.
Defendant’s motion for summary judgment as to the claim for conspiracy was denied.
U.S. v. Fleishman, 2012 U.S. Dist. LEXIS 65165 (S.D.N.Y. May 7, 2012).
On September 20, 2011, a jury convicted defendant of both conspiracy to commit wire
fraud and conspiracy to commit securities fraud. On December 21, 2011, the court sentenced
defendant to forfeit property traceable to offenses in an amount to be determined. Under
18 U.S.C. § 981(a)(1)(c) a defendant convicted of securities fraud must forfeit any property
constituted or derived from proceeds traceable to the violation. While the government could
have argued that defendant jointly and severally with his co-conspirators, must forfeit all of the
conspiracy’s gains he could have foreseen, the government instead suggested that defendant
forfeit all income received from his business, arguing that the business could not have survived
without the criminal conspiracy in which certain employees engaged. The court found that the
government did not prove by a preponderance of the evidence that the business’ continued
existence depended on the criminal conspiracy. While hundreds of thousands of dollars were
derived through the actions of defendant and his co-conspirators, the business also received
millions of dollars through others who did not engage in fraud. Finding that the business likely
could have survived without the criminal conspiracy, the income defendant received from his
business was not solely the result of the commission of the conspiracy. Therefore, the court
differentiated between the income received as a result of the conspiracy and the income received
from legitimate business. Defendant proposed calculating the amount by multiplying
commissions received from a particular client by the percentage of clients’ calls involving the
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co-conspirators. Then, adding these amounts together, for all of the defendants’ clients,
determined the total amount defendant must forfeit. Applying this method, the defendant
calculated that he must forfeit $49,100. The government did not object to this calculation and
the court determined this represented the correct forfeiture amount.
Fazzari v. Hilbrant (In re Hilbrant), 2012 Bankr. LEXIS 5001 (Bankr. W.D.N.C. Oct. 24, 2012).
Plaintiffs invested in a buy-back property development investment deal. The developer
was involved in several other projects that were struggling financially. After sale of the lots, the
developer ceased sales, marketing, and development activities and the buy-backs were never
honored. Defendant filed bankruptcy. Plaintiffs filed individual adversary proceedings against
defendant, objecting to dischargeability and asserting twelve causes of action against defendant,
one of which was civil conspiracy. Defendant filed a motion for summary judgment. Plaintiffs’
claim for civil conspiracy necessarily failed because only one defendant was left. Civil
conspiracy, at a minimum, involves two people. Although North Carolina courts have
acknowledged that it is permissible to use circumstantial evidence to establish the elements of a
conspiracy, plaintiffs still have not produced enough evidence against defendant to justify
submission of this claim to the jury. The court granted defendant’s motion for summary
judgment on plaintiffs’ civil conspiracy claim.
Liverett v. Island Breeze Int’l, Inc., 2012 U.S. Dist. LEXIS 111621 (D.S.C. Aug. 9, 2012).
Plaintiff sued for, inter alia, breach of contract. In plaintiff’s seventh cause of action for
civil conspiracy, plaintiff alleges that defendants joined together in a scheme to mislead plaintiff,
to take the benefits of his labor without compensating him, and to harm his reputation in the
business community. Defendants moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to
dismiss plaintiff’s civil conspiracy cause of action. Civil conspiracy consists of three elements:
(1) a combination of two or more persons; (2) for the purpose of injuring the plaintiff, and
(3) which causes him special damages. Plaintiff alleged defendants joined together in an attempt
to mislead plaintiff, to take the benefits of his labor without compensating him, and to harm his
reputation in the business community. Plaintiff failed to allege facts that defendants acted
outside of their normal corporate duties or had any independent stake in achieving the objectives
of the alleged conspiracy. Therefore, plaintiff’s civil conspiracy claim fails under the intracorporate
conspiracy doctrine which provides that “no conspiracy can exist if the conduct
challenged is a single act by a single corporation acting exclusively through its own directors,
officers, and employees, each acting within the scope of his employment.” By failing to include
a party outside of the defendant corporation who was also involved in the conspiracy, plaintiff
failed to allege sufficient facts to state the claim and plaintiff’s civil conspiracy claim was
dismissed.
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Kerr v. Exobox Techs. Corp., 2012 WL 201872 (S.D. Tex. Jan. 23, 2012).
Investors alleged that defendants engaged in a scheme involving the issuance and sale of
securities in violation of Texas and federal securities laws. As to the claims brought under the
Texas common law, plaintiffs asserted that the corporation and individual defendants engaged in
fraud, misrepresentation, and civil conspiracy. Plaintiffs alleged these claims involved violations
of state securities laws and that there were pendent claims for damages and injuries resulting
from statutory and common law fraud, misrepresentation, gross negligence, and conspiracy to
commit the violations of law. The Securities Litigation Uniform Standards Act of 1998
(“SLUSA”), precludes a securities class action in state or federal court if: (1) the action is a
“covered class action”; (2) the claims are based on state law; (3) the action involves one or more
“covered securities”; and (4) the claims allege a misrepresentation or omission of material fact
relating to the purchase or sale of the security. The court dismissed the claims outlined above
because the plaintiffs failed to advance any argument that their claims were outside of the
SLUSA requirements.
Aaes v. 4G Cos., 2012 U.S. Dist. LEXIS 37356 (S.D. Tex. Mar. 20, 2012).
Plaintiffs filed this action in the Southern District of Texas against defendants asserting
causes of action including conspiracy arising out of economic damages they suffered when they
purchased allegedly fraudulent shares in Texas oil and gas ventures sold by the defendants.
Here, plaintiffs were 121 foreign citizens and residents. The facts alleged indicated that every
transaction underlying the case was entirely foreign, given that all plaintiffs were foreign citizens
and were at all relevant times in foreign countries. Because there was no indication that the
transactions took place domestically plaintiffs’ securities fraud claims were dismissed.
Rabin v. McClain, 2012 U.S. Dist. LEXIS 58441 (W.D. Tex. Apr. 26, 2012).
Plaintiff filed suit alleging that defendants, personally, through agents, and through other
entities that they controlled, engaged in false and misleading promotion of stock for financial
gain, and thus defrauded investors through stock sales of $14 million. Plaintiff further alleged
that defendants created four entities, also named as defendants, using each one to finance the
start-up of the next. Plaintiff asserted claims including common law fraud, fraud in the
inducement, breach of contract, and civil conspiracy. The first entity was created to finance the
second entity, which had the appearance of a legitimate financial stock lender, but operated more
like a Ponzi scheme. The third entity claimed to own, develop, and promote a drug that the
fourth entity claimed in its Securities and Exchange Commission filings and website to have the
exclusive rights to sell. Plaintiff asserted that defendants devised a scheme wherein they would
befriend persons in local communities and provide them with false information to sell stock in
the fourth entity, in exchange for a commission and/or gifted stock. Defendants failed to respond
to plaintiff’s complaint. The court, upon finding that there were well-pleaded facts stating a
claim upon which relief could be granted, entered default judgment against defendants.
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U.S. v. Sutton, 2012 U.S. Dist. LEXIS 75103 (E.D. Mo. Jan. 17, 2012).
Defendants were indicted on 50 counts alleging various violations of federal law
including conspiracy to commit mail, wire, and bank fraud affecting a financial institution, in
violation of 18 U.S.C. § 1349. The defendants filed a motion to dismiss, arguing that the
government based its indictment on defendants’ duty to disclose the alleged lack of
independence of one of the defendants, contending there was no such duty, and challenging the
government’s position that this person was not an independent registered investment adviser
(RIA). The indictment alleged that defendants failed to fully fund a pre-need funeral trust and
improperly withheld money from that trust. Missouri law provides that any pre-need funeral
trust in excess of $250,000 may use a federally registered or Missouri registered RIA to make
investment decisions about the principle and undistributed income of the trust. Defendants made
materially false and fraudulent representations that their RIA was independent. The
independence of this RIA was compromised in at least 18 respects, including the receipt by his
firm of $1 million in fees from defendants. In 1999, the firm entered into a written agreement
with defendants to transfer custody of all the life insurance policies obtained by individuals who
purchased pre-need funeral contracts to the custody of defendants’ corporation. The RIA
permitted defendants’ corporation to use his firm’s statutory authority as the independent RIA to
direct bank-trustees to make transfers and distributions from the trust.
Defendants argued that none of the indictment’s allegations formed a basis for bank fraud
because there was no affirmative misrepresentation and no independent duty to disclose this
information to bank-trustees. Under the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1–
b-21, an RIA is a fiduciary who has an affirmative duty of good faith, fair disclosure of all
material facts, as well as an obligation to avoid misleading his clients. The indictment alleged
that the RIA had the duties of a fiduciary and for purposes of the motion to dismiss, the court
accepted this as true.
The defendants’ argument that the mail and wire fraud counts were defective because the
government could not establish materiality was also rejected by the court. The materiality
requirement is not a mandate that a term in a contract or insurance policy be designated as
“material” to actually be material for purposes of a mail fraud statute. The court explained that if
something is capable of influencing the intended victim, it is material. So long as the
indictment’s allegation of materiality is facially sufficient, materiality is an issue to be
determined by the jury. The court instructed that bank, wire, and mail fraud statutes were to be
given the same broad construction. Because the court determined that defendants’ arguments to
dismiss the various fraud counts were defective, for the same reasons, the court determined that
the argument to dismiss the conspiracy count was defective.
Kim v. Kearney, 838 F. Supp. 2d 1077 (D. Nev. 2012).
Plaintiffs brought suit against a variety of defendants, who had assisted plaintiffs in the
purchase transaction and subsequent foreclosure on a parcel of real property. Defendants had
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introduced plaintiffs to an investment opportunity in a parcel of undeveloped land and
recommended plaintiffs borrow $100,000 from another defendant. Before the court was the
registered representative and real estate licensees’ (“defendants”) motion for a partial summary
judgment on plaintiffs’ fraud claims, which included federal securities fraud, conspiracy to
commit federal securities fraud, and Nevada securities fraud. Defendants argued that they were
entitled to summary judgment because to state a federal securities fraud claim the fraud must be
in connection with a “security” and there was no evidence of a “security.” Plaintiffs argued that
under federal securities laws a Note or other evidence of indebtedness counts as a “security.”
Finding that no security was involved, the court granted defendants’ motion for partial summary
judgment on the federal securities fraud and conspiracy to commit federal securities fraud.
Fried v. Stiefel Labs., Inc., 2012 U.S. Dist. LEXIS 122507 (S.D. Fla. June 8, 2012).
Plaintiffs, current and former employees of defendant corporation, alleged defendants,
including certain board members of defendant corporation engaged in a plan to manipulate the
employees’ ownership of shares of the privately-held company in order to improperly profit from
the company’s eventual sale. Plaintiffs filed a complaint asserting various causes of action, one
of which was civil conspiracy under Florida law. Defendants moved to dismiss, arguing that the
intra-corporate conspiracy doctrine mandates dismissal of the civil conspiracy claims. The intracorporate
conspiracy doctrine provides that a corporation’s employees, acting as agents of the
corporation, are deemed incapable of conspiring among themselves or with the corporation.
Nationwide Mut. Co. v. Ft. Myers Total Rehab Ctr., Inc., 657 F. Supp. 2d 1279 (M.D. Fla. 2009).
This rule does not apply if an agent of the corporation has a personal stake in the activities that
are separate and distinct from the corporation’s interest. Cedar Hills Properties Corp. v. E. Fed.
Corp., 575 So.2d 673, 676 (Fla. Ct. App. 1st Dist. 1991). The allegations must be sufficient to
put the defendants on notice as to how the actions of individual defendants were at odds with,
rather than on behalf of, the corporation, to a point where the individuals’ interests can be said to
be separate and distinct from the corporation’s interests. Leisure Founders v. CUC Int’l, 833 F.
Supp. 1562, 1575 (S.D. Fla. 1993). Plaintiffs argue that the intra-corporate conspiracy doctrine
does not apply because the defendants were not merely outside directors, but instead formed the
control group of shareholders and officers with direct operational control over the company and
all acted on its behalf as agents. The court held that the intra-corporate conspiracy doctrine
precluded plaintiffs from pursuing a conspiracy claim. Defendants’ motion to dismiss the civil
conspiracy claim was granted.
Burger v. Hartley, 2012 U.S. Dist. LEXIS 129783 (S.D. Fla. Sept. 12, 2012).
Plaintiffs sought rescission and substantial damages from defendants related to
$4.525 million plaintiffs invested to acquire shares in a company based on false representations
that such interests would provide indirect ownership of Series A preferred shares in a different
company. After making the investment, plaintiffs never received the closing documents
reflecting their shares and later learned that defendants did not own any Series A preferred shares
in the corporation. Plaintiffs brought claims against defendants for violations of Section 10(b)
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and Rule 10b-5(a), (b), and (c) of the Securities Exchange Act of 1934; fraud (rescission); fraud
(damages); conspiracy; and civil theft in violation of Florida Statute Section 772.11. Plaintiffs
moved for summary judgment. Defendants opposed the motion and moved to dismiss the
amended complaint. A civil conspiracy requires: (1) an agreement between two or more parties;
(2) to do an unlawful act or to do a lawful act by unlawful means; (3) the doing of some overt act
in pursuance of the conspiracy; and (4) damage to plaintiff as a result of the act done under the
conspiracy. Hogan v. Provident Life & Accident Ins. Co., 665 F. Supp. 2d 1273, 1285 (M.D. Fla.
2009) (quoting Charles v. Fla. Foreclosure Placement Ctr., LLC, 988 So.2d 1157, 115960 (Fla.
Dist. App. 2008). Under Florida law, conspiracy is not a separate or independent tort, but is a
vehicle for impeding the tortious actions of one conspirator to another to establish joint and
several liability. Hoch v. Rissman, Weisberg, Barrett, 742 So.2d 451, 460 (Fla. Dist. Ct. App.
1999) (citing Ford v. Rowland, 562 So.2d 731 (Fla. Dist. Ct. App. 1990). “To be held liable for
the acts of all co-conspirators, each conspirator need only know of the scheme and assist in it in
some way.” Principal Life Ins. v. Mosberg, No. 98-22341-CIV, 2010 U.S. Dist. LEXIS 10271,
2010 WL 473042, at *6 (S.D. Fla. Feb. 5, 2010) (quoting Donofrio v. Matassini, 503 So.2d 1278,
1281 (Fla. Dist. Ct. App. 1987)). The undisputed facts before the court establish that one
defendant was in a partnership with the other defendant, and participated in drafting the private
placement memorandum and subscription documents containing the false statements, and met
personally with plaintiffs to further the transaction. Thus, the court held that plaintiffs
established the existence of a conspiracy amongst the defendants and that the moving defendant
may be held jointly and severely liable for the actions of the other defendants.
21st Century Sys. v. Perot Sys. Gov’t & Servs., 284 Va. 32 (2012).
The plaintiff company alleged that defendants, former employees of the plaintiff,
conspired to improperly use the plaintiff’s confidential and proprietary information so that
another company, also a defendant, could establish itself in the United States Navy consulting
business. Defendants appealed a verdict in favor of the plaintiff on grounds that the evidence
was insufficient to support an award of lost good will damages because of the alleged
conspiracy. Any entity injured as a result of a conspiracy to injure its business may recover the
damages sustained because of that conspiracy, including damages for loss of good will. The
court recognized that the market value method for computing good will damages is acceptable;
however, it held that plaintiff’s evidence lacked comparable sales information and was
insufficient as a matter of law to support an award of lost good will damages. The appellate
court held that the trial court erred when it refused to set aside the award of damages relating to
plaintiff’s lost good will as a result of the conspiracy.
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012).
Plaintiffs are judgment creditors of defendant corporation. They claim defendants’
alleged participation in an elaborate scheme to dissolve the company after siphoning off its assets
resulted in damages. Defendants, a manager and related entities of defendant corporation, filed a
motion to dismiss on grounds that the court lacked personal jurisdiction and plaintiffs failed to
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state a cause of action for conspiracy. Defendants argue that a distinct claim for civil conspiracy
is redundant or duplicative of a claim of aiding and abetting. Though related, “there is a
distinction between civil conspiracy and aiding and abetting.” At times and in certain
circumstances, that distinction might be immaterial or amount to “mere hair splitting.” While
relief granted for the civil conspiracy claims would be redundant of the relief for aiding and
abetting, the claims are different. Aiding and abetting is a cause of action that focuses on the
wrongful act of providing assistance, and civil conspiracy focuses on the agreement. The court
found that ultimately the two claims are not redundant or duplicative and that under the
circumstances there is no categorical bar to the plaintiffs asserting both aiding and abetting and
civil conspiracy claims. Therefore, defendants’ motion to dismiss the civil conspiracy claim was
denied.
Highland Capital Mgmt. v. Ryder Scott Co., 2012 Tex. App. LEXIS 2674 (Tex. App. 2012).
Plaintiffs brought claims against defendants for alleged violations of Section 2 of
article 33F of the Texas Securities Act, TEX. REV. CIV. STAT. ANN. art. 581-33(F)(2), fraud,
negligent misrepresentation, conspiracy, and aiding and abetting fraud in connection with their
purchases of over $23 million in unsecured bonds issued by defendant. Plaintiffs contended that
defendant petroleum engineering firm overestimated the volume of the proved oil reserves of an
oil and gas exploration company in which plaintiffs held the unsecured bonds. Plaintiffs alleged
that the petroleum engineering firm’s overvaluation resulted from its failure to apply generally
accepted engineering practices and follow Securities and Exchange Commission guidelines.
Plaintiffs further alleged that the engineering firm knew or should have known that it had not
followed SEC regulations and that the firm knew that the oil and gas exploration company would
rely on the reserve estimates in its SEC filings and that the investors would examine and rely on
this information in deciding whether or not to invest. Plaintiffs alleged they relied on the
estimates set forth in the 10-K forms and prospectuses in deciding to invest in the unsecured
bonds and later to refrain from selling them. Plaintiffs further alleged that defendant
independent oil and gas producer knew that defendant engineering firm overestimated the proved
oil reserves, and in so doing, entered into a conspiracy with the oil and gas exploration company
to perpetuate the misrepresentations regarding the reserve estimates. The trial court granted
defendants’ motion for a partial summary judgment regarding plaintiffs’ claim of conspiracy to
defraud since plaintiffs failed to plead the underlying fraud claim. Plaintiffs appealed,
contending in part that the trial court erred in granting summary judgment with respect to the
conspiracy to defraud claim. Because the fraud claim against the petroleum engineering firm
failed, the appellate court ruled that the conspiracy claim dependent on that fraud also failed.
Eagletech Communications Inc. v. Bryn Mawr Inv. Group, 79 So.3d 855 (Fla. Dist. Ct. App.
2012).
Plaintiff corporation, a start-up seeking capital, claimed that defendants engaged in a
conspiracy in connection with financing transactions and in order to execute short sales to drive
down the price of plaintiff’s stock prior to their investment. In Florida, a civil conspiracy
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equires: (a) an agreement between two or more parties; (b) to do an unlawful act or to do a
lawful act by unlawful means; (c) the doing of some overt act in pursuance of the conspiracy;
and (d) damage to the plaintiff. A complaint must set forth clear, positive, and specific
allegations of civil conspiracy. Plaintiff alleged that defendants “combined, agreed, and
conspired with each other to devise a scheme” but never explained what the alleged improper
scheme was. As such, the trial court found that plaintiff failed to clearly set forth the “act”
defendants allegedly agreed to undertake. In addition, plaintiff failed to allege sufficient facts
where the complaint merely speculated that defendants all participated in a conspiracy because
they ultimately received a benefit from the transactions. For these reasons, the conspiracy count
was insufficient, but the trial court abused its discretion in dismissing the complaint with
prejudice rather than with leave to amend.
5. Failure to Supervise
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Stout St. Funding LLC v. Johnson, 873 F. Supp.2d 632 (E.D. Pa. 2012).
Plaintiff, a provider of commercial loans to real estate investors, filed suit against
defendant insurance underwriter and others, alleging misappropriation of funds by defendant’s
agent. Plaintiff alleged negligent supervision of the agent even though the misappropriation
occurred after its contract with defendant was terminated. Defendant moved for summary
judgment, arguing that courts have uniformly held an employer cannot be liable for negligent
supervision for torts committed by an employee after the employment relationship has ended.
Plaintiff urged the close proximity between the termination date and the misappropriation (a
matter of days) as a reason to extend liability. Plaintiff also argued for vicarious liability. The
court dismissed the case, noting that plaintiff had no authority for these propositions, and stating
that a claim for negligent supervision is a claim for direct liability, rather than vicarious liability
under a respondeat superior theory.
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).
On appeal from a FINRA disciplinary action, the Securities and Exchange Commission
found that broker-dealer, its president, and trading desk supervisor failed to reasonably supervise
the broker-dealer’s registered representative who engaged in the unregistered sale of securities.
The representative admitted to selling 2.3 million shares of thinly-traded penny stock and failing
to register the transactions with the SEC.
The president and trading desk supervisor shared responsibility for supervising registered
representatives. Neither required the representative to ask questions of customers regarding their
proposed penny stock sales, and they ignored red flags that should have prompted investigation.
Contrary to the supervisor’s belief, the SEC maintained a broker-dealer has the primary
responsibility to prevent illegal sales of securities from taking place, and supervisors may no
more ignore the obvious need for further inquiry than may the broker-dealer.
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The SEC also found the written procedures deficient. The supervisory manual lacked
meaningful guidance setting forth “reasonable inquiry” procedures for representatives to follow
when customers seek to sell large amounts of an unknown stock to the public without
registration. The procedures also lacked meaningful guidance for determining whether a
proposed sale was exempt from registration and failed to provide supervisors with a reliable
mechanism for flagging unregistered sales of securities.
The SEC sustained the FINRA sanctions, a fine of $30,000 each against the broker-dealer
and its president, a $20,000 fine, and a forty-five day and thirty-day suspension of the president
and trading desk supervisor, respectively.
In re AXA Advisors, LLC, Release No. 66206, 2012 SEC LEXIS 206 (Jan. 20, 2012).
Without admitting or denying the allegations, respondents consented to Securities and
Exchange Commission findings that the firm failed to reasonably supervise its registered
representative who fraudulently induced customers to redeem securities held at the broker-dealer,
including variable annuities and mutual funds, under the false representation that the proceeds
would be invested in other securities. The representative caused seven customers to place the
funds, totaling $1.2 million, in a bank account he controlled, in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5.
The SEC alleged that the broker-dealer failed to implement adequate procedures
regarding review of variable annuity redemptions and failed to establish reasonable procedures to
supervise representatives on leave for an extended period of time, yet continuing to service
customer accounts.
The broker-dealer consented to a $100,000 civil penalty and agreed to improve its
supervisory system, including creation of a variable product withdrawal report and an automated
system for reviewing redemptions. In accepting the settlement offer, the SEC considered the
broker-dealer’s cooperation with the SEC and criminal authorities who investigated the
representative’s scheme, and the broker-dealer’s prompt reimbursement of all customer losses.
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012).
The SEC sustained findings in a FINRA disciplinary action that a broker-dealer and its
president and CEO failed to maintain adequate written supervisory procedures and exercise
reasonable supervision over the firm’s registered representatives engaging in the sale of
unregistered securities in violation of Section 5 of the Securities Act of 1933 and NASD Conduct
Rule 2110.
The broker-dealer’s representatives admitted to selling 760,000 shares of a thinly-traded
unregistered penny stock. The supervisory manual required representatives to conduct all
restricted securities transactions in accordance with Rule 144 and to contact the CEO for his
approval beforehand. The inadequate supervision system consisted solely of relying on transfer
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agents and clearing firms to ensure compliance with Rule 144. The minimal written procedures
lacked meaningful “reasonable inquiry” procedures for representatives to follow when customers
seek to sell large amounts of an unknown stock to the public without registration, and how to
determine whether a proposed sale is exempt.
The SEC upheld the finding that the broker-dealer ignored the representatives’ sale of a
large block of recently issued shares of a little-known, thinly-traded stock despite numerous red
flags. The SEC sustained the FINRA sanctions, which consisted of a two-year suspension of the
CEO and a $30,000 fine against the broker-dealer for unregistered sales, and $50,000 fines
against each for supervisory failures. The broker-dealer was prohibited from receiving and
selling unregistered securities until it revised its written procedures to comply with Section 5 of
the Securities Act.
In re 1st Disc. Brokerage, Inc., Release No. 66212A, 2012 SEC LEXIS 220 (Jan. 23, 2012).
Without admitting or denying the allegations, respondent consented to Securities and
Exchange Commission findings that the broker-dealer failed to reasonably supervise its
registered representative within the meaning of Section 15(b)(4)(e)of the Exchange Act and
Section 203(e) of the Investment Advisers Act of 1940. The representative operated a Ponzi
scheme that defrauded more than fifty investors out of almost $9 million. The broker-dealer
failed to detect the fraud due to multiple failures in its supervisory system, including the vice
president’s individual failure to implement the Heightened Supervision Committee specified in
the broker-dealer’s written compliance policies and procedures.
The SEC alleged inadequate policies and procedures regarding compliance audits, which
provided only for review of limited information about a representative’s “doing business as”
(“DBA”) account. The SEC also alleged the broker-dealer failed to have reasonable procedures
requiring compliance auditors to review compliance audit reports from previous years. Due to
this deficiency, the auditors failed to identify a reoccurring red flag, the representative’s
intentional failure to have adequate signage outside his office that would have given investors
notice of his affiliation with the broker-dealer.
The broker-dealer settled and paid $2 million to victims of the fraud, and consented to
sanctions including a civil penalty of $40,000 and suspension of the vice president from
association in a supervisory capacity with any broker-dealer or investment advisor with the rights
to reapply for association after nine months. The executive vice president consented to
individually pay a civil penalty of $10,000.
In re Urban, Release No. 3366, 2012 SEC LEXIS 346 (Jan. 26, 2012).
On October 19, 2009, the Securities and Exchange Commission instituted administrative
proceedings against the former general counsel and executive vice president of a registered
broker-dealer and investment advisor firm. The SEC alleged that a registered representative
violated anti-fraud provisions of the securities laws and that the supervisor failed to reasonably
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exercise his supervision within the meaning of Section 15(b) of the Securities Exchange Act of
1934 and Section 203(f) of the Investment Advisers Act of 1940. On September 8, 2010, the
administrative law judge found that the representative engaged in securities laws violations and
that the former general counsel and executive vice president was his supervisor. The ALJ
dismissed the proceedings against the supervisor, however, because she found he did not fail to
reasonably exercise supervision.
In re Brown, Release No. 66469, 2012 SEC LEXIS 636 (Feb. 27, 2012).
The Securities and Exchange Commission upheld an administrative law judge’s findings
that a supervisor failed to adequately supervise the firm’s registered representative who violated
Section 17(a) of the Securities Act of 1933, Section 10(b), and Rule 10b-5 of the Securities
Exchange Act of 1934 in connection with the sale of variable annuities to elderly customers. In
December 2002, the firm appointed the supervisor to review and approve all suitability issues for
the representative’s accounts. The firm did not begin training the supervisor until several months
after he began supervising the representative, and the supervisor acknowledged that the training
was “lacking.” In 2003, the Florida Department of Financial Services filed an administrative
complaint against the representative, alleging he knowingly made false statements in connection
with the sale of variable annuities to elderly customers. After he failed to respond to the
complaint, the state revoked the representative’s insurance license. The supervisor learned that
Florida had revoked the representative’s license but continued to allow him to discuss variable
annuities at public seminars and to sell them to customers.
The state reinstated the representative’s license in April 2004 on the condition that he not
market annuities to individuals over 65 years old who are not currently his clients. The
representative continued to sell variable annuities to new, elderly clients with the assistance of
his supervisor, who listed the supervisor’s name as the registered representative on new
customers’ account forms. The SEC found the supervisor failed to supervise the representative
by “falsifying documents that misled his employer and the issuing insurance companies about
what the registered representative was doing, thus creating an environment where the registered
representative could defraud his clients with impunity.”
The SEC upheld the ALJ’s decision and barred the supervisor and representative from
associating with any broker, dealer, or investment advisor, although that the representative could
apply to become so associated in a non-supervisory capacity after two years; imposed a ceaseand-desist
order; ordered a disgorgement; and imposed a civil penalty of $310,000.
In re Rizzo, Release Nos. 67479 & 3436, 2012 Fed. Sec. L. Rep. (CCH) 80,127 (July 20,
2012).
Without admitting or denying the allegations, respondents, owner of a registered
investment advisory firm and its chief compliance officer (“CCO”), consented to Securities and
Exchange Commission findings relating to violations arising out of failure to supervise the firm’s
co-founder. The co-founder, acting as an investment advisor, misappropriated $7 million from
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15 clients over a period of several years in violation of the antifraud provisions of the Securities
Exchange Act of 1934 and the Investment Advisers Act of 1940. The owner and CCO permitted
the co-founder’s continued access to clients’ accounts while failing to investigate numerous red
flags and suspicious transactions that caused them to suspect the co-founder of a Ponzi scheme,
including co-founder’s serious financial problems. They also ignored a client’s instructions to
prohibit the co-founder from managing its accounts and concealed co-founder’s continued
involvement in those accounts. Finally, they ignored an attorney’s advice to contact affected
clients. Respondents consented to a bar from associating in a supervisory capacity with any
broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent,
or nationally recognized statistical rating organization. The owner consented to pay
disgorgement of $35,079, prejudgment interest of $7,731 and civil penalties of $130,000. The
CCO consented to pay disgorgement of $15,592 plus prejudgment interest of $3,467, and civil
penalties of $25,000.
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).
Without admitting or denying the allegations, respondents, a broker-dealer and its
principals, consented to Securities and Exchange Commission findings that from January 2007
through June 2010, they failed reasonably to supervise associated day traders who used the
broker-dealer’s order management system to engage in a manipulative trading practice known as
“layering” on U.S. securities markets. Despite repeated indications of this practice occurring,
respondents failed to establish procedures to prevent and detect the manipulative trading. They
failed to respond to repeated red flags, failed to file suspicious activity reports, and failed to
retain instant messages related to the broker-dealer business. The broker-dealer failed
reasonably to supervise its overseas traders by failing to ensure that the broker-dealer had
procedures to prevent and detect manipulative trading in violation of the Securities Exchange
Act Section 9(a)(2). Respondents consented to a cease and desist order; revocation of the
broker-dealer’s registration; and a permanent bar from association with any broker, dealer,
investment advisor, municipal securities dealer, or transfer agent, and from participating in any
offering of penny stock. The individual respondent agreed to pay a civil penalty in the amount of
$250,000.
Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Aug. 9, 2012).
Plaintiff, executor of an annuity holder’s estate, sued an insurance agent, the agent’s
employer, and an insurance company, alleging that the annuity was unsuitable given the
purchaser’s age, medical condition, and past financial directives. Claims against the insurance
company were stayed by agreement while claims against the agent and agent’s employer were
referred to arbitration.
The stay agreement recited that the company’s liability, “if any, is based solely upon a
determination that the allegations against agent are true.” The arbitrators issued an award
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dismissing the claims against the agent and her employer (FINRA ID No. 10-01456 (4/28/11))
and plaintiff did not oppose the award’s confirmation.
Plaintiff then proceeded against the insurance company in state court. The trial court
granted summary judgment for the company based on the arbitration award and the parties’
agreement. Plaintiff appealed, arguing that genuine issues of material fact existed on his claim
for negligent supervision. After de novo review, the appellate court concluded that plaintiff
waived the claim by failing to plead it in the trial court, and that it failed because the arbitration
award established the agent had no liability. The court noted that, if the agent has no liability, it
logically follows that there can be no liability imposed upon the principal for the agent’s actions.
The summary judgment was affirmed.
LaWarre v. Fifth Third Sec., Inc., 2012 Ohio 4016 (Ohio Ct. App., Sept. 5, 2012).
Plaintiffs sued their broker-dealer for negligence, breach of fiduciary duty, and fraud in
connection with losses from options trading which they permitted their registered representative
to engage in on their behalf. Plaintiffs suffered no losses while their accounts were with the
defendant broker-dealer. They then moved their accounts with the representative to a new
broker-dealer and ultimately suffered substantial losses at that firm. The trial court found that
the first broker-dealer could not be held responsible for losses sustained after plaintiffs had
transferred their accounts away. The appellate court affirmed summary judgment, holding that
once the representative left the defendant firm’s employ and plaintiffs transferred their
investments to the new firm, the firm no longer owed plaintiffs a duty and could not be held
liable for negligence, negligent supervision, or breach of fiduciary duty.
H.5
I. Private Rights of Action for Violations of SRO Rules
I.
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012).
Investor brought a class action against Morgan Stanley Dean Witter, Inc., alleging that
the brokerage firm breached its contract with investors by improperly charging its clients various
transaction fees for costs the brokerage firm did not actually incur. Prior to amending her
complaint, plaintiff alleged that the fees violated NASD and NASDAQ Stock Market Rules,
which were incorporated into client contracts by reference. However, the court dismissed the
complaint finding that plaintiff did not have a private right of action under such rules, and that, in
any case, plaintiff’s claim was precluded by the Securities Litigation Uniform Standards Act.
Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261 (S.D.N.Y. 2012).
I.
Investors brought a putative securities fraud class action against Goldman Sachs Group,
Inc. Among other things, plaintiffs alleged that Goldman failed to disclose its receipt of Wells
Notices in connection with its role in certain synthetic collateralized debt obligations. Plaintiffs
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claimed that Regulation S-K and FINRA and NASD rules required such disclosure. However,
the court dismissed plaintiffs’ claim to the extent that it was based on a violation of SRO rules
because such rules do not confer private rights of action.
Holladay v. CME Group, No. 11-CV-8226, 2012 WL 5845621 (N.D. Ill. 2012).
The court dismissed claims brought against the Chicago Mercantile Exchange, CME
Group (“CME”) and related entities pursuant to Section 22 of the Commodity Exchange Act
(“CEA”) and CME rules. Plaintiff, a former employee of defendants, sued the SROs for
employment discrimination and sexual harassment. Plaintiff’s complaint also included a claim
pursuant to Section 22, which provides a private right of action to any person for damages
sustained while engaging in a transaction subject to the rules of the SRO. The court dismissed
the claim, finding that Section 22 has been interpreted to apply only to persons injured by
violations of the CEA in connection with trading on a contract market. It did not apply to
employees alleging employment discrimination under the SRO’s rules regarding discrimination.
NASDAQ OMX PHLX, Inc. v. PennMont Sec., 52 A.3d 296 (Pa. Super. Ct. 2012).
Plaintiff NASDAQ OMX PHILX, Inc. (“Exchange”) sued PennMont Securities
(“PennMont”), a member of the Exchange, for breach of contract. The Exchange alleged that
PennMont failed to pay an invoice for the Exchange’s legal fees in accordance with Exchange
Rule 651, a fee shifting provision that required a member of the Exchange to reimburse the
Exchange for its legal fees if the member did not prevail in an action it initiated against the
Exchange. The Exchange invoked Rule 651, billing PennMont for its legal fees, after PennMont
was unsuccessful in an action it brought against the Exchange. In resolving the issue of whether
the state court had jurisdiction to hear the Exchange’s breach of contract claim, the court first
considered whether the Exchange had authority to bring a private right of action to enforce Rule
651. The court held the Exchange had no authority to initiate a private right of action to collect
disciplinary fines imposed by Rule 651, a rule enacted by the Exchange pursuant to the federal
Securities Exchange Act of 1934. The court found that a private right of action would not be
implied based on Congressional silence, especially where Congress explicitly authorized private
rights of action for other sections of the Exchange Act.
I.
I.
Jirak v. Eichten, No. A11-1388, 2012 WL 2505748 (Minn. Ct. App. July 2, 2012).
I.
Appellants challenged the district court’s determination that Eleanor Eichten made a
valid 2006 inter vivos gift to her daughter Ellen Jirak and her grandson Timothy Jirak, a
representative of Ameriprise Financial Services, Inc. For the first time on appeal, appellants
asserted a violation of a Financial Industry Regulatory Authority (“FINRA”) rule. The court
declined to address appellants’ FINRA violation argument, noting that it was not included in any
pleadings to the district court. The court also noted that it was unclear whether FINRA creates a
private right of action for those affected by a breach of FINRA members’ rules of conduct.
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J. RICO
J.
Yannotti v. U.S., 475 Fed. Appx. 784 (2d Cir. 2012).
Defendant, a federal inmate convicted of conspiracy under RICO and an alleged member
of the Gambino organized crime family, filed a motion to vacate, set aside, or correct his
sentence. In support of his RICO conviction, the government adduced extensive evidence that
two foreseeable predicate acts were committed during the limitations period. Specifically, there
was extensive testimony detailing the Gambino family’s extortion of the construction industry
and the Gambino family’s securities fraud. Defendant’s trial counsel admitted that he was
unaware that defendant could be convicted of RICO conspiracy on the basis of two timely
predicate acts, where defendant was neither named as a participant nor personally involved. On
appeal, defendant alleged that counsel’s failure to understand the law constituted ineffective
assistance of counsel and required a new trial. Without addressing whether counsel was
deficient due to his misunderstanding of RICO conspiracy law, the Second Circuit concluded
that defendant could not prevail on his ineffective assistance of counsel claim because there was
substantial evidence that he was a member of the organized crime family, he failed to provide a
specific line of attack for counsel to pursue, and the jury was properly instructed about RICO
conspiracy law.
Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir. 2012).
Buyer brought an action against an auction house, alleging that the value of wine
purchased by buyer was inflated on account of it being falsely attributed to the collection of
former President Thomas Jefferson. Plaintiff purchased four bottles of the now-discredited
“Jefferson wines” from third-party dealers in November and December of 1998, allegedly
relying on promotional representations made by the auction house. In 2008, the parties agreed to
toll the statute of limitations with respect to any claims against the auction house arising out of
the Jefferson wine sales. In 2010, plaintiff asserted a civil claim against the auction house under
RICO. The district court dismissed the RICO claim as time-barred. The Second Circuit
affirmed. It held that RICO claims are subject to a four-year statute of limitations and accrual
began no later than at the time when buyer submitted the wine for testing. Plaintiff contended
that the district court erred with respect to what facts must be discovered for a RICO claim to
accrue. The Second Circuit held that 28 U.S.C. § 1658(b), which applies to securities fraud
actions, does not apply to RICO actions. The civil RICO statute is silent on the issue, and in
such circumstances, federal courts generally apply a discovery accrual rule. In applying the
discovery accrual rule, the court concluded that discovery of the injury, not discovery of the
other elements of the claim, begins the statute of limitations.
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J.
Gilmore v. Gilmore, No. 11-4091-CV, 2012 WL 5935341 (2d Cir. Nov. 28, 2012).
The District Court for the Southern District of New York granted defendants’ motion for
summary judgment on the ground that plaintiff’s RICO claim was barred by the Private
Securities Litigation Reform Act. On appeal, plaintiff argued that the district court erred in
deciding not to split the alleged predicate acts into two separate enterprises asserted under RICO.
The Second Circuit disagreed, noting that: (1) the two sets of predicate acts shared an alleged
purpose and result, defrauding other siblings; (2) the alleged victims were the same; and (3) the
only arguable difference was the alleged method of taking money out of the companies by
charging finders’ fees, rather than making representations to acquire stock from the siblings on
favorable terms. Because the predicate acts were related to a single RICO enterprise, the court
held that the district court properly refused plaintiff an opportunity to amend his complaint to
split the predicate acts into two separate RICO enterprises.
Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783 (6th Cir. 2012).
Employers brought class action lawsuit against various insurance companies, attorneys,
and insurance agents, who marketed and sold a purportedly tax-deductible welfare benefit plan,
alleging that defendants conspired in violation of RICO to defraud employers into adopting plans
that purchased variable life insurance policies that qualified as securities. Defendants argued that
even though plaintiffs did not allege securities fraud, their complaint could present a claim for
violation of securities laws and is thus barred by the Private Securities Litigation Reform Act
(“PLSRA”). Plaintiffs responded that they did not allege fraud relating to the purchases by the
plan. Further, plaintiffs’ fraud claim related to tax consequences of the plan, and it was merely
incidental that the policies were securities. The Sixth Circuit found that the securities
transactions were not integral to or “in connection with” the fraudulent scheme as a whole.
Thus, because the fraud and the securities transactions were essentially independent events, the
PSLRA did not bar plaintiffs’ RICO claims.
Son Ly v. Sonlin, Inc., No. 12-CV-1004 (EGS), 2012 WL 6561557 (D.D.C. Dec. 17, 2012).
Plaintiffs alleged that defendant corporations Solin and LPK were “enterprises” within
the meaning of RICO. Plaintiffs alleged that defendants’ pattern of racketeering activity
included the fraudulent execution of a promissory note for stock in the defendant corporations.
Plaintiffs further alleged that defendants engaged in numerous overt and predicate fraudulent
racketeering acts in furtherance of the conspiracy, including the commission of fraud in the sale
of securities in violation of 18 U.S.C. § 1961(1)(D). The district court concluded that plaintiffs
wholly failed to set forth a RICO claim under Section 1962(c). First, plaintiffs alleged only one
predicate act, despite the requirement by statute of at least two predicate acts. Because plaintiffs
alleged only one predicate act, plaintiffs could not establish the elements of relatedness and
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continuity. Further, the court found that plaintiffs failed to allege a threat of continued criminal
activity. With respect to plaintiffs’ claim for conspiracy to violate RICO under Section 1962(D),
the court noted that plaintiffs merely incorporated by reference their allegations of a single-event
based on alleged securities fraud committed by Intavong and Surachai. Accordingly, the court
held that plaintiffs failed to establish that “two or more people agreed to commit a RICO
violation,” a necessary element for a RICO conspiracy claim.
Cabacoff v. Wells Fargo Bank, N.A., No. 12-CV-56-PB, 2012 WL 5392545 (D.N.H. Nov. 5,
2012).
Pro se plaintiff sued several entities that owned, serviced, or had some other connection
to his residential mortgage loan, challenging the process by which his loan was securitized.
Among other things, plaintiff argued that the process of pooling his loan with other loans and
using the loans as security for other investments violated securities laws, antitrust laws, tax laws,
and RICO. The court determined that plaintiff’s RICO claim suffered from multiple
deficiencies. Although plaintiff alleged generally that defendants engaged in a fraudulent
scheme, he failed to plead two predicate acts of fraud with particularity, a requirement for a
viable RICO claim. Further, the court concluded that plaintiff did not sufficiently allege that his
claimed injuries were proximately caused by defendants’ predicate acts of racketeering. Plaintiff
could not recover on his RICO claim without proof that his claimed injuries were caused by the
alleged pattern of racketeering activity.
Calderon Serra v. Banco Santander Puerto Rico, No. 10-1906 GAG, 2012 WL 3067609 (D.
Puerto Rico Jul. 30, 2012).
Plaintiffs brought action against Banco Santander Puerto Rico (“BSPR”), arising from
various BSPR loans that were issued to purchase investments, which caused significant financial
losses. Plaintiffs alleged that they had a custodial bank account with BSPR. BSPR informed
plaintiffs that $9,000,000 would be available on loan for the purchase of securities through
BSPR’s subsidiary. Plaintiffs signed a series of blank loan applications, which bank personnel
later filled in. Plaintiffs claimed that defendants subsequently traded $5,000,000 worth of
securities in plaintiffs’ names. Plaintiffs alleged that they suffered losses estimated to be
$2,947,420.25 due to the decreased value of these securities. Plaintiffs asserted a RICO claim.
Defendants moved for dismissal, arguing that the Private Securities Litigation Reform Act
(“PSLRA”) preempted plaintiffs’ ability to sue under RICO. Plaintiffs alleged that the violations
did not involve the purchasing and selling of securities. Rather, the acts described in the
complaint constituted bank fraud. The court disagreed, holding that the action stemmed from the
purchase and sale of securities, and was therefore preempted by PSLRA.
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Saunders v. Principal Residential Mortgage, Inc., No. 11-cv-1817 (VLB), 2012 WL 4321974
(D. Conn. Sept. 20, 2012).
Foreclosed homeowner sued lender and financial institutions involved in securitization of
plaintiff’s mortgage for violations of RICO and the securities laws. Among other things, the
plaintiff alleged that defendants failed to properly securitize her loan and thus unlawfully
foreclosed on plaintiff’s home. The court dismissed plaintiff’s securities claim for insufficient
conclusory pleading. Similarly, the court dismissed plaintiff’s RICO claim for failure to allege
specific facts establishing an enterprise or a pattern of racketeering activity.
Velecela v. WMC Mortgage Corp., No. 3:11-cv-1720 AWT, 2012 WL 5868125 (D. Conn. Nov.
19, 2012).
Plaintiffs signed a note for $156,000 to purchase real property. Defendant was the lender
under the note. Plaintiffs alleged that defendant violated the RICO statute by attempting to
fraudulently take over Plaintiff’s real property and presenting false documents to the court. The
court held that the complaint failed to state a RICO claim because it did not allege facts
establishing a pattern of conduct that would constitute racketeering activity.
Dorn v. Berson, No. 09-CV-2717 ADS AKT, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).
The Eastern District of New York dismissed a RICO action brought by an investor
against her financial advisor because the claims were barred under the Private Securities
Litigation Reform Act. Plaintiff alleged that defendant advised her to invest in excess of
$80,000 in a fund offering 12% annual returns and which could be liquidated at any time. When
the investor sought to roll over her investment into an IRA, the defendant advised that someone
at the fund had used her investment to purchase certain stock, and that she could not liquidate her
investment. Plaintiff sued the advisor for securities fraud and RICO violations, among other
claims. Although the defendant defaulted, the court found that plaintiff could not recover on the
RICO claims because they involved securities fraud and were thus barred by the Private
Securities Litigation Reform Act.
SEC v. Wyly, 860 F. Supp. 2d 275 (S.D.N.Y. 2012).
In July 2010, the S.E.C. brought a securities enforcement action against defendant for
securities law violations. The S.E.C. sought civil penalties, injunctive relief, and disgorgement.
Thereafter, defendant died in an automobile accident, and the S.E.C. dropped its requests for
injunctive relief and monetary penalties. However, it maintained the disgorgement claim and
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sought to substitute as defendant the executor of defendant’s estate. The executor opposed the
motion, arguing that the disgorgement claim was non-compensatory, and thus did not survive
defendant’s death. The court rejected this argument, citing the survivability of disgorgement
claims in the RICO context, and finding that, although disgorgement may not be compensatory,
it seeks to prevent the unjust enrichment of the defendant and, in this case, defendant’s heirs.
TAGG Mgmt. v. Lehman, 842 F. Supp. 2d 575 (S.D.N.Y. 2012).
The Southern District of New York granted in part a motion to dismiss filed by defendant
business entities and individuals based in the People’s Republic of China for defective service of
process and lack of personal jurisdiction. Plaintiff investors placed approximately one million
dollars into escrow for investment in a Chinese credit card business, which was not returned after
the relationship between the parties deteriorated. Plaintiffs sued for, among other claims,
violations of the securities laws and RICO Act. However, because none of the defendants’
alleged fraudulent acts occurred in New York, and plaintiffs attempted to serve defendants at an
address in New York not shown to be defendants’ actual place of business, the court dismissed
the action against all but two of the corporate defendants, which had consented to service and
personal jurisdiction.
Boudinot v. Shrader, No. 09 CIV. 10163 LAK, 2012 WL 489215 (S.D.N.Y. Feb. 15, 2012).
Plaintiffs were former officers of defendant Booz Allen Hamilton Inc. (“BAH”).
Plaintiffs filed suit against BAH, its former chief executive officer Sharder, and a number of
other former BAH officers, alleging securities fraud and RICO violations. Plaintiffs alleged that
the BAH defendants orchestrated a plan to force certain BAH officers, including plaintiffs, to
retire and sell their shares under BAH’s officers’ stock rights plan and/or redeem their rights
under its shadow stock plan before BAH’s government sector was sold. Plaintiffs alleged that
the scheme wrongfully denied them economic benefits so that the remaining BAH officers would
receive higher profits. The court found that the RICO claims were based on alleged fraud in
connection with the sale of a security and were therefore barred by the Private Securities
Litigation Reform Act.
Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012).
The Southern District of New York dismissed an action for RICO violations brought by
the Bankruptcy Trustee for the estate of Bernard L. Madoff Investment Securities LLC
(“Madoff”) against various individuals, financial institutions, and feeder funds. The trustee
alleged that the defendants participated in an extensive criminal enterprise to feed investor funds
to Madoff in order to perpetuate Madoff’s Ponzi scheme. Plaintiff claimed that had defendants
not delivered the funds to Madoff, his Ponzi scheme could not have continued as long or caused
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as much harm as it did. The court dismissed the RICO claims, arguing that plaintiff failed to
establish how defendants’ alleged activities proximately caused the losses sustained under
Madoff’s Ponzi scheme. The court also found that the RICO claims involved securities fraud
and were thus barred by the Private Securities Litigation Reform Act. In doing so, it rejected the
trustee’s argument that the alleged criminal enterprise did not involve securities fraud because it
concerned only transactions in foreign securities, to which the Securities Exchange Act did not
apply.
Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Group, Inc., No. 11 Civ. 5832 AJN,
2012 WL 3542196 (S.D.N.Y. Aug. 15, 2012).
Defendant FBR Capital Trust purchased assets held by certain CDOs. The CDOs
generated income from a portfolio of underlying assets, which was paid out in a “waterfall” to
investors holding securities issued by the CDOs in tranches corresponding to varying degrees of
risk. The most junior stakeholders held only equity in the CDOs and were at the bottom of the
waterfall of payments. At one time, the portfolio collateral included $35 million in debt
securities (TruPS) issued by defendant. Plaintiff contended that defendant purported to repurchase
the TruPS for a total of $5.25 million. Plaintiff brought a RICO claim against
defendant, alleging that the repurchase of the TruPS was part of a fraudulent scheme to
extinguish $300 million of defendant’s debt. Plaintiff alleged commercial bribery, mail fraud,
and wire fraud as the predicate acts of racketeering activity under the RICO claim. The court
dismissed the RICO claim because plaintiff did not allege that it suffered a clear and definite
RICO injury. First, plaintiff’s allegations did not establish that it had actually been harmed by
the sale of the TruPS. Although the sale of the TruPS decreased the amount of collateral
generating income for the noteholders, plaintiff did not allege a payment default or a shortfall of
funds generated by the CDOs. Second, plaintiff’s RICO claim was premature because plaintiff
did not fully pursue its other remedies that might reduce or eliminate the alleged injury, a
prerequisite to asserting a RICO claim. Further, plaintiff’s RICO damages were not clear and
definite and no RICO cause of action had yet accrued.
Zazzali v. Swenson, 852 F.Supp.2d 438 (D. Del. 2012).
A bankruptcy trustee filed suit against numerous individuals and corporations alleging
violations of the federal and Idaho RICO Acts and violations of the Idaho securities laws.
Defendants sought dismissal of the case on the grounds that the District of Delaware is the
improper venue. The court concluded that the District of Delaware was a proper venue because
plaintiffs’ allegations of defendants’ scheme to commit securities fraud “sufficiently linked the
alleged dissemination of false and misleading materials to a Delaware investor, who was an
alleged victim of the fraud.” Based on the court’s finding that venue was proper for the
securities fraud claims, the court also found that the district court was the appropriate venue for
the RICO claims. The court emphasized that the complaint alleged RICO violations and
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securities fraud claims which arose from the same common nucleus of operative fact—namely,
defendants’ fraudulent representations to potential investors.
Zazzali v. Hirschler Fleischer, P.C., 482 B.R. 495 (D. Del. 2012).
The trustee of a litigation trust created pursuant to a confirmed Chapter 11 plan of DBSI,
Inc. brought an action against the law firm that had acted as debtors’ counsel pre-petition,
alleging violation of the RICO Act and Idaho’s RICO statute. Plaintiff alleged that defendant
drafted memoranda informing investors that DBSI was a successful real estate holding company
with a history of successful and sophisticated real estate ventures, in which no investor had ever
lost money. The complaint alleged that the DBSI enterprises were created “for the purpose of
carrying on a fraudulent Ponzi scheme and to cheat investors,” and that members of the
enterprise used the memoranda to defraud investors into buying syndications. Finding that the
complaint explicitly alleged that the syndications were sold by a “securities” corporation and that
the plaintiff admitted that its interests in the syndications were in fact securities, the court held
that the securities fraud exception barred plaintiff’s claims and concluded that the complaint
failed to adequately plead a violation of the federal or Idaho RICO statutes. The court also
concluded that the complaint failed to adequately plead the requisite elements of the underlying
racketeering activity of mail fraud or wire fraud and that defendant conducted a RICO enterprise.
Prudential Ins. Co. of Am. v. J.P. Morgan Secs., LLC, No. 12-CV-3489 (WHW), 2012 U.S. Dist.
LEXIS 181464 (D.N.J. Dec. 12, 2012).
The New Jersey District Court remanded an action brought by plaintiff insurance
companies against several mortgage securities firms for, among other things, New Jersey Civil
RICO violations. Plaintiffs alleged that due to defendants’ abandonment of their disclosed
underwriting guidelines, default rates on mortgage loans increased, resulting in a decline in the
value of plaintiffs’ mortgage-backed certificates. Defendants removed the claims to federal
court as related to ongoing bankruptcy proceedings because the defendants had indemnification
agreements with the loan originators and several of the loan originators were involved in
bankruptcy proceedings. The court remanded, finding that the claims concerned untrue
statements by the defendants and were not related to any liability by the loan originators.
Rabin v. McClain, No. 10-CV-981-XR, 2012 WL 1448107 (W.D. Tex. Apr. 25, 2012).
Plaintiff brought a securities fraud and RICO action against defendant entities and
individuals who sold plaintiff stock in a fake pharmaceutical investment venture. Plaintiff served
defendants, who did not answer, and the court granted plaintiff’s motion for default judgment.
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Gen. Ret. System of City of Detroit v. Onyx Capital Advisors, LLC, No. 10-CV-11941, 2012 WL
1018949 (E.D. Mich. Mar. 26, 2012).
Plaintiff pension funds brought a civil RICO and securities fraud action against Onyx
Capital Advisors and related entities, alleging that defendants made material misrepresentations
in connection with the establishment of a new fund. Plaintiffs partnered with Onyx to form the
new fund, each contributing several million dollars to the new fund, but alleged that the
defendants misrepresented the nature of the new fund’s investments. The court granted default
judgments as to certain defendants as to liability, but denied damages, which plaintiffs had not
adequately supported.
Bradley v. Miller, No. 10-CV-760, 2012 WL 4447454 (S.D. Ohio Sept. 25, 2012).
Plaintiffs asserted claims under the Ohio Pattern of Corrupt Activity statutes, which
prohibit conduct similar to that prohibited by the federal RICO Act. Plaintiff alleged that
defendant perpetuated a fraudulent “real estate/securities Ponzi scheme” by persuading
unsophisticated persons to invest in Capital Investments and Great Miami Debentures, promising
guaranteed rates of return and 100% guarantee of principal. The court noted that the Ohio antiracketeering
law is broader than the federal RICO Act, such that a plaintiff could bring a claim
under Ohio law where one of the predicate acts is securities fraud, so long as the plaintiff alleges
“at least one predicate act that is not a form of securities fraud, mail or wire fraud, or the
interstate transportation of stolen property or securities.” Defendant argued that plaintiffs’
allegations—that defendant sold unregistered securities to unidentified purchasers, at unspecified
dates and times—were simply insufficient to establish conduct that constitutes an indictable
criminal offense under any Ohio statute that would form any “predicate offense” under Ohio’s
RICO statute. In response, plaintiffs argued that the sales were sufficiently “related” to the
alleged RICO enterprise, because defendant was involved in selling illegal securities, and was an
agent and/or employed as a salesman by Capital Investments. The court concluded that the
complaint failed to allege the predicate act of securities fraud, because it failed to allege that
defendant sold any unregistered securities on any particular date to either any of the plaintiffs in
the case, or to any other specific person. In addition, the court concluded that plaintiff failed to
plead a second predicate act of money laundering because the defendant’s alleged deposit of
monies from alleged securities fraud alone was not sufficient to establish money laundering.
Jones v. U.S. Bank Nat’l Ass’n, No. 10 CV 0008, 2012 WL 899247 (N.D. Ill. Mar. 15, 2012).
The Northern District of Illinois dismissed RICO claims brought by a pro se foreclosed
homeowner against the lender for inadequate pleading. Plaintiff claimed that the lender made
various fraudulent misrepresentations to plaintiff at the closing, during the loan securitization
process, and during the foreclosure process, and that consequently the lender’s foreclosure on
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plaintiff’s home was fraudulent. To the extent that the alleged fraudulent activity involved the
securitization of the mortgage note, the court found that such activity could not be the basis of a
RICO claim because the Private Securities Litigation Reform Act bars plaintiffs from bringing
securities fraud claims as RICO claims.
MJK Partners, LLC v. Husman, 877 F.Supp.2d 596 (N.D. Ill. 2012).
Investors brought an action against defendant, asserting a claim for violation of the RICO
Act. Plaintiffs alleged that they invested money in various projects through defendant, and that
defendant misappropriated funds that should have gone to them from each of the investments.
Defendant moved for summary judgment, arguing that plaintiffs’ RICO claim was barred by the
Private Securities Litigation Reform Act “(PSLRA”). The court granted defendant’s motion as
to the RICO claim, finding that defendant’s conduct was actionable under the Securities
Exchange Act, and thus plaintiffs’ RICO claims were barred by the PSLRA.
Martinek v. Diaz, No. 11 C 7190, 2012 WL 2953183 (N.D. Ill Jul. 18, 2012).
Plaintiffs alleged that defendant proposed to plaintiffs that they should join together to
start a Vini’s Pizza in the Lincoln Park neighborhood of Chicago. Defendant told plaintiffs that
Vini’s Pizza in Palatine was netting over $1 million per year, and sent a summary and
projections for the Lincoln Park business to plaintiffs via mail. Plaintiffs alleged that this
information was known to be false, and was provided with the intent to induce plaintiffs to invest
with defendant. As a result of these misrepresentations, plaintiffs agreed to purchase securities.
Plaintiffs filed a complaint alleging, among other things, violations of the Illinois Securities Act
and violations of the RICO Act. The court concluded that plaintiffs’ RICO claim failed for
several reasons: (1) plaintiffs proceeded under the “association-in-fact” enterprise theory, but
failed to define the enterprise sufficiently or set out any type of organizational structure or
hierarchy for the enterprise; (2) plaintiffs failed to plead the relationship and continuity prongs to
satisfy the pattern of racketeering activity requirement of a RICO claim; (3) plaintiffs’
allegations of fraud did not meet the particularized pleading standard of Rule 9(b) and (4) the
Private Securities Litigation Reform Act barred plaintiffs’ RICO claims because plaintiffs, by
their own admission, were purchasers of securities.
Negrete v. Allianz Life Ins. Co. of N. Am., Nos. CV 05-6838 CAS (MANx), CV 05-8908 CAS
(MANx), 2012 WL 6737390 (C.D. Cal. Dec. 28, 2012).
Defendant moved to decertify a nationwide class as to plaintiffs’ RICO claim. In the
complaint, plaintiffs alleged that defendant conspired with a network of field marketing
organizations to induce class members to purchase deferred annuities issued by defendant based
on misrepresentations and omissions regarding the value of those annuities. Addressing the
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predominance requirement of Rule 23(b)(3), the court noted that any RICO claim for damages
also requires proof of an injury to “business or property by reason of a violation of section
1962.” With respect to the statute’s “by reason of” language and causation, the court stated that
direct proof of reliance by way of signed Statements of Understanding (“SOUs”) was
insufficient, standing alone, to establish a causal link between the alleged misrepresentations
which induced the purchase of annuities and the harm suffered by class members. While the
SOUs were compelling evidence that all class members were exposed to them, standardized
written presentations could establish proximate causation only when coupled with plaintiffs’
allegations that the annuity products at issue were “far less valuable than other comparable
products” or were worth far less than what class members paid for them. Plaintiffs also argued
that causation could be demonstrated on a class-wide basis because reliance on defendant’s
alleged misrepresentations was the “common sense” or “logical explanation” for class members’
purchasing decisions. Importantly, plaintiffs alleged that “Allianz annuities are inferior in value
and performance to alternative investment products” and that Allianz annuities are inferior to
other investments even without the alleged misrepresentations at issue in the litigation. The
court concluded that the alleged inferiority of Allianz annuities in value and performance gave
rise to an inference that customers decided to purchase the “inferior” annuities because of the
standardized marketing materials at issue in the litigation, “for they otherwise had no reason to
do so.” Because proof that at least some class members relied on the alleged misrepresentations
could be shown on a class-wide basis, the court held that plaintiffs could demonstrate that all
class members were injured by defendant’s alleged misrepresentations through a price increase
or overcharge, such that common issues predominated over individual issues. Accordingly, the
court concluded that plaintiffs offered a method for demonstrating reliance and causation on a
class-wide basis, and denied defendant’s motion to decertify the RICO class.
Reyes v. WMC Mortgage Corp., No. C 11-01988 CW, 2012 WL 1067560 (N.D. Cal. Mar. 28,
2012).
Plaintiffs obtained two loans from defendant WMC Mortgage Corporation. Thereafter, a
Notice of Default was recorded because plaintiffs were delinquent on their payments on the first
mortgage. After a subsequent sale of the property, plaintiffs filed a complaint alleging that
defendants did not fully disclose the terms of the loan, sold plaintiffs a loan they could not
afford, defendants failed to draft and explain the loan to plaintiffs in their native language, and
defendants fraudulently foreclosed on plaintiffs’ home. Plaintiffs asserted a claim under the
RICO Act, alleging that defendants worked closely together and committed mail fraud, wire
fraud and securities fraud. The court dismissed plaintiffs’ RICO claim with leave to amend
because the complaint failed to distinguish among any of the defendants and to provide specific
facts indicating how plaintiffs were defrauded by each defendant, and therefore failed to satisfy
the heightened pleading requirements for a RICO claim based on fraudulent acts.
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Tapang v. Wells Fargo Bank, N.A., No. CV-12-02183-LHK, 2012 WL 3778965 (N.D. Cal. Aug.
30, 2012).
Plaintiff brought an action against defendants, asserting violation of the RICO Act,
among other claims, in connection with defendants’ non judicial foreclosure of her home. The
court granted defendants’ motion to dismiss the RICO claim, finding that although plaintiff
generally alleged mail, wire, financial institution, and securities fraud as the predicate acts for
her RICO claim, she failed to allege with particularity the time, place, and manner of even a
single predicate act of fraud, let alone two, and therefore did not satisfy the heightened pleading
requirements of Rule 9(b).
Uthe Tech. Corp. v. Aetrium, Inc., No. C 95-02377 WHA, 2012 WL 4470536 (N.D. Cal. Sept.
27, 2012).
A manufacturer and distributor of semiconductor equipment sued another manufacturer
of semiconductor equipment and its former officer, alleging that defendants conspired to create a
new corporation to take over plaintiff’s wholly-owned subsidiary located in Asia. Defendants
allegedly made several misrepresentations to plaintiff, concealed efforts to destroy plaintiff’s
Asian operations, and contacted plaintiff’s customers asking them to terminate their relationships
with plaintiff. As a result of defendants’ conduct, plaintiff allegedly was forced to sell its shares
its subsidiary at a depressed price. Plaintiff alleged, among other things, securities fraud and
civil RICO violations. Defendants moved to dismiss, arguing that plaintiff could not meet
RICO’s pattern or enterprise continuity requirement. The court denied defendants’ motion to
dismiss plaintiff’s RICO claims, finding that although defendants’ scheme was not alleged to
have lasted more than six months, the Ninth Circuit has not adopted a bright-line rule as to what
constitutes a “substantial period,” and it could not be determined at the pleading stage whether a
six-month period constitutes a “substantial period” of time to establish a continuous pattern or
enterprise under the RICO statute.
Hardisty v. Moore, No. 11 CV 1591 AJB BLM, 2012 WL 1564533 (S.D. Cal. May 2, 2012).
Plaintiff, a real estate developer, sued the defendants, members of a limited liability
company established to acquire an interest in an apartment project, for securities fraud and RICO
violations after defendants allegedly divested plaintiff of his interest through fraud. Plaintiff
alleged that defendants tricked him into signing various documents that surrendered his interest
in the LLC. The court dismissed plaintiff’s RICO claim, finding that a RICO claim requires that
plaintiff allege a pattern or continued threat of criminal activity. Plaintiff’s alleged single
instance of fraud did not amount to a pattern of criminal activity.
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Langley v. Jones, No. 11-CV-774-PK, 2012 WL 2019522 (D.Or. May 18, 2012).
Self-represented plaintiffs brought action for elder abuse and related civil RICO
violations in connection with the defendants’ alleged financial abuse of an elder. Plaintiffs
alleged, among other things, that defendants had stolen plaintiffs’ property and arranged for a
wind farm to be erected thereon. The court dismissed plaintiffs’ claim as unintelligible and for
lack of jurisdiction over what appeared to be state law claims. The court further dismissed
plaintiffs’ RICO claim for failure to plead a RICO enterprise and because, to the extent that
plaintiffs relied on allegations of securities fraud to establish the RICO claim, securities fraud is
not actionable under RICO.
Nova Leasing, LLC v. Sun River Energy, Inc., No. 11-CV-00689-CMA-BNB, 2012 WL 3778332
(D. Colo. Aug. 31, 2012).
Plaintiff asserted claims for violations of the Colorado Securities Act (aiding and abetting
securities fraud) and the Colorado Organized Crime Control Act (“COCCA”). Defendants
argued that plaintiff failed to state a claim under COCCA because plaintiff had not “sufficiently
alleged a pattern of racketeering activity.” The court found defendants’ position unpersuasive.
Under the COCCA, a pattern of racketeering activity is defined as “engaging in at least two acts
of racketeering which are related to the conduct of the enterprise, if at least one of such acts
occurred in the state after July 1, 1981, and if the last of such acts occurred within ten years …
after a prior act of racketeering activity.” The court noted that plaintiff alleged two or more acts
of civil theft and a claim against defendants for aiding and abetting securities fraud, which
constituted an additional predicate act under the COCCA.
Boulware v. Baldwin, No. 11-CV-762 TS, 2012 WL 1412698 (D. Utah Apr. 23, 2012).
Plaintiffs invested in two entities managed by defendant. Plaintiff alleged that he was
defrauded during his relationship with both entities. Plaintiff alleged that SF5, one of the
entities, was formed to purchase loans secured by real property. After acquiring the loans, SF5
would seek to add to the loans by selling them, working out new terms with borrowers, attracting
new tenants and/or foreclosing on the real property securing the loans. Plaintiff subsequently
learned that SF5 had been using proceeds from the loans to pay down other loans and make
distributions. After demanding all distributions owed, plaintiff did not receive any distributions.
Plaintiff filed an action against defendants asserting a violation of the Federal RICO Act.
Defendants argued that the Private Securities Litigation Reform Act “(PSLRA”) preempts
plaintiffs’ RICO claim and that plaintiffs’ RICO claim was not sufficiently pleaded. The court
found that the alleged acts underlying plaintiff’s RICO claim were taken in connection with the
purchase of a security and thus could not support a RICO claim under the PSLRA.
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McGee v. S-Bay Dev., LLC, No. 11-CV-1091-T-27TGW, 2012 WL 760797 (M.D. Fla. Mar. 8
2012).
A Florida district court dismissed an action for RICO violations and securities fraud
brought by the plaintiff purchasers of units in a condominium conversion project against the
owners and developers of the property. Plaintiff alleged that defendant fraudulently
misrepresented the legal status of the property as a condominium, the value of the condominium
units, and various details regarding the condominium conversion and certain improvements to
the property. The court held that plaintiffs failed to plead securities fraud and RICO with
sufficient particularity under Rule 9(b) and that plaintiffs failed to establish that the purchase of
the condominium units qualified as transaction in securities or an investment contract. However,
the court rejected defendants’ argument that the RICO claims were subject to dismissal on the
ground that plaintiffs failed to plead justifiable reliance, which is not an element of a RICO
claim.
Adams v. Rothstein, No. 11-61688-CIV, 2012 WL 1605098 (S.D. Fla. May 8, 2012).
A Florida district court dismissed RICO claims brought by investors against a perpetrator
of a large Ponzi scheme. Plaintiffs alleged that defendants sold interests in two Delaware limited
partnerships that purportedly invested in structured settlements. However, the investment
scheme and its returns were illusory and defendant was later convicted of securities fraud after
the scheme collapsed. Plaintiffs alleged that they were defrauded in their purchase of structured
settlements that did not exist, rather than in their purchase of interests in the funds. The court
found that the plaintiffs’ limited partnership interests constituted securities and dismissed
plaintiffs’ RICO claims as precluded under the Private Securities Litigation Reform Act. In
doing so, the court rejected plaintiffs’ attempt to distinguish between the purchase of the
structured settlements and plaintiffs’ purchase of securities in the funds.
Robert L. Franklin Trustee of Global Liquidating Trust v. Consus Ethanol, LLC, No. 11-CV-
4062-TWT, 2012 WL 3779093 (N.D. Ga. Aug. 29, 2012).
Plaintiff filed a securities fraud action against an ethanol technology company and its
board of directors, alleging that defendants made material misrepresentations that induced
plaintiff to enter into two notes as part of plaintiff’s loan to the company, in violation of Georgia
and federal RICO statutes. The court dismissed plaintiff’s federal RICO claim, finding that
plaintiff failed to plead which subsection of § 1962 of the RICO Act defendants allegedly
violated. The court also dismissed plaintiff’s Georgia RICO claim because plaintiff’s allegations
of multiple misrepresentations constituted a single financing transaction rather than a “pattern of
racketeering activity.”
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Eagletech Commc’ns, Inc. v. Bryn Mawr Inv. Group, Inc., 79 So. 3d 855 (Fla. App. 2012).
A Florida appellate court affirmed the dismissal of a securities fraud and RICO complaint
brought by a technology startup against its investors. Plaintiff Eagletech sought capital from the
defendant investors to fund its business involving a proprietary telecommunications technology.
The investors engaged in a series transactions to short the Eagletech stock either prior to
acquisition or prior to conversion of other Eagletech securities. Eageltech sued the investors for,
among other things, securities fraud and state RICO claims. The trial court dismissed the action
and the appellate court affirmed, finding that Eagletech failed to establish that it has standing to
bring the securities fraud claims as the purchaser or seller of the securities and that Eagletech
failed to plead a sufficient number of criminal acts to establish “ongoing criminal behavior” by
defendants under the Florida RICO statute.
K. Damages and Other Relief in Private Actions
1. Damages as Element of Claim
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NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012).
The district court granted Defendants’ motion to dismiss Plaintiff’s putative class action
under the federal securities laws, which asserted claims based upon alleged false and misleading
statements in 17 separate Prospectus Supplements pursuant to the same Shelf Registration
Statement. The district court found that the lead Plaintiff lacked standing to assert claims on
behalf of purchasers of securities different from the ones Plaintiff had purchased, and had failed
to plead an out-of-pocket loss as required under Section 11 of the Securities Act of 1933. The
Second Circuit affirmed in part and reversed in part. On the damages question, the court first
noted that although a plaintiff need not plead damages under Section 11, the plaintiff must satisfy
the court that it has suffered a cognizable injury. The court found that the term “value” in
Section 11(e) means the security’s true value after the alleged misrepresentations are made
public. In a market economy, when market value is available and reliable, market value will
always be the primary gauge of worth, but “value” may not be equivalent to market price. The
court found that Plaintiff had adequately pleaded a decline in value, and rejected Defendants’
argument that a fixed income investor must miss an interest payment before his securities can be
said to have declined in “value.” The revelation that borrowers of loans backing the securities at
issue were less creditworthy than the offering documents represented affected the securities’
“value” immediately, because it increased the securities’ credit risk profile. The Court of
Appeals also rejected the district court’s conclusion that Plaintiff could not allege an injury based
upon the hypothetical price of the securities on the secondary market because Plaintiff knew the
securities might not be liquid. Section 11 presumes that any diminution in value is attributable to
the alleged misrepresentations, and places the burden on defendants to disprove causation. The
court also stated that the value of a security is not unascertainable simply because it trades in an
illiquid market and therefore has no actual market price.
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Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).
The district court granted summary judgment for Defendant on Plaintiff’s claim under the
Arizona securities laws on the grounds that Plaintiff failed to produce evidence of damages. The
Ninth Circuit reversed and remanded, finding that Arizona securities law, unlike federal law,
does not require a showing of damages in a rescission suit.
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 2012 WL 3584278 (S.D.N.Y. Aug.
17, 2012).
Plaintiffs asserted New York common law claims of fraud and negligent
misrepresentation seeking to recover losses from the liquidation of notes issued by a structured
investment vehicle. Defendants moved for summary judgment, arguing that some plaintiffs had
no evidence of damages because they had exchanged their original notes for new notes that were
backed by the same collateral that had backed their original notes. Defendants argued that
because these plaintiffs continued to hold and receive payments on the new notes, their damages
were speculative. The court rejected Defendants’ argument. The court found that the new notes
were not a continuation of the original investment, but a new investment, and that the subsequent
success or failure of the new investment would have no bearing on the measure of their damages
on the original investment. The court further found that, although there is generally a
presumption in securities cases that shares are purchased for the purpose of investment and their
value to the investor is the price at which they may later be sold, this presumption did not apply
here, where the plaintiffs had purchased the notes with the expectation that they would receive a
stream of interest payments, and therefore their loss was not a decrease in market price, but a
decrease in the amount of money returned to them over the course of the securitization.
Applying this reasoning, the court held that the damages of the plaintiffs holding the new notes
should be reduced by an approximation of the value of the new notes as of the day they acquired
them in return for the original notes. The court delayed making that calculation until the close of
expert discovery, but found plaintiffs had provided sufficient evidence to raise a disputed issue
of fact, precluding summary judgment, as to whether plaintiffs had suffered damages.
Freidus v. ING Group N.V., 2012 WL 4857543 (S.D.N.Y. Oct. 11, 2012).
Plaintiff brought a purported class action under Sections 11, 12, and 15 of the Securities
Act of 1933 to recover damages allegedly sustained in connection with its investments in
securities of Defendant. Plaintiff purchased the securities for $10 million, then transferred them
in exchange for an assumption of $10 million of Plaintiff’s liabilities. Plaintiff did not allege that
the value of the securities at the time suit was brought was less than $10 million, and conceded
that the price at which the securities were disposed of after suit was the same as the amount paid
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for them. Under these circumstances, the court found that Plaintiff could not recover because it
had not alleged damages. The court rejected Plaintiff’s argument that Plaintiff did not “dispose”
of the securities where Plaintiff had transferred them to a company under common ownership
with Plaintiff.
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).
Defendants moved to dismiss Plaintiff’s complaint, which asserted state and federal
securities fraud claims, actual fraud, and constructive fraud or negligent misrepresentation.
Defendants argued that Plaintiff’s claims should be dismissed because Plaintiff had not alleged
that he suffered any damages, where the complaint did not allege that Defendants had failed to
make any payments due on the note that was the basis for Plaintiff’s claims. The court first
noted that the measure of damages under Section 10(b) of the Securities and Exchange Act of
1934 is the difference between the value of the consideration paid and the value of the securities
received, and that the Virginia Securities Act allows a plaintiff to recover the consideration paid
for a security, together with interest, costs, and attorneys’ fees, less the amount of any income
received on the security, upon the tender of the security, or the substantial equivalent in damages
if he no longer owns the security. The court held that, contrary to Defendants’ argument, the
note need not mature and Defendants need not miss a payment for Plaintiff to have incurred
damages. Rather, if the notes were worth less than represented at the time Plaintiff purchased
them, he has suffered a cognizable injury that can support his claims. Moreover, Plaintiff need
not realize losses before bringing claims. Accordingly, the court rejected Defendants’ argument
on this point, while granting Defendants’ motion to dismiss on other grounds.
Lopes v. Viera, 2012 WL 691665 (E.D. Cal. Mar. 2, 2012).
Plaintiffs asserted a violation of California securities law, among other causes of action,
based on Plaintiffs’ exchange of milk for equity interests in a corporation that was to
manufacture cheese. The court determined that the “milk for equity” transaction constituted a
sale of securities. The court further noted that the usual measure of damages for securities fraud
is out-of-pocket loss, which is the difference between the value of what the plaintiff gave up and
the value of what the plaintiff received. The court concluded that Plaintiffs were not precluded
from pursuing a state securities fraud claim, but whether Plaintiffs could establish damages based
on an exchange of milk for equity would depend upon factual determinations by the jury.
Luciani v. Luciani, 2012 WL 4953110 (S.D. Cal. Oct. 17, 2012).
Plaintiffs asserted claims for federal and state securities law violations, breach of
fiduciary duty, and fraud, among others. Defendants argued that Plaintiffs failed to provide
admissible evidence of damage because no evidence had been presented that Plaintiffs would
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have been better off if not for Defendants’ actions. The court found this argument problematic,
because Defendants appeared to be relying on the fact that the securities at issue were illiquid.
The court stated that the fact that securities are not readily traded on the market does not
preclude a plaintiff from demonstrating damages; otherwise, no cause of action for securities
fraud could ever be brought for transactions involving illiquid securities. The court found that
the expert testimony of Plaintiffs’ expert provided enough evidence as to damages to withstand
summary judgment. The expert worked in a reliable field of expertise, based his findings on
evidence relevant to the matter, and provided results that did not require the jury to extrapolate
further.
Jayhawk Capital Mgmt., LLC v. LSB Indus., Inc., 2012 WL 4210462 (D. Kan. Sept. 19, 2012).
Plaintiff alleged that Defendant committed fraud, violated federal and state securities
laws, and breached fiduciary duties when Defendant made allegedly false statements that
induced Plaintiff to exchange half of its preferred shares for common stock during an exchange
offer. The court entered judgment for Defendant after a bench trial. Among other reasons, the
court found that Plaintiff’s claims based on fraud and breach of fiduciary duty failed because
Plaintiff could not prove that it suffered damage as a result of Defendant’s alleged
misrepresentations. Defendant had argued that if the exchange had not happened at all, Plaintiff
would have been in an even worse position than it was as a result of exchanging half of its shares
(the transaction that in fact happened). Plaintiff, however, argued that the one-off exchange
offers that Defendant had made to select individual shareholders created a creeping tender offer
that required Defendant to make an exchange offer to all preferred shareholders. The court
found that Defendant was not required to make an exchange offer to all shareholders on an equal
basis. Accordingly, Plaintiff was better off having exchanged half of its shares than it would
have been exchanging none at all, and Plaintiff could not prove damages.
Highland Capital Mgmt., L.P. v. Ryder Scott Co., 2012 WL 6082713 (Tex. App. Dec. 6, 2012).
The trial court granted Defendants’ motions for summary judgment on Plaintiffs’ claims
for violations of the Texas Securities Act, fraud, and negligent misrepresentation, and Plaintiffs
appealed. With respect to damages, the trial court found that Plaintiffs had adduced no evidence
with respect to this element of their fraud and negligent misrepresentation claims because there
was no evidence of the value received by Plaintiffs. The Court of Appeals affirmed this portion
of the trial court’s decision. Under either an out-of-pocket measure of damages or a benefit-ofthe-bargain
measure of damages, there was no dispute that Plaintiffs were required to adduce
evidence of the value received by Plaintiffs in the transactions. Specifically, the court held that
Plaintiffs needed to adduce evidence regarding the fair market value of the investments at the
time Plaintiffs purchased them. The court found that Plaintiffs’ evidence, which related to
interest paid on the investments after their purchase, was not obviously probative of fair market
value at the time of purchase. The court further found that testimony that the investments were
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later considered essentially worthless was not probative of their value at the time of purchase.
Summary judgment was therefore appropriate on this issue.
2. Measure of Damages
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Acticon AG v. China North East Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012).
Plaintiff asserted a putative class action, pursuant to the federal securities laws, alleging
that Defendant misled investors about its reported earnings, oil reserves, and internal controls,
and that in the trading days after Defendant revealed this information through a series of
corrective disclosures, Defendant’s stock price dropped. Defendant argued that Plaintiff could
not show an economic loss, because after the corrective disclosures Defendant’s stock had closed
at a price higher than the price at which Plaintiff had purchased it. The district court agreed and
granted Defendant’s motion to dismiss, but the Second Circuit vacated. The Second Circuit
noted that, traditionally, economic loss has been determined by the “out-of-pocket” measure for
damages, under which a defrauded buyer is entitled to recover only the excess of what he paid
over the value of what he received. The court further noted that the Private Securities Litigation
Reform Act of 1995 had instituted a “bounce back” cap on the amount of damages available in a
securities fraud action. The court found that the limitation upon damages imposed by the district
court was inconsistent with both the traditional out-of-pocket measure and the bounce back cap.
The court found it was improper to offset gains that a plaintiff recovers after fraud becomes
known against losses caused by the revelation of the fraud because the stock could recover value
for completely unrelated reasons. In the absence of fraud, the plaintiff would have purchased the
security at an uninflated price and would also have benefitted from the unrelated gain in stock
price. Because, without discovery, the court could not know whether the price rebounds
represented the market’s reactions to the disclosure of the alleged fraud or whether they
represented unrelated gains, the court could not know whether to offset the price recovery
against Plaintiff’s losses, so the dismissal of the claim was vacated.
Hickory Sec. Ltd. v. Republic of Argentina, 2012 WL 3291796 (2d Cir. Aug. 14, 2012).
Argentina appealed the district court’s order granting aggregate class-wide relief to eight
classes of plaintiff owners of beneficial interests in defaulted Argentine bonds. Argentina argued
that the district court’s aggregate damage calculations failed to account for bonds purchased in
the secondary market after the start of the class periods. The Second Circuit agreed and vacated
the judgment, in part, with instructions for an evidentiary hearing on damages on remand. The
court first noted that, although the amount of recoverable damages is a question of fact, the
measure of damages upon which the factual computation is based is a question of law. Although
aggregate class-wide damages are not per se unlawful, they must at least roughly reflect the
aggregate amount owed to class members, which the Court of Appeals found the district court’s
damages calculations did not, because they did not adequately account for bondholders who were
not class members. The district court had not adequately addressed the volume of bonds
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purchased in the secondary market after the class period began that were not tendered or were
currently held by opt-outs or other litigants. The Court of Appeals directed that if the district
court could not adequately address these issues so that the aggregate award roughly reflected the
loss to each class, it must determine proceed with awarding damages on an individual basis.
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).
A jury found in favor of Plaintiffs on their federal securities claims and determined that
rescission damages amounted to $7,700,723, but listed an award of only $1,777,909 on its
verdict form. Both parties appealed. Defendants argued that the district court erred in
instructing the jury on a rescissionary measure of damages (under which the original purchase is
cancelled and Plaintiffs would recover the price paid for the securities plus interest), and argued
that recovery should be limited to the economic losses actually caused by the misrepresentations.
The Sixth Circuit disagreed, finding that the loss causation requirement of the Private Securities
Litigation Reform Act of 1995 does not preclude rescission damages and that nothing in the
circumstances of the case made rescission damages inappropriate. The court emphasized that
rescission is a fact-dependent remedy for Section 10(b) claims under the Securities Exchange
Act of 1934 and is only appropriate in rare or unusual circumstances. Plaintiffs argued on appeal
that they were entitled to the full rescission amount of $7,700,723 and that the jury’s award of
$1,777,909 undercompensated them. The Sixth Circuit agreed with the trial court that Plaintiffs
had waived this argument by failing to raise it in a Rule 49(b) motion prior to discharge of the
jury.
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).
A jury awarded Plaintiff $1,404,769 on Plaintiff’s claims, which sought more than $3
million in damages based on alleged violations of federal and state securities laws, common law
fraud, breach of fiduciary duty, and breach of contract. The trial court reduced the award to
$1,012,835.50, because this was the maximum amount not barred by the state-law statute of
repose, upon which the jury had not been instructed. Both parties appealed, and the Sixth Circuit
set aside the $1,012,835.50 award and directed the trial court to reinstate the award of $847,858
that the jury had reached on Plaintiff’s federal securities law claims. The court found that it was
error not to have instructed the jury on the state-law statute of repose, and that this error could
not be cured by reducing the award to the maximum amount not barred by the statute of repose,
because it appeared the jury had deliberately awarded Plaintiff an amount less than the full price
paid by Plaintiff in the transaction. Because the jury’s award of $847,858 on Plaintiff’s federal
securities law claims was not affected by the statute of repose, that award could be reinstated.
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Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).
The district court granted summary judgment for Defendant on Plaintiff’s claim under
Section 10(b) of the Securities Exchange Act of 1934 on the ground that Plaintiff failed to
produce evidence of damages. On appeal, Plaintiff argued that he was not required to show
economic loss because he sought rescission and not damages. The Ninth Circuit stated that it
was not convinced that a suit seeking rescission under Section 10(b) obviates the need for
proving economic loss and loss causation. The court noted that true rescission was not feasible
in this case, but that even though true rescission was not warranted, the district court had
discretion to consider a rescissionary measure of damages. A rescissionary measure of damages
entitles the plaintiff to the return of the consideration paid less any value received on the
investment. The Ninth Circuit remanded for consideration of the claim under a rescissionary
measure of damages.
Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713 (11th Cir. 2012).
Plaintiffs brought a securities fraud class action under § 10(b) of the Securities Exchange
Act of 1934 and SEC Rule 10b–5. Plaintiffs sought to prove at trial that Defendant had
misrepresented the level of risk associated with commercial real estate loans held by its
subsidiary. Plaintiffs’ only evidence of loss causation and damages was the expert testimony of
a financial analyst who performed an event study to determine how much of the decline in
Defendant’s stock was attributable to factors specific to Defendant rather than to general market
or industry factors. The Eleventh Circuit affirmed the district court’s judgment as a matter of
law in favor of Defendant, on the grounds that Plaintiffs failed to adequately separate losses
caused by fraud from those caused by the collapse of the Florida real estate market. The court
noted the importance of the distinction between loss causation and damages, stating that a
plaintiff need not show that a misrepresentation was the sole reason for an investment’s decline
in value to prove loss causation, but ultimately will only be allowed to recover damages actually
caused by the misrepresentation. Noting that the proper of measure of damages is the out-ofpocket
rule, the court stated that to allow a jury to award damages on that measure, Plaintiffs
would have to separate the amount of the stock price decline attributable to the disclosure of
facts that were known at the time of Defendant’s misstatements from the portion of the decline
caused by the disclosure of new facts. However, because the court found that Plaintiffs failed to
present evidence sufficient to support a finding of loss causation, it was unnecessary to reach the
damages issue.
Lenartz v. American Superconductor Corp., 879 F. Supp. 2d 167 (D. Mass. 2012).
Plaintiffs asserted a purported securities class action alleging violations of Sections 10(b)
and 20(A) of the Securities Exchange Act of 1934, Rule 10b-5, and Sections 11, 12(a)(2), and 15
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of the Securities Act of 1933. In the course of dismissing certain claims against certain
defendants, the court noted that Plaintiffs were not entitled to more damages if they could show
multiple misstatements or omissions in the Registration Statement. Instead, the measure of
damages was limited to the amounts provided by statute.
Levinson v. Westport Nat’l Bank, 2012 WL 4490432 (D. Conn. Sept. 28, 2012).
Plaintiffs brought suit against Defendant bank, the custodian of their retirement
investments, alleging breach of contract, breach of fiduciary duty, negligence, and other claims
arising from Plaintiffs’ losses in the Bernard Madoff Ponzi scheme. On cross-motions for
summary judgment, Defendant argued that Plaintiffs could not recover lost profits damages
because such damages based on the fictitious profits reported by a Ponzi scheme are not legally
cognizable. The court found that in Connecticut the default rule is that recovery of lost profits on
a breach of contract claim is permissible unless they are too speculative and remote, whenever
their loss arises directly from and as a natural consequence of the breach. The court noted that
the Connecticut Supreme Court has endorsed a flexible approach to permit consideration of lost
profits based on negligence and breach of fiduciary duty claims. The court agreed with
Defendant that victims of fraud may not recover fictitious profits under the securities laws, but
found no such restriction on contract or tort claims. The court found that Plaintiffs had asserted a
non-speculative theory of lost profits damages predicated on Defendant’s failure to audit, which
created an appropriate issue for the jury.
Dorn v. Berson, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).
Plaintiff asserted claims for violations of federal securities laws, breach of contract, civil
RICO, common law fraud, and other common law claims. After entering a default judgment, the
court referred the calculation of damages to the magistrate. According to the complaint,
Defendant had presented Plaintiff with an opportunity to invest in what Defendant described as a
private investment fund that generated guaranteed returns of twelve percent annually. Plaintiff
invested in the fund through Defendant, but when Plaintiff sought to liquidate her investment,
Defendant told her that there were not enough assets remaining in the fund for her to liquidate.
As to Plaintiff’s civil RICO claim, the court found her claim was barred by the “RICO
Amendment” enacted as part of the Private Securities Litigation Reform Act of 1995. On her
breach of contract claim, the court stated that under New York law, the measure of damages is an
amount sufficient to put the non-breaching party in as good a position as she would have been
put by full performance of the contract. Thus, the court held that Plaintiff was entitled to a return
of the amount she had invested, along with the promised annual return for the period during
which she believed her money was invested. Because it was unclear exactly when Plaintiff
would have wanted to liquidate her investment, the court used an approximate date to determine
the period for which Plaintiff was entitled to twelve percent annual returns. As to Plaintiff’s
securities fraud and other claims, the court found it unnecessary to determine the amount of
damages, because a plaintiff seeking compensation for the same injury under different legal
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theories is only entitled to one recovery. Because the breach of contract claim was the only
claim as to which Plaintiff was seeking the twelve percent return in addition to the amount
invested, it yielded the highest recovery.
In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012).
In this securities class action, the court considered the parties’ proposed damages
calculations. Defendant argued that Plaintiffs could only recover actual damages, representing
the out-of-pocket economic loss caused by fraud. Defendant urged the court to “net” gains and
losses when considering a class member’s compensable loss, by taking the actual amount of
harm suffered as a result of buying shares at an inflated price and deducting the actual amount of
gain accrued as a result of selling shares at an inflated price. Plaintiffs objected to netting by
Defendant’s method, arguing that each transaction should be treated separately and losses from
unprofitable transactions should not be offset with gains from profitable transactions. The court
agreed with Plaintiffs that not all gains should or could be used to offset legally cognizable
losses. Accordingly, the court adopted “partial netting,” under which only gains resulting from
transactions occurring between the first materialization date and the end of the class period
would be used to offset losses incurred during that same period. The court further considered
whether to compute loss or gain under the “first in, first out” (“FIFO”) or “last in, first out”
(“LIFO”) methods. The court, finding that LIFO takes into account gains that might have
accrued to Plaintiffs during the class period due to the inflation of the stock price, adopted the
LIFO approach.
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y. Dec. 17, 2012).
Plaintiffs asserted claims of breach of contract, federal securities fraud, common law
fraud, and fraudulent conveyance arising out of a loan and securities purchase agreement. After
recommending default judgment, the magistrate considered the amount of damages. The court
noted that a plaintiff seeking compensation for the same injury under different legal theories is
only entitled to one recovery, and that the proper measure of damages in such cases is the one
that represents the greater recovery. The court noted that securities fraud damages are ordinarily
based on out-of-pocket losses, which are calculated by the price paid for the security less the
security’s value on the date of the transaction absent any fraud. The court further noted that outof-pocket
losses is the rule for damages caused by common law fraud. However, the court noted
that out-of-pocket damages are not the only permissible measure of recovery, and that courts
have utilized their discretion to endorse several different compensatory damages theories,
including gross economic loss and benefit-of-the-bargain damages. Gross economic loss or
rescissionary damages are based on the difference between the price paid and the price received
on resale, and benefit-of-the-bargain damages are based on the difference between the value of
what was bargained for and the value of what was received at the time of transaction. Plaintiffs
sought damages based on a liquidated damages provision in the parties’ contract, and the court
found that this while this measure of damages might have been proper on a contract theory, there
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was no evidence that it was appropriate for fraud, and that without more evidence the court could
not ascertain fraud damages with reasonable certainty.
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D. Idaho July 12,
2012).
Plaintiffs brought a securities class action alleging that Defendant issued false statements
regarding its business and that those statements artificially inflated Defendants’ securities prices.
In considering which plaintiff to appoint as lead plaintiff, the court addressed the relative
financial interest and losses of the competing plaintiffs. Two plaintiffs reached their claim
amount by valuing call options at the entire price of the options, while a third plaintiff argued it
was more accurate to employ the Black-Scholes Option Pricing Model (“BSOPM”). The court
noted that BSOPM is a method of establishing damages, not financial interest, and that the
necessary analysis at the plaintiff-appointment stage is different and far less exhaustive. The
court found that neither analysis was necessarily accurate or easy to determine at this stage, and
held that although it did not specifically adopt the BSOPM valuation, it was persuaded that the
actual amount of recoverable damages for options was likely to be closer to the BSOPM
valuation than the entire price of the options.
In re Int’l Mgmt. Assocs., LLC, 2012 WL 2105908 (Bankr. N.D. Ga. Apr. 3, 2012).
Plaintiff, the Plan Trustee under a Chapter 11 bankruptcy plan, sought coverage from
Defendant under an investment management insurance policy. Defendant sought to exclude
Plaintiff’s expert report, on the grounds (among others) that the report ignored the discretion that
the bankrupt investment advisor had. The court rejected this argument, noting that an
appropriate measure of damages when an investment advisor is liable for the improper
management of an investor’s funds is the difference between what he would have had if the
account had been handled legitimately and what he in fact had at the time the violation ended.
The court further noted that the measure of damages is an approximation of trading losses
sustained as a result of the improper investment activity, and that exact certitude is not required.
The damages analysis must take into account what the performance of the investments would
have been if investments had been proper, and a composite stock index provides a basis for
making this calculation. Accordingly, the court denied Defendant’s motion to exclude the report.
Wachovia Bank Nat’l Assoc. v. Beane, 725 S.E.2d 715 (S.C. App. 2012).
A jury awarded individual account holders money damages of $198,395.17 on their
counterclaim for negligent mismanagement of a securities account. The firm appealed, arguing
that the only evidence of damages in the record as to the amount of damages was the account
holders’ expert’s testimony that the account underperformed by $176,121. The Court of Appeals
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held that the maximum award supported by the evidence was the amount of damages testified to
by the expert, that the jury’s verdict (which also included attorney’s fees and forgiveness of a
loan) was grossly excessive, and that the excessiveness of the verdict demonstrated that the jury
acted on some basis other than the evidence presented. Under these circumstances, the trial court
erred by not granting the firm’s motion for a new trial.
3. Punitive Damages
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In re Merrill Lynch Auction Rate Sec. Litig., 851 F. Supp. 2d 512 (S.D.N.Y. 2012).
Plaintiff buyer of auction rate securities (ARS) brought action against underwriter,
underwriter’s parent company, and broker-dealer, alleging securities violations. Defendant
underwriter moved to strike those portions of Plaintiff’s First Amended Complaint seeking
punitive damages. The court, applying California law, held that punitive damages were not
available to a buyer of ARS for a claim of breach of fiduciary duty, where buyer failed to state
fraud claim based on broker-dealer’s failure to disclose alleged re-marketing agreement with
underwriter to create a distribution channel for underwriter’s products. Furthermore, the court
found that a claim for punitive damages under California law requires sufficient allegations of
despicable conduct that is so vile, base, contemptible, miserable, wretched or loathsome that it
would be looked down upon by ordinary, decent people.
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 WL 5451188 (S.D.N.Y. Nov. 8, 2012).
The Federal Housing Finance Agency (“FHFA”), as conservator for the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac), stated a claim for punitive damages under New York law, alleging that Merrill Lynch and
affiliated individuals acted recklessly by seeking to profit from risky mortgage lending while, at
the same time, passing on the risk associated with this lending by selling securities to Fannie
Mae and Freddie Mac. In deciding Merrill Lynch’s Motion to Dismiss, the Court stated that,
under New York law, punitive damages are permitted on a fraud claim “only when the plaintiff
can demonstrate exceptional misconduct, as when the wrongdoer has acted maliciously,
wantonly, or with a recklessness that betokens an improper motive or vindictiveness or has
engaged in outrageous or oppressive intentional misconduct or with reckless or wanton disregard
of safety or rights.” The court held that FHFA’s allegations against Merrill Lynch were
sufficient to meet this test, and denied Merrill Lynch’s Motion to Dismiss the portion of the
Complaint seeking punitive damages.
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In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio 2012).
Institutional investors brought action against note issuer and placement agent, alleging
violations of § 10(b) of the Securities Exchange Act of 1934 and blue sky laws of various states,
as well as various tort claims, in relation to investors’ purchase of nearly $2 billion in notes.
Defendants moved for summary judgment on institutional investors’ punitive damages claim.
The court, applying New York law, found that New York does not permit recovery of punitive
damages in a case of ordinary fraud and that punitive damages are only permitted when a
defendant’s wrongdoing is not simply intentional, but instead evinces a high degree of moral
turpitude and demonstrates such wanton dishonesty as to imply a criminal indifference to civil
obligations. Because genuine issues of material fact existed as to the Defendants’ knowledge of
the fraud, the court was precluded from granting summary judgment on institutional investors’
claim for punitive damages.
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4. Attorneys’ Fees and Costs
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Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).
The Fourth Circuit affirmed the denial of a firm’s motion to vacate an arbitration award
of fees and costs against it under South Carolina’s Frivolous Civil Proceedings Act (the
“FCPA”). The court held that the arbitration panel was not required to follow the procedural
requirements of the FCPA (in this case providing the firm with thirty days to respond to the fee
request). The court also held that even if FCPA’s procedures applied in arbitration, there was no
evidence that the panel intentionally engaged in misconduct or manifestly disregarded the law
because the applicability of procedural requirements of the FCPA was debatable.
Union Asset Mgmt. Holding A.G. v. Dell, Inc., 669 F.3d 632 (5th Cir. 2012).
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The Fifth Circuit affirmed an attorneys’ fee award representing 18% of the settlement
fund in a class action. The court found that the district court properly used the percentage
method rather than the lodestar method in its calculation. The court noted that ample Fifth
Circuit authority supports the use of the percentage method and the PSLRA itself contemplates
employing such a calculation. The court also concluded that the district court did not abuse its
discretion in setting the amount of fees, even though the case was dismissed prior to discovery.
The court observed that the district court considered the amount and sources of discovery in
determining that the fee amount compensated counsel while protecting the class’s interests. The
court also affirmed the award of interest on the fee award, explaining that courts routinely award
interest on attorneys’ fees and that the objecting class members cited no authority to support their
argument to the contrary.
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Reuter v. Cutcliff (In re Reuter), 686 F.3d 511 (8th Cir. 2012).
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The Eighth Circuit held that attorney’s fees incurred by five creditors to whom the debtor
sold unregistered securities were non-dischargeable in bankruptcy. The bankruptcy court held
that the debtor violated Missouri’s Securities Act, which allows successful plaintiffs to recover
reasonable attorneys’ fees. The Eighth Circuit affirmed the bankruptcy court’s ruling that the
debtor’s liability on the Securities Act claims, which included his liability for the creditors’
attorneys’ fees, was non-dischargeable.
Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012).
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The Fifth Circuit reversed the district court’s order vacating an arbitration award and
awarding attorneys’ fees to the firm. The Fifth Circuit held in part that since the district court
erred in vacating the award, the firm was not entitled to recover its attorneys’ fees under the
applicable client agreements.
In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 2012 WL 6184269 (D. Mass. Dec.
10, 2012).
As part of its approval of the settlement of a securities class action, the court awarded
lead plaintiffs’ counsel fees in the amount of $6,000,000 (representing 24% of the settlement
fund) plus expenses of $798,277.56. The court held the award was reasonable given the
substantial risk of non-recovery, the time and effort involved, and the result obtained and was
fair and reasonable when cross-checked against counsel’s lodestar fee calculation.
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In re Sturm, Ruger & Co. Sec. Litig., 2012 WL 3589610 (D. Conn. Aug. 20, 2012).
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In the settlement of a securities class action, the court approved attorneys’ fees of
$900,000.00 (representing 30% of the settlement value) and expenses of $45,537.12. The court
considered the number of hours expended on the case; the complexity of securities litigation; the
risk to attorneys of contingent fee representation; the high quality of the representation; the
public policy of enforcing the federal securities laws; and that the requested fee was a multiplier
of 1.26 of the lodestar amount.
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Dorn v. Berson, 2012 WL 1004907 (E.D.N.Y. Mar. 1, 2012).
In this civil securities fraud and RICO action, where the district court had entered a
default judgment against the defendants, the Magistrate Judge recommended the denial of
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plaintiff’s request for attorneys’ fees. Although the RICO statute provides that a successful
plaintiff may recover reasonable attorney fees, the magistrate judge found that the plaintiff had
no remedy under RICO because the alleged predicate acts were specifically actionable as
securities fraud. Moreover, attorneys’ fees are not awarded to prevailing parties in actions for
violations of Section 10(b) of the Securities Exchange Act of 1934 and the plaintiff did not
identify any contractual provision under which she was entitled to attorneys’ fees.
Donoghue v. Morgan Stanley High Yield Fund, 2012 WL 6097654 (S.D.N.Y. Dec. 7, 2012).
The court granted in part plaintiff’s motion for attorneys’ fees in a derivative action in
which plaintiff brought claims under Section 16(b) of the Securities Exchange Act of 1934.
Plaintiff sought fees representing 50% of the settlement amount. The court held that the request
far exceeded a reasonable rate and that attorneys’ fees of one-third or less of the settlement
amount were customarily found to be reasonable. The court awarded fees representing one-third
of the settlement amount.
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In re Bear Stearns Cos. Sec., Derivative, and ERISA Litig., 2012 WL 5465381 (S.D.N.Y. Nov. 9,
2012).
As part of its approval of a class action settlement, the court approved attorneys’ fees of
$35,388,000, representing12% of the settlement amount. The court determined that this award
was reasonable under the factors set forth in Goldberger v. Integrated Resources, Inc., 209 F.3d
43 (2d. Cir. 2000).
In re IMAX Sec. Litig., 2012 WL 3133476 (S.D.N.Y. Aug. 1, 2012).
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The court awarded attorneys’ fees representing 33% of the settlement amount in a
securities class action. The action had several entities serve as both lead plaintiff’s counsel and
lead plaintiff over nearly five years of litigation. The first appointed lead plaintiff lacked Article
III standing, and it, as well as its counsel, was removed. The second lead plaintiff was an
inadequate class representative because it was represented by an attorney not disclosed to the
court. A third lead plaintiff and its counsel settled the litigation for $12,000,000.00.
Plaintiffs’ counsel requested payment of $4,719,351.32 for nearly 10,000 hours of work
and $1,719,351.32 in expenses, which the court concluded was excessive. The court concluded
that the expenses were unusually high and unreasonable in relation to the recovery, particularly
because the issues raised by the case were not overly complex and some recovery risks were
apparent from the beginning. In addition, the court held that the fee award should be reduced for
issues relating to the disqualification of the second lead plaintiff.
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In re Wachovia Equity Sec. Litig., 2012 WL 2774969 (S.D.N.Y. June 12, 2012).
In connection with the approval of a class action settlement, the court awarded plaintiff’s
counsel attorneys’ fees (totaling approximately 5% of the settlement fund) and expenses. The
court evaluated the attorneys’ fee request under the factors set out in Goldberger v. Integrated
Resources, Inc., 209 F.3d 43 (2d Cir. 2000) and noted: (1) There were no substantive objections
to the fee request, beyond very general concerns that the lawyers were being paid too much; (2)
plaintiff’s counsel had spent a significant amount of time on the matter, and the requested fees
were 1.65 times the lodestar; (3) plaintiffs would face substantial hurdles in establishing liability
and damages in this action; (4) lead counsel litigated the case entirely on contingency; (5) the
litigation was complex; (6) the 5% fee request was reasonable in relation to fee requests
commonly made in other cases for 20-30% of the fund; and (7) lead counsel obtained a
significant settlement for the class.
Allstate Ins. Co. v. CitiMortgage Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012).
The court denied plaintiffs’ request, pursuant to 28 U.S.C. § 1447(c), for attorneys’ fees
in connection with defendants’ unsuccessful effort to remove this residential mortgage-backed
securities case to federal court. The complaint alleged common law claims for fraud and
negligent misrepresentation, as well as claims under the Securities Act of 1933. In granting the
plaintiffs’ motion to remand, the court found unpersuasive the defendants’ arguments that federal
jurisdiction existed because (1) the case “related to” the bankruptcy of one of the mortgage
originators, and (2) the Edge Act conferred jurisdiction because the claims arose out of
transactions involving territorial banking. Although the court was not persuaded by these
arguments, it found that defendants had a good-faith basis for making them. Accordingly, the
court denied plaintiffs’ request for fees.
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In re Am. Int’l Grp., Inc. Sec. Litig., 2012 WL 345509 (S.D.N.Y. Feb. 2, 2012).
In a class action case, after analyzing the factors set forth in Goldberger v. Integrated
Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000), the court approved lead plaintiffs’ counsel’s
motion seeking an award of attorneys’ fees equal to 13.25% of the amount of the settlement
fund. The court determined that the amount of attorneys’ fees awarded was in line with awards
permitted in similar cases, was appropriate based on the complexity of the case and lead
counsel’s effort and experience, and promoted the valuable public policy interests at stake. In
addition, the court awarded reimbursement of litigation expenses of $8,257,111.29, the amount
sought by lead plaintiffs’ counsel.
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In re Wachovia Preferred Sec. & Bond/Notes Litig., 2012 WL 2589230 (S.D.N.Y. Jan. 3, 2012).
The court awarded plaintiffs’ counsel attorneys’ fees in the amount of $75,240,000.00
(equal to 12% of the settlement fund) and reimbursement of litigation expenses in the amount of
$860,877.47. Plaintiffs’ counsel had sought a fee award equal to 17.5% of the settlement
amount. The court analyzed the factors set forth in Goldberger v. Integrated Resources, Inc.,
209 F.3d 43, 50 (2d Cir. 2000) and determined that the attorneys’ fees awarded by it (1) were fair
and reasonable under the circumstances; and (2) compensated plaintiffs’ counsel for their
exemplary work while ensuring that class members maintained a significant portion of the
settlement fund.
Indus. Tech. Ventures LP v. Pleasant T. Rowland Revocable Trust, 2012 WL 777313 (W.D.N.Y.
Mar. 8, 2012).
The court denied the defendants’ motion for sanctions under Federal Rule of Civil
Procedure 11, holding that the relevant allegations in the plaintiff’s complaint were not “utterly
lacking” in support, and granted the plaintiff’s cross-motion for sanctions because the
defendants’ Rule 11 motion was baseless. Plaintiff had produced a voluminous record in support
of its claims for unjust enrichment, tortuous interference with business relationships, common
law fraud, civil conspiracy, and violations of the Securities Exchange Act of 1934. In light of
this evidence, which would have been sufficient to defeat a motion for summary judgment, the
court found that defendants’ motion for sanctions was “utterly without support.” Thus, the court
awarded plaintiff the attorneys’ fees and costs it incurred in defending against the Rule 11
motion.
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012).
The court granted the plaintiffs’ motion to remand a putative class action to state court
and denied the plaintiffs’ request for attorneys’ fees under 28 U.S.C. § 1447(c). The court found
that it could not say that the removing defendants lacked an objectively reasonable basis for
seeking removal despite the fact that the removal was untimely and the Securities Litigation
Uniform Standards Act did not provide a basis for removal.
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Bajaj v. Fisher Asset Mgmt, LLC, 2012 WL 1293169 (D. Del. Apr. 10, 2012).
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The court granted respondent’s request for an award of attorneys’ fees for defending
against petitioner’s motion to vacate an arbitration award. The court found that the petitioner
had no basis to resist the arbitration award and the petition to vacate had no chance to prevail.
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SEC v. Berlacher, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012).
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The district court denied the defendants’ motion, pursuant to the Equal Access to Justice
Act, for attorney fees and costs expended in defending against the SEC’s civil enforcement
action. The court found that the SEC’s lawsuit alleging securities fraud and insider trading was
substantially justified even though the defendants prevailed on some claims. The court also
found that the SEC’s demand was not substantially in excess of the judgment it obtained.
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SEC v. Kiselak Capital Grp., LLC, 2012 WL 369450 (N.D. Tex. Feb. 3, 2012).
The court granted the receiver’s request, under Federal Rule of Civil Procedure
37(b)(2)(c), for an order requiring the attorney for one of the defendants to pay the fees incurred
by the receiver due to the defendant’s failure to comply with a discovery order. During postjudgment
discovery, the defendant waited until one day after a court-imposed discovery deadline
before he asserted for the first time a blanket objection to all discovery requests based on his
Fifth Amendment privilege from self-incrimination. The court found that the attorney’s advice
to the defendant to disregard the court’s order was not substantially justified, particularly because
there was no true danger of self-incrimination and the assertion of the defendant’s Fifth
Amendment privilege failed for lack of specificity. Moreover, the court found that the attorney’s
delay tactics were evidence of bad faith and that there were no special circumstances making an
award of reasonable fees unjust.
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In re Northfield Labs., Inc. Sec. Litig., 2012 WL 2458445 (N.D. Ill. June 26, 2012).
As part of its approval of the settlement of securities fraud class action the court approved
attorneys’ fees representing 12.3% of the settlement fund. The court found that the award
reasonably approximated market value. The court noted that while attorneys often sought higher
percentages in fees, a lower percentage was appropriate in this case where the class was created
by consolidating several individual actions – all with their own counsel.
The court also held that expert witness fee expenses totaling approximately 27% of the
fund, were reasonable because without the experts, the plaintiffs could not have prevailed in
getting the class certified. The court denied, however, reimbursement for expenses for online
legal research and also denied reimbursement of expenses in connection with press releases
issued to the class members, as the court viewed this as a firm marketing expense.
In re Apollo Grp., Inc., Sec. Litig., 2012 WL 4513608 (D. Ariz. Oct. 2, 2012).
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The court denied a motion for attorneys’ fees brought by an objector to the proposed
attorneys’ fee award in a class action settlement. The court noted that objectors are entitled to an
award of attorneys’ fees when their actions substantially enhance the benefit to the class but held
that the objection in this case provided no substantial benefit to the class.
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Yenidunya Invs., Ltd. v. Magnum Seeds, Inc., 2012 WL 538263 (E.D. Cal. Feb. 17, 2012).
In this action for declaratory relief and accounting based on defendants’ alleged violation
of a shareholder’s rights, the court granted defendants’ motion for attorneys’ fees pursuant to the
contractual clauses of a buy-out agreement, stock-purchase agreement, and promissory note.
Applying California law regarding contractual obligations to award attorney fees, the court first
held that the defendants were the “prevailing party” because the court had dismissed the
complaint as barred by the applicable statute of limitations. The court also held that although the
plaintiff did not seek to enforce the agreements, the action was still brought “on a contract” for
purposes of California law.
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R.Q. Constr., Inc. v. Ecolite Concrete U.S.A., Inc., 2012 WL 6091408 (S.D. Cal. Dec. 7, 2012).
The court denied plaintiff’s motion for attorneys’ fees. The plaintiff asserted claims for
securities fraud and negligent misrepresentation but was successful on only some of its claims.
The plaintiff moved to recover all of its fees under a contractual attorneys’ fee provision. The
court held that plaintiff’s fee submission left the court unable to determine how much time was
spent on successful versus unsuccessful claims and that the plaintiff had failed to meet its burden
to justify its fees relating to the claims on which it prevailed.
I.B.E.W. Local 697 Pension Fund v. Int’l Game Tech., Inc., 2012 WL 5199742 (D. Nev. Oct. 19,
2012).
As part of its approval of a securities class action, the court approved attorneys’ fees in
the amount of 25% of the settlement fund and costs of $196,134.16. The court determined that
the amount of fees was reasonable given that plaintiffs’ counsel had litigated the case for over
two years and had shouldered the risk of non-payment by taking the case on a contingency. The
court also held that the 25% fee was reasonable when compared with the result under the lodestar
method.
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Szymborski v. Ormat Tech., Inc., 2012 WL 4960098 (D. Nev. Oct. 16, 2012).
As part of its approval of a securities class action settlement, the court approved
attorneys’ fees in the amount of 30% of the settlement fund and costs of $169,749. The court
held that the requested fee was reasonable considering the skill of plaintiffs’ counsel, the
complexity of the issues, the risk shouldered by plaintiffs’ counsel, and customary fees in similar
cases. The court held that the requested fee was also reasonable when compared with the result
under the lodestar method, which yielded a larger number.
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Finkel v. Am. Oil & Gas, Inc., 2012 WL 171038 (D. Colo. Jan. 20, 2012).
The court granted in part and denied in part plaintiffs’ motion for attorneys’ fees in
connection with the settlement of a class action suit where non-monetary benefits were conferred
on the class. The court awarded attorneys’ fees and expenses in the amount of $200,000.00.
Plaintiffs had requested $850,000.00 in fees and expenses. The court, applying Nevada law, held
that the benefits conferred to shareholders, which consisted of supplemental disclosures to be
included in a proxy statement, were “moderate at best” and “not very substantive.” Secondarily,
the court focused on factors such as attorney time spent on the matter and fee awards in similar
cases. The court determined that (1) the plaintiffs did not persuade the court that good billing
judgment was exercised or that there was no duplication of efforts with respect to billing matters;
and (2) the $200,000 awarded for fees and expenses was comparable to awards granted in similar
cases.
In re Thornburg Mortg., Inc. Sec. Litig., 2012 WL 6004176 (D.N.M. Nov. 26, 2012).
The court approved an attorneys’ fee award of $400,000 and $243,145.93 (plus interest)
in expenses as part of the settlement of a class action in which plaintiffs asserted federal
securities law claims. The court held that the requested fee, which was 20% of the settlement
value, was reasonable.
Pub. Emps. Ret. Ass’n of N.M. v. Clearlend Secs., 2012 WL 2574819 (D.N.M. June 29, 2012).
The court twice denied the plaintiff’s motion for attorneys’ fees under 28 U.S.C.
§1447(c). The defendant removed the case twice before and after conducting discovery – both
times on the ground that the plaintiff was not an arm of the state and was therefore a citizen of
New Mexico for diversity purposes. The court granted both of the plaintiff’s motions for
remand, but denied the plaintiff’s request for attorneys’ fees because it concluded that the
defendants had an objectively reasonable basis for removal.
Fornell v. Morgan Keegan & Co., 2012 WL 3155727 (M.D. Fla. Aug. 3, 2012).
The court awarded sanctions in the form of attorneys’ fees incurred by the plaintiff after
the defendant moved to vacate an arbitration award. The defendant alleged that one of the
arbitrators failed to disclose two litigation matters in which he was involved and that this lack of
disclosure established partiality and misbehavior. The court held that there was no evidence of
actual conflict and that neither of the two matters would lead a reasonable person to believe a
conflict existed.
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BCJJ, LLC v. Lefevre, 2012 WL 2590473 (M.D. Fla. July 3, 2012).
The court granted the defendant bank’s motion for sanctions and ordered the plaintiff to
pay the defendant’s reasonable attorneys’ fees and costs. The court had dismissed the plaintiff’s
first amended complaint (which alleged state and federal securities and common law claims) and
directed it to file an amended complaint including a more definite statement regarding the
circumstances under which the appraisal at issue was provided to the plaintiff. The plaintiff did
so, alleging that the appraisal was described to one of plaintiff’s representatives by a
representative of the defendant. The representative’s deposition testimony refuted this
allegation. The court concluded that even if the plaintiff did not “affirmatively fabricate” the
allegations in its complaint, its failure to confirm the truth of its allegations with its
representative before filing the complaint “evinces a failure to conduct reasonable inquiry into
the evidentiary basis of [its] factual claims.”
Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., 962 N.E.2d 221 (Mass. App. Ct.
2012).
The court reversed in part the lower court’s grant of a motion to dismiss the plaintiff
investors’ challenge to the defendant investment management firm’s handling of a previous
settlement agreement. Because the motion to dismiss was reversed in part, the court held that the
defendant’s cross-motion request for Rule 11 sanctions was “absolutely foreclosed.”
K.4
Bear, Stearns & Co. v. Int’l Capital & Mgmt. Co., 952 N.Y.S.2d 106 (N.Y. App. Div. 2012).
The court granted a request by a firm and its affiliates to confirm an arbitration award and
denied the customer’s motion to vacate or modify the portion of the award granting attorneys’
fees. The court found that the arbitration panel did not exceed its authority under FINRA rules
by awarding attorneys’ fees, noting that the customer had demonstrated its consent to the
imposition of fees on multiple occasions and did not withdraw its own fee request until closing
statements.
Stratton v. XTO Energy Inc., 2012 WL 407385 (Tex. App. Feb. 9, 2012).
The Texas Court of Appeals affirmed the trial court’s award of nearly $4,000,000.00 in
attorneys’ fees in a shareholder class action, but modified the award upward to $8.6 million after
reviewing the lower court’s calculations regarding the lodestar amount and the application of a
multiplier. The court concluded that the trial court’s lodestar amount was reasonable but that its
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efusal to apply a higher multiplier to the lodestar amount was error due to the complexity of
securities cases, the exceptional results achieved by counsel, the high risk of trying a case with a
contingency fee, the undesirability of the litigation, and the fact that the fee award requested was
comparable to other class action awards. These factors were part of a mandatory test that the
trial court did not undertake. The Court of Appeals affirmed the award of fees, applied the test
(based on the undisputed record), and modified the award.
Caruthers v. Underhill, 287 P.3d 807 (Ariz. Ct. App. 2012).
The court held that A.R.S. § 12-341.01(A), which authorizes the award of attorneys’ fees
in contract actions, applied to the plaintiffs’ fraudulent inducement claims. The court reasoned
that the statute applied to plaintiffs’ claims that the defendant had fraudulently induced them to
enter an agreement to sell their stock at a diminished value because the plaintiffs’ claims would
not exist but for the fraudulently induced contract.
Kool Radiators, Inc. v. Evans, 278 P.3d 310 (Ariz. Ct. App. 2012).
The Arizona Court of Appeals vacated the trial court’s award of attorneys’ fees. The
Court of Appeals held that the trial court erred when it dismissed the plaintiff’s complaint for
lack of ripeness and further erred by awarding the defendant its attorneys’ fees and costs. The
Court of Appeals overruled its prior decisions that it could review an award of attorneys’ fees
entered after a dismissal without prejudice. Although the court lacked appellate jurisdiction to
review the order awarding attorneys’ fees, it invoked its special action jurisdiction, appropriate
when there is no equally plain, speedy, and adequate remedy by appeal, to review the award.
Azure Ltd. v. I-Flow Corp., 143 Cal.Rptr.3d 136 (Cal. App. June 21, 2012).
The court affirmed the trial court’s denial of attorneys’ fees pursuant to California’s
private attorney general fee statute, Code of Civil Procedure section 1021.5. The plaintiff had
acquired shares of defendant’s stock, which defendant wrongfully transferred to the state as
escheated property. After several years of litigation, during which the California Supreme Court
held that the defendant was not entitled to immunity under the state’s Unclaimed Property Law,
the parties entered a stipulated entry of judgment. The plaintiff then sought attorneys’ fees under
the California private attorney general statute. The court held that the defendant did not engage
in conduct that could affect the rights of the public or a substantial number of people or
otherwise adversely affect the public interest and that plaintiff therefore was not entitled to
recover attorneys’ fees.
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Kaltenbacher v. Morgan Keegan & Co., 84 So. 3d 1127 (Fla. Dist. Ct. App. 2012).
The court held that the defendant firm was entitled to recover its attorneys’ fees for
successfully defending a motion to vacate an arbitration award. The firm’s client agreement
stated that the client would pay the firm’s attorneys’ fees if the firm prevailed in an action
brought by the client. The court reversed the lower court’s denial of the firm’s request for an
award of attorneys’ fees on the motion to vacate. The court held that the arbitration panel’s
denial of attorneys’ fees in the arbitration was not binding on the lower court in the separate
action to vacate the arbitration award and that the firm was entitled to recover its attorneys’ fees
pursuant to the contract between the parties.
L. Contribution, Indemnification
L.
In re Med. Capital Sec. Litig., 842 F. Supp. 2d 1208 (C.D. Cal. 2012).
The court dismissed with prejudice third-party equitable indemnification claims that
banks, which were defendants in an underlying breach of contract action, asserted against broker
dealers. The court reasoned that under California law, equitable indemnification may exist only
among joint tortfeasors. Because the banks were sued in contract, they could not seek
indemnification from the broker dealers in tort. The court also dismissed without prejudice the
banks’ contribution claims against the broker dealers because under California law, the right of
contribution ripens only after the issuance of a judgment and no judgment had been entered.
Katz v. China Century Dragon Media, Inc., 2012 WL 6644353 (C.D. Cal. Dec. 18, 2012).
Plaintiffs alleged that the defendants, in violation of the Securities Act of 1933, made
false and incomplete statements in the prospectus and registration statement issued in connection
with an IPO. Certain defendants who had assisted in the underwriting of the IPO brought a
cross-claim against the former auditor for the IPO for indemnity and contribution. The auditor
moved to dismiss. The court held that as a matter of law, there cannot be a claim for indemnity
between or among co-defendants in an action brought against them under the Securities Act.
The court also held that while the contribution claims were allowed between or among
defendants in Securities Act cases, the underwriter’s claim was premature and would not accrue
until the underwriter paid a judgment. The court granted the auditor’s motion to dismiss.
L.
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Pastimes, LLC v. Clavin, 274 P.3d 714 (Mont. 2012).
The Supreme Court of Montana reversed an award of attorney’s fees based on an
indemnification clause in a limited liability company’s operating agreement. The court
concluded that declaratory judgment action seeking a valuation of a deceased member’s interest
in the LLC did not fall under the operating agreement’s indemnification provision that allowed
for indemnification for any action brought “on behalf of the Company or in furtherance of the
interests of the Company.”
L.
Wiederhorn v. Merkin, 952 N.Y.S.2d 478 (N.Y. App. Div. 2012).
The court modified the trial court’s partial confirmation of an arbitration award but
affirmed its denial of one appellant’s (a respondent in the arbitration proceeding) counterclaim
for indemnification. The court rejected the appellant’s argument that because the arbitration
panel dismissed the claims against it, it was a “prevailing party” in the arbitration and entitled to
indemnity from the claimant under a fee-shifting clause in a subscription agreement.
The court noted that although some of the arbitration claimant’s claims against one
appellant were dismissed and his claims against the other appellant were dismissed in their
entirety, the claimant succeeded in obtaining an arbitration award for the full value of his
investments. The court noted that a party need not prevail on all its claims to be considered
“prevailing.” The court also rejected the one appellant’s argument that it should be considered
separately for the purpose of determining whether it prevailed in the arbitration. The court noted
that the appellants mounted a joint defense and had maintained “absolute identity” in the
arbitration and court proceedings. Furthermore, the record indicated that the cost of defense
accrued to both appellants jointly, making it impossible to allocate expenses.
Denenberg v. Rosen, 941 N.Y.S.2d 38 (N.Y. App. Div. 2012).
In an action alleging wrongful establishment of a pension plan, the court affirmed the
dismissal of an accountant’s cross claims for contribution and common-law indemnification
against a bank that provided the insurance policies, the administrator of the pension plan, and the
attorneys for the administrator. The court reasoned that the accountant did not receive
professional advice from those parties and did not have a fiduciary or confidential relationship
with them. The court also held that the accountant’s cross-claims for contribution and commonlaw
indemnification against an insurance broker were not subject to dismissal because the broker
owed a duty to the accountant to disclose information that was relevant to affairs entrusted to
him.
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Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Res., Inc., 47 A.3d 1 (App. Div.), cert
denied, 56 A.3d 395 (N.J. 2012).
The court affirmed an injunction prohibiting defendants from pursuing third-party
FINRA arbitration claims for contribution and indemnification against a securities broker dealer.
The court also upheld the denial of the defendants’ cross-motion to compel FINRA arbitration.
The court held that the trial court had authority to determine whether the claims were
substantively arbitrable, and that the claims were not arbitrable because there was no agreement
to arbitrate the claims. The court also held that the claims were derivative in nature and not a
covered, exchange-related dispute that would subject the claims to FINRA arbitration.
L.
M. Statute of Limitations
1. Federal Securities Claims
M.1
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).
The United States Supreme Court held that even if the two-year statute of limitations
applicable to claims under Section 16(b) of the Securities Exchange Act of 1934 can be equitably
tolled (an issue on which the Court divided), the limitations period is not tolled pending the filing
of a Section 16(a) statement. The Court reasoned that Section 16(b) clearly states that the
limitations period begins to run when the insider realizes a profit and says nothing about
extending the period until a Section 16(a) statement is filed. The Court further reasoned that
extending the limitations period in such a manner is inconsistent with the principles of equitable
tolling because the tolling period could potentially be extended indefinitely where a plaintiff
knows the facts giving rise to a Section 16(b) claim, yet no statement has been filed. The Court’s
opinion abrogated the Ninth Circuit’s decision in Whittaker v. Whittaker Corp., 639 F.2d 516
(9th Cir. 1981), which held that the limitations period is tolled until the insider discloses his
transactions in a Section 16(a) filing regardless of whether the plaintiff knew or should have
known of the transactions.
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012).
The Sixth Circuit held that the two-year statute of limitations period for the plaintiffs’
claims under Section 10(b) of the Securities Exchange Act of 1934 was equitably tolled because
the defendant concealed its intent to deceive. The court found that the plaintiffs had been
stymied from obtaining information from the defendant and that they were able to obtain
information that made them aware of an alleged intent to deceive only after filing a state court
action and pursuing discovery in that case.
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The court held that the plaintiffs’ claims under Section 12(a)(1) of the Securities Act of
1933 were time-barred, however, because they had not been brought within one year of the date
of the alleged violation and were not subject to equitable tolling. Following the approach taken
by a majority of federal courts and the interpretive canon expression unis est exclusion alterius,
the court reasoned that the language of Section 12(a) plainly shows that Congress intended for
the limitations period to run from the date of the violation irrespective of whether the plaintiff
knew of the violation.
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9th Cir. 2012).
The Ninth Circuit reversed the dismissal of investors’ claims under Section 10(b) of the
Securities Exchange Act of 1934 as untimely where the district court applied the “inquiry notice”
test to determine when the investors’ securities fraud claims accrued. The court explained that
since the district court’s decision, the United States Supreme Court in Merck & Co. v. Reynolds,
559 U.S. 633 (2010), abrogated the “inquiry notice” rule in favor of the “discovery” rule under
which the limitations period begins to run when the plaintiff discovers, or a reasonably diligent
plaintiff would have discovered, the facts constituting the violation. The court therefore
remanded to allow the district court to apply the Merck standard to the statute of limitations
determination.
SEC v. Brown, 878 F. Supp. 2d 109 (D.D.C. 2012).
In an SEC enforcement action against former corporates officers of a publicly held
company who allegedly concealed the status of one of the officers, the court held that issues of
material fact prevented summary judgment that the claims were time-barred under the five-year
statute of limitations applicable to SEC civil penalties. The court first determined that the
discovery rule did not toll the claims because the SEC’s complaint failed to allege facts that
would establish that it exercised reasonable diligence in trying to uncover the defendants’
wrongdoing, when the SEC discovered the claims, or that the SEC remained ignorant of the
claims. Nevertheless, the court found that an issue of fact existed to whether the continuing
violation doctrine tolled the limitations period because factual disputes existed as to when the
alleged scheme to conceal the officer’s status arose and when (if ever) a duty to disclose the
officer’s status arose. The court held that resolution of these disputes depended on a credibility
determination that rests with the trier of fact.
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2012 WL
4480735 (D. Mass. Oct 1, 2012).
The court held that the tolling doctrine announced in Am. Pipe Constr. Co. v. Utah, 414
U.S. 538 (1974), tolled the limitations period for class members’ claims relating to a security
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even though the class representative lacked standing as to that security. The plaintiff pension
fund brought a putative class action against the issuers and underwriters of certain mortgagebacked
securities, alleging violations of the federal securities laws.
The fund lacked standing, however, with respect to its claims pertaining to a security it
did not purchase. Two other plaintiffs had standing but did not bring their claims until after the
applicable one-year statute of limitations had expired. The court held that the American Pipe
doctrine (where under certain circumstances, the commencement of a class action tolls the
running of the applicable statute of limitations for all class members, even where class status is
later denied) applied to the claims and tolled the limitations period.
M.1
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012).
In a class action arising from the Bernard Madoff Ponzi scheme, the court held that the
plaintiffs’ claims under the Securities Exchange Act of 1934 were not barred by the Exchange
Act’s five-year statute of repose. The court held that a defendant asset management firm was
under a continuing duty to disclose its true concerns regarding Madoff so as to render its prior
statements of opinion not misleading.
M.1
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.
2012).
In a putative class action brought by investors in residential mortgage-backed securities
pass-through certificates, the court held that plaintiffs’ claims arising under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 were timely under the Security Act’s one-year statute of
limitations and three-year statute of repose. The court held that the plaintiffs’ Securities Act
claims were subject to the discovery standard in Merck & Co. v. Reynolds, 559 U.S. 633 (2010),
rather than the inquiry notice standard. The court found that the plaintiffs’ knowledge of news
articles, reports, lawsuits, and news conferences was insufficient to trigger the one-year statute of
limitations applicable to the Securities Act claims. The court reasoned that it was not clear that a
complaint supported solely by that body of information would survive a motion to dismiss
because that information related only generally to the industry and market, rather than to the
particular certificates held by the plaintiffs.
The court also held that the Securities Act’s three-year statute of repose did not bar the
plaintiffs’ claims. Relying on its holding in In re Morgan Stanley Mortg.Pass-Through
Certificates Litig., 810 F. Supp. 2d 650 (S.D.N.Y. 2011), the court explained that the
commencement of this class action tolled the statute of limitations for all members of the
putative class, including where the original named plaintiffs lacked standing to bring some of the
claims. Because each of the plaintiffs asserted claims on behalf of purchasers of certificates less
than three years after each of the offerings’ issuance, the claims were not barred by the statute of
repose.
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M.1
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012).
In a putative class action, the court held that a proposed intervenor’s claims relating to the
defendants’ alleged failure to disclose risks associated with certain exchange-traded funds were
time-barred and not subject to either relation-back tolling under Am. Pipe & Constr. Co. v. Utah,
414 U.S. 538 (1974), or equitable tolling. The court found that the relation-back doctrine did not
apply because the intervenor’s claims had been voluntarily dismissed by amendment of the
complaint. Thus, under the operative version of the complaint, no plaintiff currently had
standing to bring the claims that the intervenor sought to assert. The court likewise concluded
that the American Pipe doctrine did not suspend the statute of limitations because the intervenor
was not an asserted member of the putative class and was aware of information sufficient to put
him on notice that his claims were not part of the putative class and his interest was not
protected. Finally, the court held that the intervenor’s claims were not subject to equitable
tolling because he failed to act with diligence to protect his claims and there were no
extraordinary circumstances that prevented him from timely filing his motion.
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y. 2012).
The court held that a three-year statute of limitations in the Housing and Economic
Recovery Act (“HERA”) governed the timeliness of claims that the Federal Housing Finance
Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, asserted under the
Securities Act of 1933. FHFA brought the claims against financial institutions that packaged,
marketed, and sold residential mortgage-backed securities. The court rejected the financial
institutions’ argument that HERA has no effect on the Securities Act’s three-year statute of
repose. The court also rejected the financial institutions’ claim that HERA’s limitation provision
applies only to state law claims and not federal claims.
The court also held that the claims at issue were not time-barred under the Securities Act
when FHFA’s conservatorship began. The court held that Securities Act claims are subject to
the discovery standard in Merck & Co. v. Reynolds, 559 U.S. 633 (2010). The court further
reasoned that the information Fannie Mae and Freddie Mac received (such as news articles,
lawsuits, and government investigations) may have signaled general problems in the residential
mortgage-backed securities market, but did not give them sufficient information to adequately
plead a violation of the Securities Act.
Pa. Pub. Sch. Emps.’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y. 2012).
The court dismissed a pension fund’s claims under Section 11 of the Securities Act of
1933 as time barred under the Act’s one-year statute of limitations. The court held that
irrespective of whether Merck & Co. v. Reynolds, 559 U.S. 633 (2010), abrogated the inquiry
notice standard for Securities Act violations, the Securities Act claims were time-barred because
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the company disclosed various lawsuits that not only put the plaintiff on inquiry notice of the
facts underlying its claims, but also allowed a diligent plaintiff to plead facts constituting the
violation. The court also rejected the pension fund’s argument that management’s reliable words
of comfort excused its failure to inquire because the statements were material to the company
and did not discuss how the company would avoid future problems. Finally, the court concluded
that the limitations period was triggered even if the plaintiff did not have notice of all of the
misconduct it alleged, so long as it was on notice of the issues central to its complaint.
In re Vivendi Universal, S.A. Sec. Litig., 281 F.R.D. 165 (S.D.N.Y. 2012).
The court held that the Sarbanes-Oxley Act’s two-year statute of limitations applied to
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 that were asserted
against a former corporate officer by shareholders who were excluded as class members from a
putative class action against the officer. The class action was filed prior to the effective date of
the Sarbanes-Oxley Act. The court rejected the defendant-officer’s argument that the
shareholders’ claims were duplicative of the class action and thus governed by the one-year, pre-
Act limitations period. The court determined that even though the putative class action was filed
before the effective date of the Act, the shareholders’ individual claims were distinct and new
proceedings because they had been excluded from the existing class proceedings by court order.
The court also held that tolling under Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538
(1974), extended through the Federal Rule of Civil Procedure 23(f) appeals process. Noting that
courts are split on whether American Pipe tolling ceases upon the denial of class certification or
the exhaustion of the Rule 23(f) appeals process, the court held that it is reasonable for putative
class members to rely on a class action as a means of redressing their individual claims during
the appeal and that because a Rule 23(f) appeal is swift, tolling the limitations period imposes no
undue hardship on defendants.
In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012).
In a securities fraud class action, the court denied the class’s motion to amend the class
definition to include putative class members that were excluded from the class when it was
initially certified. The court held that the claims of the excluded class members were time-barred
because they did not file complaints within one or two years of the order certifying the class
(under the one-year statute of limitation applicable to pre-July 30, 2002 fraudulent activity or the
two-year statute of limitation for post-July 30, 2002 fraud).
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 6584524 (S.D.N.Y. Dec. 18, 2012).
In a case involving claims under Section 11 of the Securities Act of 1933, two groups of
defendants moved to dismiss claims as time-barred under the Securities Act’s three-year statute
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of repose. The court denied without prejudice the first group of defendants’ motion pending
resolution of an appellate issue. The court denied the other motion to dismiss on the grounds that
the defendant and plaintiff had entered into a tolling agreement and the defendant was estopped
from raising the statute of repose.
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 4866504 (S.D.N.Y. Oct. 15, 2012).
The court dismissed as untimely certain plaintiffs’ claims under Sections 11 and 15 of the
Securities Act of 1933. The claims related to purchases that took place more than three years
after the securities at issue were “bona fide offered to the public” under Section 13 of the
Securities Act’s three-year statute of repose. The court held that the repose period began to run
on the effective date of the registration statements for the securities at issue and rejected the
plaintiffs’ argument that subsequent pricing supplements reset the running of the statute of
repose.
M.1
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2012 WL 6840532 (D. N.J. Dec. 20, 2012).
The court denied defendant’s motion to dismiss plaintiffs’ claim under Section 10(b) of
the Securities Exchange Act of 1934. Defendants argued that the claim was time-barred under
the applicable five-year statute of repose in 28 U.S.C. § 1658. The court held that the tolling
doctrine articulated in Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) applied to statutes
of repose as well as statutes of limitation and that an initial timely-filed securities fraud class
action tolled the statutory repose period.
M.1
In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., 876 F. Supp. 2d 616 (D. Md. 2012).
The court held that investors’ claims for violations of Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933 were not time-barred under the Securities Act’s one-year statute of
limitations. Applying Merck & Co. v. Reynolds, 559 U.S. 633 (2010), the court reasoned that
even though the company had announced a large-scale restatement of its financial statements
more than one year before the plaintiffs filed their complaint, the announcement alone was
insufficient to provide the plaintiffs with sufficient information to adequately plead Securities
Act violations. The court also rejected the defendants’ contention that only statements made
around the time that the securities were offered for sale were relevant to the inquiry, explaining
that the relevant date for limitations purposes is not the date that actionable statements are made,
but rather when a reasonably diligent plaintiff would have information to state a plausible claim.
The court also held that a separate claim for a violation of Section 11 of the Securities
Act was time-barred under the Securities Act’s three-year statute of repose. The court rejected
the investors’ argument that the repose period was triggered by the date that the shares were first
available for sale and instead concluded that the period begins to run upon the effective date of
the allegedly false registration statement.
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Szulik v. TAG Virgin Islands, Inc., 858 F. Supp. 2d 532 (E.D.N.C. 2012).
The court held that investors’ claims under Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 based on an alleged kickback arrangement were timely under the twoyear
statute of limitations applicable to such claims. Applying Merck & Co. v. Reynolds, 559
U.S. 633 (2010), the court held that the defendants failed to show that the investors had
knowledge of the kickback arrangement or that a reasonably diligent plaintiff would have known
about it more than two years prior to filing suit. The court noted that the pleadings confirmed
that the investors were repeatedly thwarted in their attempts to investigate their portfolio and that
it was not until approximately seven months prior to their filing of the complaint that they were
able to uncover the facts constituting the alleged violations.
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).
The court held that the continuing fraud exception does not apply to the five-year statute
of repose governing claims under Section 10(b) of the Securities Exchange Act of 1934. The
court reasoned that such an exception is akin to a continuing violation or fraudulent concealment
theory based on equitable tolling, which is inconsistent with United States Supreme Court
decisions holding that the statute of repose is not subject to equitable tolling. Thus, plaintiff’s
claim was untimely to the extent it was based on purchases that took place outside the period of
repose.
The court rejected the defendant’s argument that the plaintiff’s Section 10(b) claims were
barred under the two-year statute of limitations. The court reasoned that it was not apparent
from the face of the complaint that the plaintiff discovered or that a reasonably diligent plaintiff
would have discovered the facts constituting a Section 10(b) violation. The court also
recognized that poor performance of an investment alone is insufficient to commence the
limitations period.
SEC v. Jackson, 2012 WL 6137551 (S.D. Tex. Dec 11, 2012).
The court granted in part and denied in part the defendants’ motion to dismiss a civil
enforcement action brought by the SEC. The court held that the SEC’s complaint against
officers of an off-shore drilling company sufficiently alleged that the defendants concealed their
wrongdoing as was required to state a claim for fraudulent concealment and toll the five-year
statute of limitations for enforcement of civil penalties for violations of the Securities Exchange
Act of 1934. The court held, however, that the SEC failed to plead facts to support the inference
that it acted diligently in bringing the complaint and granted leave to amend the complaint to
plead such facts. The court also held that although the complaint failed to state a claim for
aiding and abetting within the limitations period, the continuing violation doctrine could apply to
the claims at issue should the SEC plead appropriate facts in an amended complaint.
406
M.1
M.1

La. Mun. Police Emps.’ Ret. Sys. v. KPMG, LLP, 2012 WL 3780344 (N.D. Ohio Aug. 31, 2012).
The court granted plaintiffs’ motion for reconsideration. The court had previously
ordered plaintiffs to file an amended complaint that did not include any allegations outside the
statute of repose applicable to plaintiffs’ federal securities fraud claims. On reconsideration, the
court noted that that a statute of limitations or repose does not bar factual evidence supporting a
timely claim. The court amended its earlier order to permit plaintiffs to allege facts outside the
period of repose.
M.1
M.1
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).
The court dismissed claims for violations of the Securities Act of 1933 brought by a
purchaser of residential mortgage-backed securities certificates as untimely under the Securities
Act’s three-year statute of repose. The court held that a series of state court actions involving
similar but not identical certificates did not toll the statute of repose under Am. Pipe & Constr.
Co. v. Utah, 414 U.S. 538 (1974), because the plaintiffs in those actions lacked standing to
pursue the claims at issue in this case.
The court also dismissed the plaintiff’s claims for violations of the Securities Exchange
Act of 1934 as untimely under the Exchange Act’s two-year statute of limitations, holding that a
reasonable investor should have discovered facts sufficient to state every element of a claim
more than two years prior to the filing of the complaint. The court also concluded that the
pendency of the state court actions did not toll the limitations period under American Pipe
because the claims in the state cases were Securities Act claims and thus involved fundamentally
different elements.
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal. 2012).
The court held that claims under Sections 11 and 12(a)(2) of the Securities Act of 1933
brought by purchasers of residential mortgage-backed securities were time-barred under the
Securities Act’s three-year statute of repose. Explaining that the statute of repose begins to run
for Section 11 claims when the security is bona fide offered to the public and for Section
12(a)(2) claims on the first day of sale, the court concluded that because plaintiffs’ complaint
was filed more than three years after each of the certificates at issue in the case was bona fide
offered to the public and purchased by the plaintiffs, the claims were time-barred. Citing Allstate
Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011), the court also
rejected the plaintiffs’ argument assertion that the Securities Act claims were subject to tolling.
M.1
407

In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 2012 WL 5275327 (C.D. Cal. Oct. 18,
2012).
The court denied defendants’ motion to dismiss the Federal Housing Finance Agency’s
(“FHFA”) claims under the Securities Act of 1933. Defendants argued that the securities at issue
were purchased more than three years before the filing of the action and that the FHFA’s claim
was untimely under the three-year statute of repose in Section 13 of the Securities Act. The
court held that a provision of the Housing and Economic Recovery Act extending “statutes of
limitation” for certain actions brought by the FHFA also applied to statutes of repose and that the
FHFA’s Securities Act claims were therefore timely.
M.1
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo. 2012).
The court held that the issue of whether articles and press reports put investors on inquiry
notice to trigger the one-year limitations period for violations of Sections 11 and 12(a)(2) of the
Securities Act of 1933 was not suitable for resolution on a motion to dismiss. The court
reasoned that even if the plaintiffs had read the articles and some of the articles had triggered
inquiry notice, the articles could not be said to have provided all the facts required for a
reasonably diligent investor to discover the alleged materially misleading nature of the
defendants’ statements. The court also rejected the defendants’ argument that the plaintiffs
received disclosures placing them on notice of material facts, holding that the plaintiffs
adequately alleged that the prospectuses and registration statements were misleading.
M.1
2. State Securities Claims
M.2
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012).
The Sixth Circuit held that an investor’s claims under the Ohio’s Blue Sky Law were
governed by a five-year statute of repose rather than the four-year statue of repose that was in
effect at the time the plaintiff purchased the investments. The court rejected the defendants’
argument that applying the five-year statute of repose violated Ohio’s prohibition on ex post
facto amendments affecting substantive rights. The court reasoned that the substantive right for
a statue of repose begins when the limitations period has run. When the Ohio legislature
changed the period from four to five years, the period for plaintiff to bring its claims had not
expired.
M.2
Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239 (6th Cir. 2012).
The Sixth Circuit affirmed the lower court’s dismissal of a suit alleging fraud, negligent
misrepresentation, and violations of Kentucky’s Blue Sky Law. The Sixth Circuit affirmed the
trial court’s conclusion that the five-year statute of limitations for fraud actions began to run no
408

later than a few months after the defendant company issued a public prospectus. The court
concluded that “ordinary vigilance and attention” demanded that the plaintiff read the public
prospectus “long before” five years before filing suit. The court also held that plaintiffs’ Blue
Sky Law claims were subject to dismissal in part because any claims that were based on
mortgage pass-through certificates issued in 2003 were untimely under the Blue Sky Law’s
three-year statute of limitations.
M.2
Anderson v. AON Corp., 674 F.3d 895 (7th Cir. 2012).
The Seventh Circuit upheld the dismissal of an investor’s “holder” claims under
California law. The court first noted that plaintiff could not establish causation because he did
not attempt to show how he could have avoided a loss on the shares he held if the defendant had
made earlier disclosures regarding mismanagement. The court rejected the investor’s attempt to
base causation on a related options transaction. The court held that the sale of the option was
distinct from the plaintiff’s “holder” claims and was untimely. The plaintiff did not challenge
the district court’s earlier decision that the option claim was untimely.
M.2
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass. 2012).
The court held that newspaper articles, industry publications, and government reports
were not sufficient to put the plaintiff, a purchaser of residential mortgage-backed securities
certificates, on inquiry notice of its claims under section 410(a) of the Massachusetts Uniform
Securities Act. The court reasoned that the articles and publications provided only generalized
reports on the industry, did not discuss the defendants’ practices specifically, and did not alert
the plaintiff to potential fraud in any particular certificate it had purchased. The court also found
that monthly loan data reports that showed an increase in loan defaults and offering documents
for certain certificates that warned of increasing loan defaults, depreciation of appraisal values,
and problems with loan originators were insufficient to put the plaintiff on inquiry notice of
potential violations. The court concluded that although those reports and warnings may have
indicated that the loans were performing poorly, they did not put the plaintiff on notice that
representations concerning specific underwriting and appraisal processes were false. The court
further concluded that because the reports and warnings related to a small subset of
securitizations, the plaintiff could not have been alerted to the alleged wholesale abandonment of
guidelines.
M.2
Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012).
The court held that the plaintiff-investor’s fraud and constructive fraud claims under
Virginia law were not subject to dismissal under Virginia’s two-year statute of limitations.
Recognizing that the limitations period accrues when the fraud is discovered or should have been
discovered by the exercise of reasonable diligence, the court determined this was an issue of fact
that was not appropriate for determination on a motion to dismiss.
409

The court also held that the plaintiff’s claim for violations of the Virginia Securities Act
was barred by the Act’s two-year statute of limitations to the extent that the claim was based on
notes he purchased more than two years before filing the complaint. The court explained that
Virginia’s Blue Sky Law imposes an absolute bar on claims two years after the transaction on
which the claims are based.
M.2
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062 (C.D. Cal. 2012).
In a case arising out of the plaintiffs’ purchase of residential mortgage-backed securities
certificates, the court dismissed various plaintiffs’ state law claims as untimely. The court
dismissed claims for violations of the Connecticut Uniform Securities Act as untimely under the
applicable statute of limitations. The court also dismissed another plaintiff’s common law claims
as untimely under Oklahoma law and all but one of a third plaintiff’s claims as untimely under
the Illinois Securities Law.
M.2
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal. 2012).
In a multi-district litigation action involving residential mortgage-backed securities, the
court dismissed as time-barred certain state-law fraud and negligent misrepresentation claims
brought by 22 separate corporate plaintiffs. The court had previously held that a reasonable
investor was on inquiry notice of claims relating to the defendant’s loan-origination practices by
February 14, 2008. Stichting Pensionenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d
1125, 1140 (C.D. Cal. 2011). The complaint in this case was filed on August 8, 2011.
Accordingly, the court held that with the exception of certain claims that were subject to a tolling
agreement, all fraud and negligent misrepresentation claims under Arizona, California, and
Tennessee law and negligent misrepresentation claims under Texas law were time-barred under
these states’ two or three-year limitations periods. The court declined to dismiss the fraud claims
under Texas law (which were subject to a four-year limitations period) or the other claims that
were subject to the tolling agreement. The court held that it could not at this stage of the case
determine whether the plaintiffs were on inquiry notice at such time as would render those
claims untimely.
M.2
Bank Hapoalim B.M. v. Bank of Am. Corp., 2012 WL 6814194 (C.D. Cal. Dec. 21, 2012).
The court dismissed the majority of one plaintiff’s state law claims as untimely. The
court applied Iowa’s five-year statute of limitations to the plaintiff’s fraud and misrepresentation
claims and determined that the plaintiff purchased all but five of the securities at issue outside
the statute of limitations. The court rejected the plaintiff’s argument that defendants were
estopped from raising the statute of limitations because the plaintiff did not show any affirmative
act by the defendants to conceal their alleged fraud. The court also held that Iowa’s statutory
discovery rule, Iowa Code § 614.4, applied only to actions at equity and not where, as here, the
plaintiff sought monetary relief.
410

In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 2012 WL 5275327 (C.D. Cal. Oct. 18,
2012).
The court denied defendants’ motion to dismiss the Federal Housing Finance Agency’s
(FHFA) claims under the Virginia and District of Columbia Securities Acts. Defendants argued
that the securities at issue were purchased more than three years before the filing of the action
and that the FHFA’s claim was untimely under both of the Acts’ statutes of repose. The court
held that a provision of the Housing and Economic Recovery Act extending “statutes of
limitation” for certain actions brought by the FHFA also applied to statutes of repose and that the
FHFA’s claims were therefore timely.
M.2
Wiand v. Lee, 2012 WL 6923664 (M.D. Fla. Dec. 13. 2012).
The Magistrate Judge recommended that the District Court deny the defendants’ motion
for summary judgment. The plaintiff, a receiver, brought a “clawback” action against the
defendants alleging claims under Florida’s Uniform Fraudulent Transfer Act, Fla. Stat. §§
726.01, et seq. and unjust enrichment. The Magistrate Judge found that the claims at issue,
which were added in an amended complaint, were timely because they related back to the
original complaint and because the amended complaint was filed within the one-year discovery
period that began upon the receiver’s appointment.
M.2
Oxbow Calcining USA Inc. v. Am. Indus. Partners, 96 A.D.3d 646 (N.Y. App. Div. 2012).
The court held that for purposes of New York’s borrowing statute, which requires that
nonresident plaintiffs show that claims they assert that accrued outside of New York are timely
under both the laws of New York and the other state, a corporation is deemed to reside in New
York if it is incorporated or maintains its principal place of business there. Reversing the trial
court’s order which had dismissed the plaintiff’s claim as time-barred, the court held that the
plaintiff had alleged facts sufficient to show that its principal place of business at the time its
claim arose was in New York. If true, this allegation would mean that the plaintiff was a resident
of New York, that the claim accrued in the state of New York, and only New York’s statute of
limitations would apply. The court also held that allegations of fraud were essential to the
plaintiff’s breach of fiduciary duty claim. Thus, if New York law applied, the claim would be
subject to New York’s six-year statute of limitations.
M.2
Dunn v. Dunn, 281 P.3d 540 (Kan. Ct. App. 2012).
The court affirmed the grant of summary judgment in favor of a firm and broker and held
that the plaintiffs’ action was time-barred under Kansas law. The firm and broker acted as sales
and servicing agent on a variable annuity account sold to the plaintiffs’ stepmother. The court
found that the broker and firm were not equitably estopped from raising the statute of limitations
defense to claims of breach of fiduciary duty and that no ongoing fiduciary relationship existed
between the plaintiffs’ and the broker or the firm, as neither the firm nor the broker had any
411
M.2

contact with the plaintiffs between the time the annuity was purchased in 1994 and when the suit
was filed fourteen years later. The court found no evidence that the broker intended to deceive
or mislead the plaintiffs so as to justify application of equitable estoppel. For the same reasons,
the court also rejected the plaintiffs’ argument that the doctrine of continuing representation
tolled the limitations period.
M.2
Stichting Pensioenfonds ABP v. Credit Suisse Grp. AG, 2012 WL 6929336 (N.Y. Sup. Nov. 30,
2012).
The court denied the defendants’ motion to dismiss plaintiff’s claims as untimely under
Dutch law. The plaintiff, a Dutch pension fund, asserted common law claims against the
defendants arising from the plaintiff’s purchase of residential mortgage-backed securities. The
court held that Dutch law applied and that under the applicable Dutch statute of limitations; a
buyer was required to give “prompt notice” of its claim. The court held that this standard is
highly fact specific and could not be determined on a motion to dismiss.
3. RICO
M.3
Pitkin v. Ocwen Fin. Corp., 2012 WL 5986480 (D. Md. Nov. 27, 2012).
The court dismissed the plaintiff’s federal RICO claim as time-barred. The plaintiff
entered into the transaction at issue approximately seven years before filing the complaint.
Plaintiff’s claim was therefore untimely under RICO’s four-year statute of limitations for private
enforcement actions.
4. SRO Rules
Andrade v. Ewanouski, 962 N.E.2d 245 (Mass. App. Ct. 2012).
The court affirmed the lower court’s confirmation of an arbitration award in favor of the
defendants. The arbitration panel had held that many of the plaintiffs’ claims were barred for
lack of jurisdiction under the six-year limitations period of FINRA Code of Arbitration Rule
12206(a). The court noted that its ability to disturb an arbitration award was narrow and rejected
the plaintiffs’ argument that the arbitration panel exceeded its authority.
M.4
412

M.4
Nee v. Fin. Indus. Regulatory Auth., Inc., 2012 WL 832665 (Mass. Super. Feb. 17, 2012).
The court dismissed the plaintiff’s complaint against FINRA, because the complaint—
which sought expungement from FINRA’s Central Registration Depository (“CRD”) database of
an arbitration award issued six and a half years before the complaint was filed—was untimely.
The court found the action both untimely under a Massachusetts statute that required an
application to vacate an arbitration award be made within 30 days after delivery of the award and
barred by the doctrines of res judicata and issue preclusion. The court rejected the plaintiff’s
argument that FINRA Rule 2080, which sets out a procedure internal to FINRA by which
information concerning a broker may be expunged from the CRD, provides an exception to the
statutory procedure for vacatur of an award or provides a substantive right that overrides
principles of res judicata.
N. Arbitration
1. Scope
N.1
Compucredit Corp., et al., v. Greenwood, 132 S. Ct. 665 (2012).
Plaintiffs sought to avoid an agreement to arbitrate in a new credit card application,
arguing that Congress intended to preclude claims under Credit Repair Organizations Act
(CROA), 15 U.S.C. § 1679 et seq., when it stated that a credit repair organization must provide
disclosures that advise the consumer of their “right to sue” for a violation of the CROA. The U.S.
Supreme Court held that pursuant to the Federal Arbitration Act (FAA) a court must enforce an
arbitration agreement according to its terms, even where the claims at issue are federal statutory
claims, unless the FAA’s mandate is overridden by contrary congressional command. The
language in the CROA does not rise to the level of the congressional command necessary to infer
an intent to preclude arbitration of claims under the CROA.
Filho v. Safra Nat’l Bank, 2012 U.S App. LEXIS 15309 (2d Cir. July 25, 2012)
N.1
Defendants sought to compel arbitration arguing Plaintiffs constructively received, and
therefore were bound by, an agreement to arbitrate. In 2002, Plaintiffs executed a customer
agreement which did not contain an arbitration provision; however, it contained a provision
where the customer expressly accepted that rather than actual notice, the bank would hold all
mail related to his account, and that he agreed to be bound by announcements in the documents
without explicit agreement. The Second Circuit held that Defendant did not meet the burden to
show constructive notice by a preponderance of the evidence of when the subsequent agreement
was mailed to customers, and if so, when it was placed in Plaintiff’s held mail.
413

Schneider v. Kingdom of Thailand, 688 F.3d 68 (2d Cir. 2012)
N.1
Plaintiff initiated arbitration against Thailand claiming it had interfered with investments
made in the country. An arbitrational tribunal was convened and representatives from both
parties agreed to Terms of Reference incorporating the United Nations Commission on
International Trade Law (UNCITRAL) Arbitration Rules. Thailand objected to the jurisdiction of
the panel on the ground that the dispute did not concern “approved investments.” The Second
Circuit held that the question of the scope of the claims in this instance was to be decided by the
tribunal because the parties incorporated UNCITRAL Rules of Procedure, which includes Article
21, providing that the tribunal has the authority to decided questions of arbitrability. Where the
parties explicitly incorporate rules empowering the arbitrator to decide arbitrability, there is clear
intent to delegate such issues to the arbitrator.
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9, 2012)
Plaintiff sought to enjoin an arbitration proceeding instituted before the Financial
Industry Regulatory Authority (FINRA) arguing Defendant was not a “customer” within the
scope of FINRA Rule 12200 and therefore not entitled to arbitration because there was otherwise
no agreement to arbitrate. FINRA Rule 12200 provides that a “customer” may institute an
arbitration proceeding against a FINRA member. The court found that Defendant did not present
any evidence to counter Plaintiff’s showing that he was not a “customer.”
Waterford Inv. Serv., Inc., v. Bosco, 682 F.3d 348 (4th Cir. 2012)
Investors instituted arbitration proceedings against their financial advisor, the firm the
advisor was employed with when the claims arose, Community Bankers, and the investment firm
the financial advisor was later employed with, Weatherford, pursuant to Rule 12200 of the
Financial Industry Regulatory Authority (FINRA). Weatherford sought to enjoin the arbitration
proceedings arguing that the advisor was not an “associate person” of Waterford during the
events in question. A person associated with a member is a natural person engaged in the
investment banking or securities business directly or indirectly controlling or controlled by a
member. The Fourth Circuit found that Rule 12200 is susceptible to the meaning that the advisor
was an associated person of Waterford because the two investments firms had significant
personnel and resource overlap and therefore, the investors’ dispute is within the scope of Rule
12200.
N.1
Grant v. Houser, 2012 U.S. App. LEXIS 6060 (5th Cir. Mar. 23, 2012)
Plaintiff signed a securities brokerage account with Brecek & Young Advisors, Inc.
(BYA) containing an arbitration clause which compelled any controversy between them and
BYA, or its registered representatives, employees, or agents to arbitration. BYA was acquired by
414
N.1
N.1

Securities America, which maintained Plaintiff’s account. Securities America argued it could
enforce the arbitration agreement. The Fifth Circuit held that a declaration submitted by
Securities America’s Vice President, stating that based on his personal knowledge, in acquiring
BYA, Securities America inherited all contractual rights and obligations associated with BYA’s
accounts, including Plaintiff’s account, was sufficient evidence to establish an assignment for
purposes of a Motion to Compel Arbitration.
N.1
Dottore v. Huntington Nat’l Bank, 2012 U.S. App. LEXIS 9185 (6th Cir. May 4, 2012)
An investment fund manager operated a ponzi scheme. The receiver for the fund alleged
the defendant bank, with whom the original fund manager opened fund accounts, breached its
duty to the fund investors by aiding the fraud. Defendant moved to compel arbitration, but the
Sixth Circuit rejected Defendant’s argument that there was a valid agreement to arbitrate. The
initial agreements in 2001 governing the accounts did not contain an arbitration clause. In 2003 a
notice was sent to all bank customers containing amendments to the account documents,
including an arbitration provision. However, in 2005, a representative of the investment fund
signed and filed a change of signature, substituting himself for the initial fund manager on the
account. This change of signature document contained a terms and condition portion governing
the account, it did not have an arbitration clause. The 2005 agreement governed the account
because it was complete on its face, and therefore no analysis of the 2003 notice was necessary.
N.1
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012)
Investors moved to compel arbitration pursuant to Rule 12200 of the Financial Industry
Regulatory Authority (FINRA) Code of Arbitration Procedure arguing they were customers of a
broker dealer which was a managing dealer for a private placement memoranda offering. A
“customer” in the Eighth Circuit refers to one involved in a business relationship with a FINRA
member that is related directly to investment or brokerage services provided to the customer.
Here, the Court found no customer relationship existed because merely being the managing
broker for the offering was not sufficient direct rendition of investment of brokerage services to
the Investors.
N.1
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012)
An investor instituted a second arbitration against a broker dealer alleging malicious
prosecution and abuse of process after the broker dealer unsuccessfully sought to vacate the
arbitration award to the investor in the first arbitration. The client agreement clause compels
arbitration of “all controversies” between the parties which may arise from any account or for
any cause whatsoever. The court found the arbitration clause applies to these claims because they
arise from litigation between the parties over account related activity.
415

N.1
Garcia v. Wachovia Corp., 699 F.3d 1273 (11th Cir. 2012)
The arbitration clause at issue provided that any dispute or claim concerning [the
customer’s] account or relationship with the bank would be decided by arbitration. However, the
provision restricted the availability of bringing the claims as a class action. Defendants argued
they did not waive their right to compel by waiting until the U.S. Supreme Court decided the
issue in AT&T Mobility LLC., v. Concepcion, 131 S.Ct. 1740 (2011) to compel arbitration
because the state laws governing the agreements precluded enforcement of the arbitration
agreement to arbitrate on an individual basis. The Eleventh Circuit rejected the Defendants’
argument because it would not have been futile because the arbitration was at least arguably
enforceable prior to Concepcion.
N.1
In Re Checking Account Overdraft Litig., 685 F.3d 1269 (11th Cir. 2012).
Plaintiff opposed Defendant’s motion to compel arbitration on the ground that a cost and
fee shifting provision in the customer agreement providing for Defendant’s recovery of expenses
regardless of whether Plaintiff prevails was unconscionable under South Carolina law. The
Eleventh Circuit found the cost and fee shifting provision unconscionable because nothing in the
arbitration clause notifies the reader of its potential application in arbitration. However, the court
found the provision severable from the arbitration clause, so it reversed and remanded with
instructions to compel arbitration.
N.1
In Re Checking Account Overdraft Litig., 674 F.3d 1252 (11th Circ. 2012)
The arbitration agreement provided that any issue regarding whether a particular dispute
or controversy is subject to arbitration will be decided by the arbitrator. The Eleventh Circuit
found that this delegation provision was clear and unmistakable evidence that the parties
intended to arbitrate the issue of whether Plaintiffs’ claims were within the scope of the
arbitration agreement. Furthermore, Plaintiff’s argument that the agreement was procedurally
unconscionable was not directed specifically to the delegation provision, and therefore pursuant
to Rent-A-Center, W., Inc., v. Jackson, 130 S. Ct. 2772 (2010), the decision as to whether the
claims were within the scope of arbitration was for the arbitrator.
N.1
In Re Checking Account Overdraft Litig., 2012 U.S. App. LEXIS 15781 (11th Cir. Mar. 11,
2012)
The Eleventh Circuit held that pursuant to North Carolina law, a cost-and-fee shifting
provision in a customer agreement providing for the payment of the defendant’s costs regardless
of Plaintiff prevailing was unconscionable. However, the court found the cost-and-fee shifting
provision was severable and therefore the arbitration provision in the customer agreement was
enforceable.
416

Plaintiffs’ S’holders Corp., v. Southern Farm Bureau Life Ins. Co., 2012 U.S. App. LEXIS
16713 (11th Cir. Aug. 10, 2012)
Plaintiff opposed Defendants’ Motion to Compel Arbitration arguing that the filing of the
second amended complaint did not revive Defendants’ right to compel arbitration which had
been waived. Defendants argued that because the agreement to arbitrate was an agreement to
arbitrate waiver claims by incorporation of the rules of the American Arbitration Association,
specifically 7(a), which gives an arbitrator the power to rule on their jurisdiction. The Eleventh
Circuit rejected this argument because absent clear and unmistakable evidence of an agreement
to arbitrate questions regarding waiver, the courts decide these matters.
N.1
Solymar Inv., Ltd., v. Banco Santander S.A., 672 F.3d 981 (11th Cir. 2012)
Plaintiffs executed a partial settlement agreement, with the intention to execute a more
comprehensive settlement, containing an agreement to arbitrate “all controversies between the
client and the bank or the bank parties arising out of or relating to this agreement or matters
related thereto” for losses relating to investments in funds exposed to Madoff. When the
settlement negotiations fell through, Plaintiffs argued their claims alleging causes of action for
breach of fiduciary duty, negligence, claims under the Securities and Exchange Act, and state
statutory claims were outside the scope of the arbitration clause because they were based on
different investments. The court rejected this argument because the pleadings focused on the
investments with Madoff as the source of the losses sustained.
N.1
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass. Mar. 8, 2012)
N.1
Plaintiffs are trustees who received investment advisory and brokerage services from the
Defendant. In connection with the account opening, Plaintiffs entered into an agreement to
arbitrate and signed as trustees. Plaintiffs seek to avoid a counterclaim filed by the Defendant to
the arbitration Plaintiff’s instituted in the Financial Industry Regulatory Authority (FINRA),
arguing they did not sign the arbitration agreement in their individual capacity, only as trustees,
and because the counterclaim is asserted against them in their individual capacity it is not
brought against a signatory to the arbitration agreement. The court rejected this argument finding
no basis to conclude the counterclaim was asserted against them individually, as opposed to in
their capacity as trustees.
N.1
Barros v. UBS Trust Co. of P.R., 2012 U.S. Dist. LEXIS 133233 (D.P.R. Sept. 17, 2012)
Plaintiffs brought suit against Defendant alleging breach of fiduciary duty in connection
with the management of Plaintiffs’ trust. Plaintiff argues the dispute is not within the scope of
the arbitration agreement executed with Plaintiffs brokerage account opening because “(1) her
relationship with UBS-Trust is not an "Agreement" within the meaning of the Individual
Account Agreement, (2) she never intended to arbitrate any disputes with UBS-Trust, and (3) the
417

terms of the Individual Account Agreement only affect disputes related to the brokerage
account.” The court rejected the argument, and applied a broad reading to the agreement taking
note of the use of the disjunctive, holding that a breach-of-fiduciary-duty claim is a
"controversy" that has arisen concerning a "dispute" with UBS-Trust, an affiliate of UBS-
Financial.
N.1
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist. LEXIS 30988
(E.D.N.Y. Mar. 8, 2012)
Plaintiff is a Canadian Corporation. Its predecessor corporation was a Massachusetts
corporation registered with the Securities and Exchange Commission (SEC) and the Financial
Industry Regulatory Authority (FINRA) as a broker dealer. Plaintiff's predecessor surrendered its
corporate existence in the State of Massachusetts and ceased to do business as a U.S. broker
dealer. Plaintiff argues that it is not a member for purposes of FINRA Rule 13200 and therefore
cannot be compelled to arbitrate. The court rejected the argument and compelled arbitration
because “Section 13100(o) of the FINRA code defines the term "member" to include any broker
or dealer admitted to membership in FINRA, whether or not the membership has been
terminated or cancelled.” Both parties were FINRA members at the time of the Agreement. The
subsequent cancellation of Plaintiff's broker dealer status did not change the court's conclusion.
Ayco Co., L.P. v. Frisch, 2012 U.S. Dist. LEXIS 2112 (N.D.N.Y Jan. 9, 2012)
Plaintiff, a non Financial Industry Regulatory Authority (FINRA) member firm, filed a
Complaint against Defendants, individual brokers, who resigned and became employed by a
competitor investment services firm. Defendants moved to compel arbitration based on the
Uniform Application for Securities Industry Registration Form U4 signed by Defendants,
arguing Plaintiff’s should be bound despite not being signatories, pursuant to FINRA rules and
on the common law theories of agency, veil-piercing/alter ego, and estoppel. The Court denied
the motion to compel.
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Peyser v. Kirshbaum, 2012 U.S. Dist. LEXIS 176873 (S.D.N.Y. Dec. 11, 2012
Plaintiff filed a motion to compel arbitration against a Financial Industry Regulatory
Authority (FINRA) member firm of the disputes relating the brokers recommendation to
purchase Tax Advantaged Stock Loans as a “customer” of the firm and the dispute related to the
business activities of the member firm under FINRA Rule 12200. The court found the dispute
fell within the scope of “business activities” and compelled arbitration.
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French v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 18233 (D. Vt. Feb. 14, 2012)
Plaintiff was a financial advisor, employed by Defendant’s predecessor and Defendant,
but was ultimately terminated by Defendant. Defendant moved to compel arbitration of
Plaintiff’s dispute which alleged bad faith termination pursuant to the arbitration agreement in
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the Uniform Application for Securities Industry Registration or Transfer Form U4, which
requires arbitration in compliance with the rules of the Financial Industry Regulatory Authority
(FINRA). The court found the dispute fell within FINRA Rule 13200(a), "a dispute must be
arbitrated . . . if the dispute arises out of the business activities of a member or an associated
person and is between or among: . . . Members and Associated Persons." The term "business
activities" encompassed a dispute arising from the employment or termination of an associated
person.
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Erichsen v. RBC Capital Mkts., LLC, 2012 U.S. Dist. LEXIS 93641 (E.D.N.C. July 5, 2012)
A securities trader filed suit against an investment firm and alleged that Defendant could
not enforce an arbitration agreement assigned to it by the predecessor signatory. The court
rejected Plaintiff’s argument, and found that there was a valid assignment to the entity and the
assignee, under principles of equitable estoppel, which it could enforce against the trader even
as a nonsignatory.
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Benezra v. Zacks Inv. Research, Inc., 2012 U.S. Dist. LEXIS 47769 (M.D.N.C. Mar. 30, 2012)
Investor executed an account opening agreement, which included an arbitration
agreement. However the agreement did not contain a signature by a representative of the
investment firm. The court found a valid agreement existed because by the Investor’s signature
and delivery of investment funds to the investment firm, manifested a clear intent to enter into
the agreement and to be bound by it; and the firm, by accepting the funds and investing them, did
so as well. Thus, the parties mutually assented.
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Estate of Campana v. Comerica Bank & Trust, N.A., 2012 U.S. Dist. LEXIS 1490 (N.D. W. Va.
Jan. 4, 2012).
Defendant trustee moved to compel arbitration of a Complaint brought by an estate and
its beneficiaries, alleging mismanagement of the trust property. Defendant alleged Plaintiffs
entered into arbitration agreements related to the opening of the trust account and between the
beneficiary of the estate and a financial services company, for an unrelated brokerage account,
the trustee retained to provide investment advice for the trust. Plaintiff argues that because the
beneficiary of the trust did not sign the agreements she cannot be bound to arbitrate the claims.
The court rejected Plaintiffs argument, holding that the dispute over management and execution
of the Trust agreements clearly falls within the broad "any and all controversies" language of the
arbitration clauses. Furthermore, to the extent that the application of these clauses to trust
beneficiaries is ambiguous, "ambiguities as to the scope of the arbitration clause itself are
resolved in favor of arbitration."
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Harding v. Midsouth Bank N A, 2012 U.S. Dist. LEXIS 143984 (W.D. La. Oct. 3, 2012)
Plaintiff opened a checking account containing an arbitration agreement to submit “any
controversy or claim involving more than $25,000 that arises out of, or relates to, this agreement,
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or your deposit relationship with us,” to arbitration. The court found that this was a broad
arbitration clause and compelled arbitration of the dispute. Determining whether a dispute falls
within the scope of an arbitration clause requires the court to characterize the arbitration clauses
as "broad" or "narrow." Narrow arbitration clauses require arbitration only of disputes "arising
out of" the contract, while broad clauses are those that cover all disputes that "relate to" or "are
connected with" the contract. Also, the use of the disjunctive “or” evinced an intent to have a
broader scope of claims.
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Taylor v. Cmty. Bankers Sec., LLC, 2012 U.S. Dist. LEXIS 179266 (S.D. Tex. Dec. 19, 2012)
Defendants moved to compel arbitration arguing that the appointed receiver, who brings
this action on behalf of a class of investors, was bound to arbitrate the claims because the
Noteholders are customers of the firms who offered the notes at issue to the investors and entered
into customer agreements containing arbitration agreements. The court denied Defendants’
motion because they did not show which of the investors represented by the receiver had signed
the agreements, and furthermore, did not proffer a reason as to why the Noteholders who had not
executed the agreements should also be compelled to arbitrate.
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Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 74288 (N.D. Ill. May 30, 2012)
Plaintiff, a Financial Industry Regulatory Authority (FINRA) member firm argued
Defendant, who only dealt with an independent third party financial advisor, could not institute
an arbitration proceeding against Plaintiff pursuant to FINRA Rule 12200 because the Defendant
was not Plaintiff’s “customer.” The Court found Plaintiff was not a customer. To allow an overly
broad definition of "customer" under FINRA would not accurately recognize the relationship
between FINRA members and other parties, and would not accord FINRA members with the
terms that they should have reasonably expected to exist when joining FINRA
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Ireland v. Lear Capital, Inc., 2012 U.S. Dist. LEXIS 171544 (D. Minn. Dec. 4, 2012)
An investor filed a complaint alleging breach of fiduciary duty, misrepresentations, fraud,
violations of the Minnesota Consumer Protection act in connection with the purchase of gold
coins. The arbitration agreement stated the parties would be conducted in accordance with the
rules of the American Arbitration Association (AAA). AAA Rule 7, provides in relevant part that
arbitrators determine their own jurisdiction, including "the existence, scope or validity of the
arbitration agreement. The Court found that the incorporation of the AAA rules was a sufficient
manifestation of a clear and unmistakable intent to submit the gateway question of arbitrability
of a dispute to the arbitrator and compelled arbitration of a dispute.
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Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 15,
2012)
Investor initiated an arbitration proceeding before the Financial Industry Regulatory
Authority (FINRA) under Rule 12200 arguing they are Plaintiff’s “customer” and therefore
entitled to compel arbitration against a FINRA member. Plaintiff moved for a preliminary
injunction of the arbitration proceeding arguing the Investor was not a “customer.” The Investor
filed a motion to dismiss the injunction proceeding, arguing the question of whether the Investor
is a “customer” is an issue for the FINRA arbitrator to decide. The Court rejected the Investors
argument, and agreed with the prevailing view that FINRA rules do not “clearly and
unmistakably” grant arbitrators the authority to determine questions of arbitrability, and therefore
was for the court to decide.
Alakozai v. Chase Inv. Servs. Corp., 2012 U.S. Dist. LEXIS 30759 (C.D. Cal. Mar. 1, 2012)
Financial Advisors brought suit against a securities brokerage firm alleging various
causes of action related to nonpayment of overtime and other wages owed. The securities
brokerage firm filed a motion to compel arbitration against the individual financial advisors
pursuant to the arbitration agreement contained in the employment agreement executed by each.
The arbitration clause prevented the institution of arbitration proceedings as a class. However,
the court denied the motion to compel arbitration, because Rule 13200 of the Financial Industry
Regulatory Authority prevents a member of associated person from enforcing an arbitration
agreement against a member of a certified or putative class action until certification is denied, the
class is decertified, the member is excluded from the class by the court, or the member elects not
to participate in the class action. None of the requirements to enforce the arbitration agreement
had occurred.
Holland v. TD Ameritrade, Inc., 2012 U.S. Dist. LEXIS 22470 (E.D. Cal. Feb. 22, 2012)
Plaintiff alleged that defendant engaged in a fraud violating the California Consumers
Legal Remedies Act (CLRA) by operating a self directed trading platform. Defendants’ motion
to dismiss the claims was granted. The Court found the Plaintiff did not meet the heightened
pleading requirements to state a claim for fraud, nor did the placement of an arbitration provision
in the contract violate the CLRA.
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Johannsen v. Morgan Stanley Credit Corp., 2012 U.S. Dist. LEXIS 5367 (E.D. Cal. Jan. 11,
2012)
Plaintiff signed an agreement in connection with her receipt of financing for a real estate
purchase by a lending affiliate of the securities brokerage firm she held her account with. The
agreement gave the lending affiliate a security interest in her brokerage account. Both her
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okerage account and the financing agreement contained and agreement to arbitrate all
controversies between her and agents, principals or affiliated corporations of the securities
brokerage firm, arising out of or concerning any of your accounts, order or transactions, or the
construction, performance, or breach of this or any other agreement between the parties. Plaintiff
defaulted on the loan and sought to declare the security interest void, alleging that the lending
affiliate could not have a security interest in both the property and brokerage account, and that
the brokerage firm mismanaged her investment account The court granted the lending affiliates
motion to compel arbitration because the language “any claim” is considered to be broad in
scope, and it extended to affiliates of the brokerage firm.
NDX Advisors, Inc. v. Advisory Fin. Consultants, Inc., 2012 U.S. Dist. LEXIS 176977 (N.D. Cal.
Dec. 12, 2012)
NDX, a Financial Industry Regulatory Authority (FINRA) member brokerage firm,
sought to avoid an arbitration initiated by AFN, another FINRA member firm, pursuant to Rule
13200 by arguing that the dispute did not “arise out of the business activities” between them as
required by the rule. For a dispute to fall within the purview of Rule 13200, it need only "pertain
to matters with some nexus to the activity [of the member or associated person] actually
regulated by FINRA." The court found sufficient nexus because the dispute centers around
commissions owed to AFN by the predecessor NDX, who received all the accounts when the
predecessor went out of business.
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Ross Sinclaire & Assoc., v. Premier Senior Living, LLC, et al., 2012 WL 2501115 (N.D. Cal.
June 27, 2012)
The court found that Defendants (PSL) were “customers” of the brokerage firm and could
initiate arbitration under Rule 12200 of the Financial Industry Regulatory Authority (FINRA).
The parties entered into a letter agreement where the brokerage firm would assist PSL in
refinancing mortgages and raising capital, resulting in the issuance variable rate bonds. PSA filed
a claim in arbitration with FINRA alleging the firm failed to disclose the risks in issuance of the
debt. The term customer is not to be narrowly construed, nor is a direct customer relationship
necessary so long as there is some nexus between the purported customer and the FINRA
member. PSL was a customer of the brokerage firm as it had purchased investment advice and
financial services in connection with the creation and sale of securities, furthermore, the
brokerage firm structured the transaction and acted as underwriter, remarketing agent, and
advisor.
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Safadi v. Citibank, N.A., 2012 U.S. Dist. LEXIS 142773 (N.D. Cal. Oct. 2, 2012)
Customer opened a deposit account which contained an agreement to arbitrate any
disputes relating to the account, and a provision which granted the arbitrator the authority to
determine the arbitrability of the dispute. The agreement also included a prohibition on class
action litigation. As part of the promotion, customer received 30,000 airline miles, which was
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eported by the bank to the IRS, who assessed a tax liability for the receipt. Customer sought to
certify a class alleging violation of consumer protection statutes, breach of contract, and unjust
enrichment, and the bank moved to compel arbitration of the customer’s claims. Where the
gateway issue of arbitrability has been delegated to the arbitrator a court’s review is limited to
the consideration of the validity of the contract and the enforceability of the delegation provision.
Here there was no specific challenge to the arbitration provision and therefore, the court
compelled arbitration.
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White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19, 2012)
Plaintiff sought to enjoin an arbitration initiated by the defendants against it and its
financial advisor employee, arguing Defendant was not entitled to arbitrate pursuant to Rule
12200 of the Financial Industry Regulatory Authority because Plaintiff was unaware of the
particular fund the employee was marketing and therefore Defendant was not a “customer.” The
court rejected the argument. There is no exception from the obligation to arbitrate based on an
assertion that the activities of the associated person were unknown to the firm or outside the
scope of the relationship.
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Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012)
An employee alleged violations of federal and state employment antidiscrimination
statutes and non-statutory claims for wrongful termination on the basis of religious
discrimination. Defendant moved to compel arbitration of the dispute pursuant to the arbitration
agreements in the promissory notes and Uniform Application for Securities Industry Registration
or Transfer Form U4. The Court compelled arbitration of the non-statutory claims, but not for the
statutory claims because the arbitration agreements do not demonstrate the employee knowingly
waived their right to a jury trial on a claim based on statutory employment discrimination.
Bixler v. Next Fin. Group, Inc., 858 F. Supp. 2d 1136 (D. Mont. 2012)
Plaintiff argued its claims related to the purchase of a variable annuity could not be
compelled to arbitration pursuant to Montana law, Mont. Code Ann. § 27-5-114 excludes
disputes over annuity contracts from arbitration. The Court rejected the Plaintiff’s argument
because the U.S Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (Apr. 27,
2011), held that a state law that stands as an obstacle to the purpose of Congress in enacting the
[Federal Arbitration Act] (FAA), cannot be used to override arbitration agreements. "When state
law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:
The conflicting rule is displaced by the FAA." Therefore, the FAA preempted the Montana
Statute.
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Goldman v. City of Reno, 2012 U.S. Dist. LEXIS 167902 (D. Nev. Nov. 26, 2012)
Goldman Sachs sought to enjoin an arbitration proceeding instituted by Defendant
pursuant to Rule 12200 of the Financial Industry Regulatory Authority in connection with the
issuance of Auction Rate Securities (ARS) on the basis that ARS are Municipal Securities
governed by the Municipal Securities Rulemaking Board, and the Defendant was not a
“customer.” The Court rejected Goldman Sachs’ argument and applied the Second Circuit test
from UBS Financial Services, Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011) to
determine whether a party is a customer. “[A]s in UBS, the FINRA member has provided more
than financial advice, but rather has provided services directly related to the securities, i.e.,
facilitation of auctions of the securities themselves. The Court finds this to be sufficiently related
to the broker – dealer function for the City to fall under the definition of customer.”
D-J Eng'g Inc. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 6678 (D. Kan. Jan. 20, 2012)
Defendant moved to compel arbitration of the claims brought by Plaintiff pursuant to an
agreement to arbitrate all controversies between the parties in a brokerage agreement. This is a
broad and comprehensive arbitration clause and clearly encompasses the claims in this lawsuit.
Osborne v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 100205 (M.D. Fla. July 19,
2012)
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Defendant moved to compel arbitration of a dispute with a former associated person
related to two promissory notes executed between them based on the language of the Uniform
Application for Securities Industry Registration or Transfer Form U4 agreement and Rule 13200
of the Financial Industry Regulatory Authority. The court rejected the former associated persons
argument that a dispute regarding the promissory notes is outside the scope of the “business
activities” of a member firm and an associated person as a personal loan.
MTA, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 Ala. LEXIS 167 (Ala. Dec. 7,
2012)
Trustee opened a brokerage account with Defendant to manage the assets of the trust. The
account-authorization form stated that it was entered into by Merrill Lynch and the Trustee on
behalf of the Trust. Plaintiff, the grantor of the trust, filed a third-party complaint against the
trustee and Defendant, asserting claims for indemnification and alleging breach of fiduciary duty,
negligence, and wantonness. The Court denied Defendant’s motion to compel arbitration because
the arbitration provisions in the identified contracts are broad in the sense that they apply to "any
controversies" and "all controversies," but narrow in the sense that they apply only to
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controversies between "the parties," "the customer" and Defendant, or "the client" and
Defendant. The contracts containing the arbitration provisions do not define the terms "the
customer" or "the client" in such a way that would encompass Plaintiff. Regardless of Plaintiff’s
involvement in establishing or funding the trust, it is neither the trust nor the trustee and is
accordingly a nonsignatory to the contracts and does not fall within any of the exceptions to the
enforcement of arbitration agreements against nonsignatories.
Gomez v Brill Sec., Inc., 95 A.D.3d 32 (N.Y. App. Div. 1st Dep't 2012)
Plaintiffs, registered representatives of a securities firm, brought a class action alleging
wage and overtime violations. Defendants moved to compel arbitration pursuant to the
arbitration agreement in the Form U4, which states “you agree to arbitrate any dispute, claim or
controversy that may arise between me and my firm . . . that is required to be arbitrated under the
rules . . . of [the Financial Industry Regulatory Authority (FINRA)].” FINRA Rule 13204(d)
prohibits arbitration of class action claims unless certain conditions are met, of which none
existed in this case. The court denied the motion to compel arbitration because the requisite
conditions were not met under FINRA rules.
Brashear v Pelto, 94 A.D.3d 1189 (N.Y. App. Div. 3d Dep't 2012)
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Plaintiff opened a brokerage account with Defendant TD Ameritrade, Inc. and signed a
limited trading authorization allowing his brother-in-law, Defendant Pelto, to act as his agent to
trade securities in the account. By signing the limited trading authorization, the parties agreed to
be bound by an arbitration clause in the client agreement originally entered into between plaintiff
and TD Ameritrade. As a result of investment losses, Plaintiff sought to compel arbitration of his
claims against Pelto, and TD Ameritrade moved to compel arbitration of plaintiff's claims
against it. The Court granted TD Ameritrade’s motion because the arbitration agreement
included all disputes between TD Ameritrade and plaintiff or between TD Ameritrade and
plaintiff's agent. However, in the limited trading authorization, Pelto agreed to arbitrate only his,
or his principal's, disputes with TD Ameritrade. Pelto cannot be compelled to arbitrate disputes
between himself and plaintiff without an express, unequivocal agreement to do so.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45
(App.Div. 2012)
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Defendants, associated persons of Cantone Research, a member firm of the Financial
Industry Regulatory Authority (FINRA), sought to compel arbitration of its third party claims for
contribution and indemnification against Merrill Lynch pursuant to FINRA Rule 13200. The
claims for contribution and indemnification were based on possible liability in a pending FINRA
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arbitration initiated by customers of Cantone. The Court found that these were derivative claims
and not arbitrations exclusively between industry members and therefore Merrill Lynch was not
obligated to arbitrate them pursuant to the FINRA Rule 13200 of the Industry Code.
Carter v. TD Ameritrade Holding Corp., 721 S.E.2d 256 (N.C. Ct. App. 2012)
Defendants moved to compel arbitration of Plaintiffs’ claims for North Carolina
Securities Fraud, common law fraud, conversion, breach of contract, breach of fiduciary duty,
gross negligence arise from investment losses sustained in an Individual Retirement Account
(IRA). The IRA agreement contained an agreement to arbitrate “all claims and disputes of every
type and matter between the Account Owner and [Defendant], including but not limited to claims
in contract, tort, common law claims or alleged statutory violations.” The court compelled
arbitration finding the claims were based on duties created by the contract, and the transactions
formed the factual foundations of the claims.
Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490 (S.C. Ct. App. July 11,
2012)
The Court found an arbitration provision in an acquisition loan agreement unenforceable
under South Carolina law. The arbitration notice provision does not comply with S.C. Code Ann.
§ 15-48-10(a) (2005) because the clause was not fully underlined.
Palazzo v. Fifth Third Bank, 2012 Ky. App. Unpub. LEXIS 585 (Ky. Ct. App. Aug. 17, 2012)
Plaintiff was an investment advisor jointly employed by related entities, Fifth Third
Securities and the bank. Plaintiff admitted that she was employed by both entities, and she
treated them, for purposes of her complaint, as one entity. The court found that Fifth Third
Securities and the Bank could both compel arbitration pursuant to the arbitration agreement in
Plaintiff’s Form U4.
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Anthony v. Princeton Trading Group, Inc., 2012 Ohio 1834 (Ohio Ct. App., Cuyahoga County
Apr. 26, 2012)
Plaintiff brought an action stemming from investment losses from a precious metal
broker. The broker moved to compel arbitration pursuant to a customer account agreement, in
which the investor provided information to the broker. The court denied the motion to compel
arbitration because the customer account document was only for the purpose of collecting
information about potential customers and was not an account opening document, or other
investment agreement.
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Musikantow v. Deutsche Bank AG, 2012 Ill. App. Unpub. LEXIS 1108 (Ill. App. Ct. 1st Dist.
May 11, 2012)
Plaintiffs sought damages for Deutsche Bank's financial advice related to the
implementation of a tax shelter that ultimately caused Plaintiffs to owe back taxes. Defendants
moved to stay the action pending arbitration. Plaintiffs argue the arbitration provision covered
only "accounts," "agreements," or "transactions" between the parties and their claims against
Deutsche Bank did not fall within any of the three categories. The provision before the court
expressly provided that Plaintiffs "agree to arbitrate with [Deutsche Bank] any controversies
which may arise." The court rejected Plaintiff’s argument and compelled arbitration.
Griffin v. Morgan Stanley Smith Barney, LLC, 2012 Ill. App. Unpub. LEXIS 2297 (Ill. App. Ct.
1st Dist. Sept. 19, 2012)
Plaintiff is the agent of an accountholder who entered into an agreement to arbitrate any
disputes with Defendant and its employees arising from the handling of any of his accounts or
any duty arising from Morgan Stanley Smith Barney’s (MSSB) business. Plaintiff signed an
agency agreement, which made this arbitration agreement applicable to claims she might bring.
Plaintiff alleged that MSSB, through its registered representative, mishandled the customer’s
account and breached a duty to the customer arising from MSSB's business. The court found the
dispute in the customer’s contract, incorporated by reference into the agency agreement, gave
MSSB and its employee, the right to arbitrate Plaintiff’s claims.
Rathje v. Horlbeck Capital Mgmt., LLC, 2012 Ill. App. Unpub. LEXIS 1794 (Ill. App. Ct. 2d
Dist. July 26, 2012)
Plaintiff entered into a subscription agreement with the partnership in which he agreed to
make a capital contribution in exchange for a partnership interest. The subscription agreement
required Plaintiff to open an investor account at with an investment firm and to deposit into the
account an amount equal to his capital contribution to the partnership. Plaintiff executed an
arbitration agreement in connection with the account opening. Plaintiff brought suit against the
partnership and named the investment firm and the investment advisor for inaccuracies related to
accountings received of the value of the contributions to the partnership. Arbitration clauses that
provide that all claims "arising out of" or "relating to" an agreement shall be decided by
arbitration are categorized as generic arbitration clauses. Defendants allege the nexus lies in that
opening the investment account was required to acquire the partnership interest. The Court
rejected the argument, holding Defendants did not demonstrate that the instant controversy arose
out of the investment-account agreements and not out of partnership agreements.
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Mastick v. TD Ameritrade, Inc., 209 Cal. App. 4th 1258 (Cal. App. 2d Dist. 2012)
The client alleged she had been given bad advice about the tax consequences of an
investment transaction. She signed two investment management agreements containing
arbitration clauses that specified different arbitration rules. One of the agreements provided that
it was governed by California law, while the other agreement was governed by Nebraska law.
The court held that the Federal Arbitration Act (FAA), did not preempt the application of Cal.
Stat. § 1281.2, which allowed a court to deny a motion to compel if multiple litigations exist and
there is a risk of conflicting rulings because the parties agreed to apply state law, even though the
contract involved interstate commerce. A general choice-of-law provision was sufficient to
invoke California's arbitration rules. As to the agreement governed by Nebraska law, however,
arbitration had to be compelled because Nebraska's statute governing petitions to compel
arbitration did not authorize a trial court to deny a petition to compel arbitration based on a
potential for conflicting rulings.
Thomas v. Westlake, 204 Cal. App. 4th 605 (Cal. App. 4th Dist. 2012)
Plaintiff’s action named as defendants some parties that were not signatories to any
arbitration agreement executed by Plaintiff in connection with investment account openings. The
complaint alleged that each defendant acted as an agent of each other defendant in connection
with Plaintiff’s transactions. The allegations of an agency relationship sufficed to allow the
alleged agents to invoke the arbitration agreement even though the agents were not parties to it.
Equity would not allow one-sided application of agency principles, in accordance with Civ.
Code, § 3521. Arbitration was available under Rule 12200 of the Financial Industry Regulatory
Authority (FINRA) as to alleged agents of FINRA members.
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MV Ins. Consultants, LLC v. NAFH Nat'l Bank, 87 So. 3d 96 (Fla. Dist. Ct. App. 3d Dist. 2012)
A collateral assignment of termination payments and economic interests agreement, a
promissory note, a collateral assignment of agency agreement, and a guaranty were all executed
on the same date regarding the same loan transaction. The borrower in the transaction asserted
that arbitration was to be compelled because of an arbitration provision in the collateral
assignment of termination payments and economic interests agreement. The court construed the
documents as a single contract. Because the parties evidenced an intent that the arbitration
provision applied to all the loan documents, the bank's separate claims regarding each of the loan
documents were to be arbitrated.
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Bedard v. Brewer Fin. Servs., LLC, 2012 Mass. Super. LEXIS 258 (Mass. Super. Ct. July 2,
2012)
Plaintiffs argue their complaint against a broker dealer and its investment representative
should not be compelled to arbitration because the broker dealer is no longer a member of the
Financial Industry Regulatory Authority (FINRA). The court rejected Plaintiff’s argument, but
held that despite arbitration not being available through FINRA, the agreement gives the
customer the choice of forum within a specified range of permissible choices. Therefore,
Plaintiffs may choose the arbitration forum subject only to the choice being commercially
reasonable.
Cheng v David Learner Assoc., Inc., 35 Misc. 3d 1238A (N.Y. Sup. Ct. 2012)
Plaintiffs David and Amy Cheng entered into an agreement to open an investment
account with Defendant David Lerner Associates (DLA) containing an agreement to arbitrate
any controversy concerning their account, or any transaction. Plaintiffs argued the entire contract
was induced through fraud and therefore, no valid agreement to arbitrate exists between the
parties on which to compel arbitration. Relying on Prima Paint Corp v Flood & Conklin Mfg.
Co., 87 S. Ct. 1801 (1967), the court compelled arbitration holding that a challenge to the
contract as a whole is treated differently than challenges to the arbitration clause itself. Because
Plaintiff's challenge is not to arbitration clause itself, it is proper to compel arbitration, and is for
the arbitrator to consider the issue of the contract's validity as a whole.
Mitchell v. Cantor Fitzgerald, L.P., 2012 N.Y. Misc. LEXIS 5418 (N.Y. Sup. Ct. Nov. 21, 2012)
Defendant, Plaintiff’s employer, filed motion to stay or dismiss Plaintiff’s action for
breach of an oral employment contract, defamation and employment discrimination in favor of
arbitration pursuant to the arbitration agreement in Plaintiff’s Uniform Application for Securities
Industry Registration Form U4, and an arbitration agreement in his employment contract with
Defendant. This agreement complements the mandatory arbitration clause in Form U4. Though
claims of employment discrimination are not subject to mandatory FINRA arbitration, they may
be arbitrated by FINRA, if parties agree to do so, as they did in the Arbitration Agreement. The
court compelled arbitration of all claims because they were within the scope of the two
agreements.
Soloway v Morgan Stanley Smith Barney, LLC, 34 Misc. 3d 1217A (N.Y. Sup. Ct. 2012)
Plaintiff brought an action for conversion of funds in her brokerage accounts when
Defendant refused to return the proceeds of the accounts because Plaintiff’s son, who had a
power of attorney, claimed Plaintiff was incompetent. Defendant moved to compel arbitration
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pursuant to an agreement to arbitrate all claims "concerning or arising" from the two brokerage
accounts. The Court rejected Plaintiff’s argument because the causes of action, which stem from
defendant's failure to follow her instructions, involve the issues typically arbitrated, such as
issues of money management, investment advice, or disputes over commissions.
2. Eligibility/Limitations
Abeyrama v. J.P. Morgan Chase Bank, 2012 U.S. Dist. LEXIS 87847 (C.D. Cal. July 22, 2012)
Defendant moved to compel arbitration of Plaintiff’s claims. The Court rejected
Plaintiff’s argument that the agreement “requiring an employee to "give notice of arbitration
within 'the statute of limitations otherwise applicable under law” was unconscionable because it
limited relief available in court by creating its own statute of limitations.
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12, 2012)
Broker sought to vacate an arbitration award awarding damages to investors who claimed
the broker breached his fiduciary duty by inducing them to loan money to a startup company on
April 6, 2001. The Statement of Claim was filed in the Financial Industry Regulatory Authority
(FINRA) July 23, 2008. Broker argued the award should be reversed because the claims were
barred by the six-year Eligibility Rule. The court rejected the broker’s argument that the
triggering date was the date of purchase, because the Panel was free to interpret Rule 12206 as it
saw fit, in particular the "occurrence or event giving rise to the claim.”
Baker Hughes Inc. v. BNY Mellon Capital Mkts. LLC, 2012 U.S. Dist. LEXIS 162796 (S.D. Tex.
Nov. 14, 2012)
On December 18, 2008 and February 24, 2009, the parties filed their dispute before the
Financial Regulatory Authority (FINRA). Baker Hughes (BHI) alleged causes of action for: (a)
breach of fiduciary duty; (b) promissory estoppel; (c) violation of the New York Common Law
(fraud); (d) violation of Texas' Blue Sky Laws; and (e) violation of the Securities Exchange Act
of 1934 and Rules 10b-5. On August 1, 2011, the FINRA Arbitration Panel entered its award,
dismissing with prejudice each of BHI claims against BNY Mellon (BNY). BHI filed a
complaint alleging the negligence claim was not within the scope of the agreement to arbitrate,
the arbitration proceeding tolled the Statute of Limitations, and the doctrine of "equitable tolling"
should apply and save its negligence claim. The Court granted BNY’s motion for summary
judgment, holding that equitable tolling does not apply because there is no evidence that BNY
actively misled BHI or prevented it from asserting its claim in a court of law while
simultaneously proceeding with arbitration. A demand or agreement to arbitrate claims does not
N.2
N.2
N.2
430

y itself toll a statute of limitations. The Court did not want to exercise its discretion absent
inequitable conduct on the part of BNY.
Andrade v. Ewanouski, 2012 Mass. App. Unpub. LEXIS 236 (Mass. App. Ct. Mar. 1, 2012)
Investors appealed the confirmation of an arbitration award alleging the arbitration panel
improperly declared claims ineligible under the Financial Industry Regulatory Authority
(FINRA) six year Eligibility Rule 12206. The court rejected that argument, noting the arbitration
proceedings’ record shows the panel found no facts to support tolling the statute of limitations.
The Court further held that the panel’s dismissal of the ineligible claims does not preclude the
Investors from pursuing them in court pursuant to Rule 12206(b) of the Financial Industry
Regulatory Authority Code of Arbitration Procedure.
Susman v Commerzbank Capital Mkts. Corp., 95 A.D.3d 589 (N.Y. App. Div. 1st Dep't 2012)
Plaintiff brought an action alleging wrongful termination. The Court rejected Plaintiff’s
contention that the arbitration proceeding previously instituted to recover his unreimbursed
business expenses tolled the two year statute of limitations on his claims. To toll the statute of
limitations, the arbitration must have been instituted by the parties in order to resolve the present
controversy and the issues raised in the case are distinct from the issue in the arbitration.
Hantz Fin. Servs. v. Monroe, 2012 Mich. App. LEXIS 147 (Mich. Ct. App. Jan. 24, 2012)
Financial Services firm appealed the confirmation of an arbitration award on the grounds
that the Financial Industry Regulatory Authority (FINRA) panel erroneously concluded the
claims were within the FINRA six-year Eligibility Rule 12206. They argued the date of purchase
of the investments is the event that gives rise to a claim and therefore is when the limitations
period should run from. The Court rejected the argument because the investor seeking arbitration
alleged wrongful acts that occurred after the date of the initial investment, such as bogus account
statements and fraudulent misrepresentations.
N.2
N.2
N.2
3. Jurisdiction/Estoppel
Wootten v. Fisher Invs., 688 F.3d 487 (8 th Cir. 2012).
N.3
A client initiated an arbitration against his former investment advisor. During the
arbitration, the investment advisor moved to dismiss the client’s Missouri statutory claims based
on the arbitration agreement’s Delaware choice-of-law provision, which the arbitrators granted
and sua sponte prohibited the client from adding a federal securities law claim. The client
431

subsequently filed a civil action against the investment advisor in federal court, re-alleging the
Missouri statutory and federal securities claims, seeking a declaration that the arbitration
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
required the client to complete the arbitration before pursuing remedies in federal court. The
client appealed on the grounds that (1) the district court had jurisdiction to address his claims; (2)
the arbitrator limited the scope of the arbitration agreement to only Delaware claims, allowing
him to bring non-Delaware claims in federal court; (3) the arbitrator’s interpretation of the
arbitration provision rendered it void; (4) the investment advisor waived its right to arbitrate; (5)
the arbitration agreement was unenforceable; (6) the client did not waive his right to challenge
the arbitration agreement; and (7) the provisional remedies in the Letter of Agreement (LOA)
between the parties voided the LOA’s arbitration provisions. The Eighth Circuit affirmed on the
grounds that: (1) it did not have jurisdiction to adjudicate the claims due to the complete
arbitration rule; (2) the complete arbitration rule precluded the Court from reviewing the
arbitrator’s decision regarding a dispute covered by the arbitration agreement; (3) while the
client might have had valid federal claims, the complete arbitration rule applied and he needed to
complete arbitration before a court could hear those claims; (4) the investment advisor did not
act inconsistently with the right to arbitrate and therefore did not waive arbitration claims; (5) the
issue of arbitrability was to be left to the arbitrator under the LOA and the district court did not
err in declining to rule on the issue; (6) because the arbitrator had not yet decided whether the
LOA’s arbitration provision was enforceable, the client’s challenge in federal court was
premature; and (7) the district court did not err in refusing the interpret the LOA’s provisional
remedies provision to override the express language requiring the arbitrator to decide the
agreement’s enforceability.
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2012 U.S. App. LEXIS 24847 (11th Cir. Dec. 4,
2012).
The district court granted summary judgment in favor of the defendant holding
companies based on res judicata and collateral estoppel resulting from a prior arbitration award
and the plaintiff investor appealed. The Eleventh Circuit affirmed on the grounds that the factual
issues raised in the court proceeding were actually litigated in the prior arbitration, were a critical
and necessary part of the arbitration decision, and there was no suggestion that the investor did
not have every opportunity to litigate such issues in that forum.
Lobaito v. Chase Bank, 2012 U.S. Dist. LEXIS 107344 (S.D.N.Y. July 30, 2012).
A former employee filed suit in federal court against his former brokerage firm employer
alleging that he was wrongfully terminated and that an arbitration decision rejecting his claims
was the product of fraud and conspiracy. The brokerage firm moved to dismiss the complaint on
the basis of res judicata. The Court granted the motion to dismiss on the grounds that the former
employee was seeking to re-litigate the causes of action set forth in the arbitration action and
N.3
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432

therefore res judicata applied. The Court also noted that to the extent the complaint might be
construed as a motion to vacate the arbitration award, it was time-barred.
Sher v. Goldman Sachs, 2012 U.S. Dist. LEXIS 56596 (D. Md. Apr. 19, 2012).
A Chapter 11 Trustee for a company filed suit against a financial institution for claims
arising from a repurchase agreement between the parties relating to the financing of the
company’s acquisition of mortgage-backed securities. The financial institution moved to compel
arbitration, and to stay or dismiss the action, or in the alternative, dismiss the complaint filed.
The Court granted the financial institution’s motion to compel arbitration and declined to make a
determination as to the arbitrability of the plaintiff’s claim, finding that the arbitration provision
in the agreement between the parties was valid and sufficiently evinced the parties' intent to
submit the question of arbitrability to the arbitrator.
Baker Hughes Inc. v. BNY Mellon Capital Mkts. LLC, 2012 U.S. Dist. LEXIS 162796 (S.D. Tex.
Nov. 14, 2012).
A claimant brought a Financial Industry Regulatory Authority (FINRA) action against a
securities dealer regarding auction rate securities (ARS). During the arbitration, it was
determined that the claimant’s negligence claim was not within the scope of the parties’
arbitration agreement and the securities dealer refused to expand the scope of the arbitration
when the claimant sought to add the claim in the arbitration action. As a result, the arbitrators
ruled that they lacked jurisdiction over that claim. The arbitration panel dismissed the remainder
of claimant’s claims and the award was confirmed by a court of competent jurisdiction. The
claimant subsequently filed a negligence action in federal court against the securities dealer. The
securities dealer argued that the negligence claims were barred by res judicata and the applicable
statute of limitations. The Court granted summary judgment on the grounds that because the
claim of negligence arose out of the same nucleus of operative facts as the claims submitted to
arbitration, res judicata barred the claimant’s negligence claims.
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 14,
2012).
A claimant brought a Financial Industry Regulatory Authority (FINRA) arbitration action
against respondent securities firms asserting that he was the victim of identity fraud, that
someone stole his identity, opened an account with respondents using false information, and
authorized the selling of securities without his knowledge. The respondent securities firms filed
an action in federal court requesting a preliminary and permanent injunction, as well as
declaratory relief, to prohibit a claimant from pursuing arbitration claims with the Financial
Industry Regulatory Authority (FINRA) on the grounds that the claimant was not a customer of
the respondents and the parties did not sign an arbitration agreement. The court determined that
433
N.3
N.3
N.3

the issue of arbitrability was properly before it and granted the preliminary injunction. In doing
so, the Court noted that while the Ninth Circuit Court of Appeals had not yet addressed the issue
directly, a majority of circuit courts have held FINRA's rules do not evidence a clear and
unmistakable intent that the issue of arbitrability should be submitted to an arbitrator, and, as a
result, the court decided the question of arbitrability and granted the preliminary injunction.
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31, 2012).
An issuer of auction rate securities (ARS) brought a Financial Industry Regulatory
Authority (FINRA) claim against the underwriter of the ARS securities at issue. The underwriter
filed a complaint against the issuer in federal court requesting declaratory and injunctive relief
precluding the issuer from arbitrating the claims against it on the basis that (1) the parties were
not in a relationship that came within the scope of FINRA’s jurisdiction because the issuer was
not a “customer”; and (2) the underwriter did not consent to arbitrate claims with the issuer. The
Court determined that the issuer was likely a customer of the underwriter because it hired the
underwriter to perform the underwriting services on both of its ARS offerings, that the claims
were likely suitable for arbitration, and therefore the underwriter could not meet the requirements
for entry of a temporary injunction.
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367, 7-8 (N.D. Cal. June 12, 2012).
A financial advisor moved to vacate an arbitration award on the grounds that, among
other things, the panel manifestly disregarded the law by acting without jurisdiction over the
claimant’s claims, which were barred by the six year eligibility rule under the Financial Industry
Regulatory Authority (FINRA) rules. The Court denied the motion to vacate on the grounds
that, among other things, it was within the panel’s jurisdiction to make eligibility determinations
under the FINRA rules.
UTHE Tech. Corp. v. Aetrium, Inc., 2012 U.S. Dist. LEXIS 139538 (N.D. Cal. Sept. 27, 2012).
Defendants in a securities fraud dispute moved to dismiss the claims against them on a
number of grounds, including that one claim was barred by the single recovery rule and collateral
estoppel because, as a result of an arbitration in Singapore, the plaintiff was already awarded
compensatory damages. Although the plaintiff argued that it was entitled to additional damages
under the law in the Court’s jurisdiction such as consequential damages, the plaintiff failed to
make any reference to such damages in its second amended complaint and, as a result, could not
use such damages as an avenue for avoiding preclusion of his claim. As such, the Court
dismissed this count.
N.3
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434

In re Oppenheimer Champion Fund Sec. Fraud Class Actions, 2012 U.S. Dist. LEXIS 35243 (D.
Colo. Mar. 15, 2012).
Claimant was a class member in a securities fraud class action involving funds in which
she invested and simultaneously engaged in a Financial Industry Regulatory Authority (FINRA)
arbitration with the securities firm that had recommended her investment in the funds. The class
action settled and claimant did not opt out of the settlement, believing that her arbitration claims
were distinct from the claims brought on behalf of the class. The securities firm sought to
enforce the class action settlement and enjoin further prosecution of claimant’s FINRA claims.
The Court determined that it had jurisdiction to determine whether claimant’s arbitration claims
fell within the scope of the class action settlement release because where the settlement
agreement goes beyond mere disposition of a class action to govern rights and obligations after
settlement, a court’s retention of jurisdiction over a surviving settlement agreement requires the
court to consider whether arbitration rights survive.
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012).
Claimants in an underlying arbitration action appealed confirmation of arbitration award
in favor of the respondent brokerage firm on the grounds that the panel exceeded its authority by
recording findings on ineligible matters. The appellate court affirmed the lower court’s
confirmation of the award. During the arbitration hearing, the panel found that many of the
claimants’ claims were barred for lack of jurisdiction. The Court determined that although the
panel expounded in the award on matters that were not eligible for arbitration, they did not
exceed the scope of their authority because the plaintiffs brought the ineligible claims, thereby
giving the panel the power to discuss its dismissal of those matters.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45, 50
(App.Div. 2012).
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action
against several respondent broker-dealers. The claims against one broker-dealer were dismissed
by the Court on the grounds that the claimants were not customers of that broker-dealer. One of
the remaining respondents subsequently filed a third party claim against the broker-dealer in the
arbitration and the broker-dealer moved to enjoin the claims, which the lower court granted. The
respondent subsequently appealed the four orders enjoining them from pursuing their third party
arbitration claims for contribution and indemnification against the broker-dealer arguing in part
that that the judge who previously ruled on the motions lacked authority to interpret FINRA’s
customer and industry code and that such interpretation was delegated to the arbitrators. The
Court determined that the court was the correct venue to pursue a determination as to whether the
parties agreed to arbitrate the dispute, especially in the absence of an express agreement to
arbitrate such claims and affirmed the orders.
435
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4. Motions to Vacate or to Enjoin
a. Punitive Damages
N.4.a
Davey v. First Command Fin. Servs., 2012 U.S. Dist. LEXIS 11481 (N.D. Tex. Jan. 31, 2012).
A respondent in Financial Industry Regulatory Authority (FINRA) arbitration sought to
vacate the arbitration award rendered against it on the grounds that (1) the arbitrators lacked
authority to award punitive damages because the arbitration agreement specifically prohibited
such damages; and (2) the claimant abandoned his request for costs and an award of costs should
not stand. The Court vacated the award with respect to punitive damages on the ground that such
damages were precluded pursuant to the parties’ contract, the FINRA submission agreement did
not nullify such provision, and the award did not provide the Court with any reason to ignore the
arbitration clause’s prohibition on punitive damages. The Court did find, however, that the issue
of costs had been submitted to the panel and vacatur of that portion of the award was denied.
b. Attorneys’ Fees
Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).
N.4.b
A former employer sought vacatur of an arbitration award in favor of former employees
on their Wage Act claims and attorney’s fees under the South Carolina Frivolous Civil
Proceedings Act (FCPA). The employer argued that vacatur was warranted because the panel
manifestly disregarded the law by awarding sanctions for ignoring FCPA’s conditions precedent
and because the panel deprived the employer of a fundamentally fair hearing by denying it the
procedural safeguards under the FCPA and by not allowing it to review or rebut critical evidence
that the employees submitted to the panel in support of their fee claim. The district court denied
the motion and the Fourth Circuit affirmed on the grounds that (1) the panel was not compelled
to follow the FCPA’s procedural mandates in the arbitration; (2) the employer alleged no
arbitrator misconduct; (3) the hearing on the attorney’s fees issue was cut short by the employer,
who declined to submit additional briefs, not the arbitrators; and (4) and the Court could not
conclude that the arbitrators manifestly disregarded the law in awarding attorney’s fees to the
employees under FCPA.
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012).
N.4.b
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)
arbitration award regarding a promissory note between her and her former broker-dealer
employer on the basis that, among other things, the promissory note, including its provision
regarding attorney’s fees, was unenforceable. The Court denied vacatur of the award because,
436

among other things, the promissory note was not an illegal contract, and the attorney’s fees
provision in the promissory note was enforceable.
Fid. Brokerage Servs. LLC v. Brown, 2012 U.S. Dist. LEXIS 141960 (S.D. Cal. Sept. 28, 2012).
N.4.b
A brokerage firm sought modification and/or vacatur of an award of attorney’s fees
against it on the grounds that the arbitration panel had no authority to make such an award. The
district court denied the brokerage firm’s motion because it found that the issue of attorney’s fees
was submitted to arbitration. The Court determined that (1) the arbitration panel “plainly
believed” the issue was submitted for their decision; (2) the panel received evidence regarding
each party’s attorney’s fees; (3) and the panel held a special session regarding the issue of
attorneys’ fees, allowed argument that permitted the brokerage firm to set forth its legal position,
and the brokerage firm made no objection during this time.
N.4.b
Morgan Stanley & Co., LLC v. The Core Fund, 2012 U.S. Dist. LEXIS 115760 (M.D. Fla. July
11, 2012).
A brokerage firm filed a motion to vacate the portion of an arbitration award denying its
attorney’s fees on the grounds that the parties did not submit the issue of attorney’s fees to
arbitration. The brokerage firm additionally requested that the Court enter an order awarding its
fees. The Court denied the motion, finding that the parties had mutually agreed to submit the
issue of attorney’s fees to the panel by virtue of their pleadings and other filings and that there
was no mutual withdrawal of the attorney’s fees issue from arbitration.
N.4.b
Matter of Bear, Stearns & Co., Inc. v. Int’l Capital & Mgt. Co. LLC, 99 A.D.3d 402 (N.Y. App.
Div. 1st Dep't 2012).
The Court determined that the arbitration panel did not exceed its powers or violate
public policy by awarding attorney’s fees for discovery sanctions to respondents in an underlying
arbitration action because the claimant in the arbitration demonstrated its consent to the
imposition of attorney’s fees relating to discovery matters on multiple occasions throughout the
arbitration, sought an award of attorneys’ fees in both its initial pleadings and in an amended
pleading it filed two years later, and agreed to arbitration pursuant to the Financial Industry and
Regulatory Authority (FINRA) rules, which specifically permit an award of attorneys’ fees as a
sanction for discovery abuse. Additionally, during pre-hearing discovery, the claimant twice
complied without objection to the panel’s direction that it pay the respondents’ attorney’s fees
and during the final hearing, the claimant failed to object to respondents’ repeated request for
fees or to withdraw its own fee request. The Court further found that the claimant’s last minute
attempt to withdraw consent of the fee issue in its closing statement at the final hearing was
ineffectual to remove the issue from the arbitrators.
437

c. Other
N.4.c
Bonnant v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 467 Fed. Appx. 4 (2d Cir. 2012).
An attorney opened an account with a broker-dealer on behalf of a client company and
executed the relevant customer agreements as the president, director, and representative of the
company. The company subsequently filed a Financial Industry Regulatory Authority (FINRA)
arbitration action against the broker-dealer for unsuitability and unauthorized trading and the
broker-dealer named the attorney as a third party defendant and asserted claims against him
personally for indemnification on the basis that the attorney authorized the transactions in the
account. The attorney subsequently filed an action in the district court seeking to enjoin the
broker-dealer from bringing him into the arbitration on the grounds that he was not personally a
party to the arbitration agreement and executed the account opening documents for the company
in a purely representative capacity. The district court denied the attorney’s motion, finding that
the attorney’s second signature on the account document as a separate account holder indicated
that he opened the account in both a representative and personal capacity. The Second Circuit
vacated district court’s judgment, finding that the district court relied on theories that were based
on a misreading or misinterpretation of the contract or legal precedents. The Court determined
that New York law did not support the proposition that a corporate representative rendered
himself personally liable on a corporation’s contract merely by signing it twice.
438
N.4.c
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors' Comm. of Bayou
Group, LLC, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012).
A clearing and prime broker for hedge funds run as a Ponzi scheme unsuccessfully
sought to vacate an arbitration award in favor of an unsecured creditors’ committee on the
grounds that arbitrators manifestly disregarded the law when they determined that the clearing
and prime broker was an “initial transferee” under 11 U.S.C. § 550(a), from whom the
committee could recover for fraudulent transfers under 11 U.S.C. § 548. The Second Circuit
affirmed the district court’s denial of vacatur on the grounds that under the factual circumstances
and prevailing legal authorities, it could not conclude that the arbitrators manifestly disregarded
the law in imposing transferee liability onto the clearing and prime broker.
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9, 2012).
N.4.c
A claimant filed a Financial Industry Regulatory Authority (FINRA) arbitration action
against a brokerage firm asserting claims arising from his investment, through his nominee, in a
fund. The brokerage firm sought to preliminarily enjoin the FINRA arbitration, arguing that the
claimant was not a “customer” within the meaning of FINRA arbitration rules. The Second
Circuit affirmed the district court’s denial of the brokerage firm’s motion to enjoin, finding that
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
could not demonstrate that it was likely to succeed on the issue of arbitrability of the claims.
439
N.4.c
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Schwarzwaelder, 2012 U.S. App. LEXIS 16845
(3d Cir. Aug. 13, 2012).
An employee sought to vacate an arbitration award against her on grounds that arbitrators
exceeded their powers by concluding that a release executed as part of a prior Employee
Retirement Income Security Act (ERISA) settlement barred her from claiming an offset to her
liability to her former employer on a promissory note. Although the district court vacated the
award, the Third Circuit reversed, finding that the arbitrators’ reading of the settlement
agreement was not irrational and they did not exceed their powers under the Federal Arbitration
Act in determining that the employee had released her claims as to the compensation she sought
as offset.
Waterford Inv. Servs. v. Bosco, 682 F.3d 348 (4th Cir. 2012).
N.4.c
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action
against a financial advisor, his current firm, and his former firm asserting claims regarding his
investment in Ponzi scheme securities. Although separate corporate entities, the current and
former firms had a significant degree of overlap in terms of their majority owner, officers and
directors, and shared resources. The financial advisor’s current firm sought to enjoin the
arbitration proceedings and to have a declaratory judgment entered stating that it did not need to
arbitrate the claimants’ claims because the financial advisor was not an “associated person” of
the firm. The district court determined that the financial advisor was an “associated person” at
his current firm during the events in question, and as such, the current firm had to arbitrate the
Claimants’ claims. The Fourth Circuit affirmed, finding that as a result of the overlap between
the current and former firms and the evidence to that effect, the current firm had the power to
influence and indirectly control the financial advisor, rendering him an “associated person”
within the context of the FINRA rules.
Morgan Keegan & Co. v. Garrett, 2012 U.S. App. LEXIS 22057 (5th Cir. Oct. 23, 2012).
N.4.c
Upon a brokerage firm’s motion, the district court vacated an arbitration award and
granted the brokerage firm its attorney’s fees and expenses on the grounds that the arbitration
panel exceeded its authority by hearing from two claimants with whom the brokerage firm had
no agreement to arbitrate. The district court additionally found that the claims were derivative
and therefore not subject to Financial Industry Regulatory Authority (FINRA) arbitration. The
district court alternatively vacated the award on the ground that it was procured by fraud because
claimants’ expert knowingly testified to incorrect numbers and the panel based its damages
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:
(1) the panel did not exceed its authority to interpret and determine the applicability of FINRA’s
rules and was entitled to make the determination as to whether the claims were derivative and
whether the two claimants at issue qualified as “customers” under such rules; and (2) the
brokerage firm could not meet the burden of proof to vacate based on fraud because the grounds
for fraud were discoverable by due diligence before and/or during the arbitration.
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012).
440
N.4.c
A brokerage firm obtained a preliminary injunction enjoining claimants from proceeding
with their Financial Industry Regulatory Authority (FINRA) claims on the grounds that the
claimants were not “customers” under FINRA’s rules. The brokerage firm served as the
managing broker-dealer for the offering of the securities at issue in the arbitration, which were
issued by a group of limited liability companies. As managing broker-dealer, the brokerage firm
assembled a group of FINRA registered broker-dealers who in turn offered the securities to their
own customers, including claimants. The district court granted the preliminary injunction and
the Eighth Circuit affirmed on the grounds that the claimants had no contact with the brokerage
firm in the course of investing in the securities at issue, there was no relationship between the
claimants and the brokerage firm, and the brokerage firm did not provide investment or
brokerage related services to the claimants.
McCrary v. Stifel, Nicolaus & Co., 687 F.3d 1052 (8th Cir. 2012).
N.4.c
A client filed a Financial Industry and Regulatory Authority (FINRA) arbitration action
against a broker-dealer alleging various violations of state and federal securities law committed
by two financial advisors. A class action was subsequently filed against the broker-dealer and
the client was added as a named plaintiff. The class action plaintiffs sought to enjoin the client’s
FINRA arbitration, which was denied by the district court. The Eighth Circuit affirmed the
district court’s decision on the grounds that plaintiffs failed to provide any legal support for their
request to stay the arbitration in light of the individual claimant’s agreement to be bound by the
arbitration panel’s decision.
Wootten v. Fisher Invs., 688 F.3d 487 (8th Cir. 2012).
N.4.c
A client initiated an arbitration against his former investment advisor. During the
arbitration, the investment advisor moved to dismiss the client’s Missouri statutory claims based
on the arbitration agreement’s Delaware choice-of-law provision, which the arbitrators granted
and sua sponte prohibited the client from adding a federal securities law claim. The client
subsequently filed a civil action against the investment advisor in federal court, re-alleging the
Missouri statutory and federal securities claims, seeking a declaration that the arbitration
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
required the client to complete the arbitration before pursuing remedies in federal court. The
client appealed on the grounds that (1) the district court had jurisdiction to address his claims; (2)
the arbitrator limited the scope of the arbitration agreement to only Delaware claims, allowing
him to bring non-Delaware claims in federal court; (3) the arbitrator’s interpretation of the
arbitration provision rendered it void; (4) the investment advisor waived its right to arbitrate; (5)
the arbitration agreement was unenforceable; (6) the client did not waive his right to challenge
the arbitration agreement; and (7) the provisional remedies in the Letter of Agreement (LOA)
between the parties voided the LOA’s arbitration provisions. The Eighth Circuit affirmed on the
grounds that: (1) it did not have jurisdiction to adjudicate the claims due to the complete
arbitration rule; (2) the complete arbitration rule precluded the Court from reviewing the
arbitrator’s decision regarding a dispute covered by the arbitration agreement; (3) while the
client might have had valid federal claims, the complete arbitration rule applied and he needed to
complete arbitration before a court could hear those claims; (4) the investment advisor did not
act inconsistently with the right to arbitrate and therefore did not waive arbitration claims; (5) the
issue of arbitrability was to be left to the arbitrator under the LOA and the district court did not
err in declining to rule on the issue; (6) because the arbitrator had not yet decided whether the
LOA’s arbitration provision was enforceable, the client’s challenge in federal court was
premature; and (7) the district court did not err in refusing the interpret the LOA’s provisional
remedies provision to override the express language requiring the arbitrator to decide the
agreement’s enforceability.
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22492 (9th Cir. Oct. 25, 2012).
N.4.c
A broker-dealer sought to vacate an arbitration award of $1.45 million against it in favor
of the investor claimants on the grounds that (1) one arbitrator failed to disclose facts that would
create and impression of bias; (2) the arbitrators prejudged the outcome of the case and denied
the broker-dealer a fundamentally fair hearing; and (3) the arbitrators exceeded their powers in
setting the size of the award. The Ninth Circuit affirmed the district court’s denial of the motion.
With respect to one arbitrator’s failure to make disclosures, the broker-dealer argued that the
arbitrator was biased in favor of the claimant because (1) he sometimes represented investors
against their brokers and (2) the arbitrator’s website advertised his knowledge of the securities at
issue in the case and solicited investors to sue over losses related to such securities. The Ninth
Circuit, however, determined that the arbitrator’s practice was disclosed in his initial disclosure
report and that the portion of his website at issue only appeared on the website months after the
hearing and did not specify how long he had been practicing in the area. As for the grounds set
forth argument regarding prejudgment of the case, the broker-dealer relied on an inadvertently
recorded conversation among the arbitrators in the hearing in which they referred to the
securities at issue as “crap” and a “sucker play.” The Court found that such recording was not
grounds for vacating the award for “other misbehavior” under 9 U.S.C. § 10(a)(3) and merely
suggested that the arbitrators had begun to form some opinions based on the evidence presented
thus far—not that that they were unwilling to consider the broker-dealer’s evidence. Finally, the
Ninth Circuit determined that the $1.45 million award was authorized under a benefit-of-thebargain
damages theory for fraud committed by one owing fiduciary duties.
441

N.4.c
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012).
A broker-dealer unsuccessfully sought to vacate a $1.45 million arbitration award against
it and appealed the district court’s denial of its motion to vacate. While that appeal was pending,
the claimant in the underlying arbitration claim filed a second arbitration claim against the
broker-dealer alleging malicious prosecution and abuse of process in conjunction with the first
arbitration action. The broker-dealer sued the claimant in district court, alleging that the second
arbitration action was not arbitrable and sought an injunction to stop the second arbitration from
proceeding prior to the resolution of the appeal in the underlying arbitration action. The district
court granted the claimant’s motion to compel arbitration, denied the broker-dealer’s request for
a preliminary injunction as moot, and dismissed the case. The Ninth Circuit affirmed, finding
that the claims set forth in the second arbitration were not restricted by the Federal Arbitration
Act (FAA) because they were not seeking to attack or change the award in the first arbitration
and that such claims fell within the arbitration clause in the client agreement between the parties.
Wierzba v. E*Trade Fin. LLC, 471 Fed. Appx. 709 (9th Cir. 2012).
442
N.4.c
A pro se claimant moved to vacate an arbitration award entered against him. The district
court denied the motion and the Ninth Circuit affirmed because the claimant’s allegations of
arbitrator incompetence and his disagreements with the arbitration process and result failed to
demonstrate any of the statutory grounds for vacating an award.
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass. Mar. 8, 2012).
N.4.c
Claimants sought to enjoin a brokerage firm from pursuing a counterclaim against them
in an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA) on the
grounds that the brokerage firm was seeking to recover from them individually and personally,
as opposed to in their capacity as trustees of the plan at issue, and that the counterclaim was
improper under FINRA rules. The Court denied the request to enjoin on and found that the
record reasonably permitted that the counterclaim was brought against the claimants in their
capacity as trustees and was proper under FINRA’s rules.
N.4.c
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist. LEXIS 30988
(E.D.N.Y. Mar. 8, 2012).
A brokerage firm initiated a Financial Industry Regulatory Authority (FINRA)
proceeding against a company seeking to recover a debt owed to it under the customer agreement
between the parties. The company sought to enjoin the action on the basis that it was not subject
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.
The Court denied the brokerage firm’s motion on the grounds that the forum selection clause in
the customer agreement, which indicated that the state and federal courts shall have exclusive
jurisdiction, was of a mandatory nature and did not allow for the possibility of arbitration.
N.4.c
Freedom Investors Corp. v. Kahal Shomrei Hadath, 2012 U.S. Dist. LEXIS 15129 (S.D.N.Y.
Feb. 7, 2012).
A request to vacate an arbitration award was denied where the claimants in the
underlying arbitration merely raised arguments considered and rejected by the panel and did not
show that the panel intentionally defied the law. The Court also denied the request to vacate on
the grounds that the plaintiff could not raise a credible argument of evident partiality based on an
arbitrator’s service on the Financial Industry Regulatory Authority’s board of governors.
N.4.c
In re Lehman Bros. Secs. & Erisa Litig., 2012 U.S. Dist. LEXIS 90796 (S.D.N.Y. June 29,
2012).
Claimant banks commenced an arbitration proceeding before the Financial Industry
Regulatory Authority (FINRA) against respondent brokerage firms seeking to recover losses
stemming from certain investments, including shares in Lehman Brothers securities. The
claimants were also members of the plaintiff class in a class action that had been partially settled
regarding such securities. As a result, the respondent brokerage firms sought to enjoin the
claimants from making certain claims in the FINRA arbitration on the grounds that such claims
were barred by the class action settlement agreement. The Court denied the motion on the
grounds that it could not conclude that the FINRA claims involved the identical factual predicate
as the claims in the class action complaints.
Bajaj v. Fisher Asset Mgmt., LLC, 2012 U.S. Dist. LEXIS 50524 (D. Del. Apr. 10, 2012).
N.4.c
A claimant sought to vacate an arbitration award on grounds that: (1) the respondents
procured the award by fraud by introducing fraudulent notes and phone records into evidence at
the hearing; (2) the arbitrator committed misconduct when he refused to consider cell phone
records introduced by the claimant; and (3) the arbitrator refused to rule on claimant’s discovery
requests for documents and admissions during a conference call, thereby prejudicing her right to
a fair hearing. The Court denied the motion to vacate and found that (1) the petitioner failed to
prove that the notes or phone records were fraudulent and their introduction into evidence could
not support a vacatur; (2) the fact that the arbitrator was not persuaded by the claimant’s
evidence did not warrant vacatur; and (3) the claimant failed to identify the nature of the
allegedly key documents and admissions, did not explain how they would have helped her case,
and did not raise this issue at the hearing.
443

N.4.c
Cerone v. Bank of Am., 2012 U.S. Dist. LEXIS 76952 (D.N.J. June 4, 2012).
Where a claimant sought vacatur of an arbitration award and simply reasserted the claims
addressed at the arbitration without pleading more, the high standard necessary for vacating an
arbitration award was not met and the Court denied vacatur.
Stone v. Bear, Stearns & Co., 872 F. Supp. 2d 435 (E.D. Pa. 2012).
444
N.4.c
A claimant’s petition to vacate a Financial Industry Regulatory Authority (FINRA) award
was denied because the fact that one arbitrator failed to disclose her husband’s ties to the
securities industry did not establish evident partiality since the arbitrator twice tried to disclose
the information, and because the husband’s relationship with a particular securities investment
firm was too tenuous to show partiality.
N.4.c
Morgan Keegan & Co. v. Louise Silverman Trust, 2012 U.S. Dist. LEXIS 3870 (D. Md. Jan. 12,
2012).
A brokerage firm sought to enjoin an arbitration action on the grounds that the claimants
purchased the funds at issue through an unrelated third-party broker-dealer and never had any
contractual or other relationship with the brokerage firm. The Court determined that there was
no arbitration agreement, business relationship, or any other relationship between the parties and,
finding that the brokerage firm met all of the necessary legal requirements, granted the
preliminary injunction.
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012).
N.4.c
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)
arbitration award regarding a promissory note between him and his former employer brokerage
firm on the grounds that (1) the award was procured by fraud and undue means as a result of the
brokerage firm’s refusal to comply with discovery orders and making of intentional
misrepresentations as to the availability of certain evidence; (2) the panel was partial in favor of
the brokerage firm; (3) the panel denied the employee a fundamentally fair hearing by depriving
him of access to material evidence exclusively controlled by the brokerage firm; and (4) the
panel manifestly disregarded the law by failing to enforce the governing rules of arbitration and
its own orders and by ignoring uncontroverted evidence of breach of contract. The employee
also argued that the promissory note, including its provision regarding attorney’s fees, was
unenforceable. The Court denied vacatur of the award on the grounds that there was no evidence
to support the employee’s allegations, the promissory note was not an illegal contract, and the
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).
445
N.4.c
Respondent brokerage firms sought to enjoin a Financial Industry Regulatory Authority
(FINRA) arbitration against them on the grounds that the claimant was not their customer and
therefore had no right to arbitrate before FINRA, and because the claimant effectively waived its
right to arbitration by agreeing to a mandatory forum selection clause requiring the dispute to be
litigated in the United States District Court for the Southern District of New York. The Court
denied the motion based on its determination that (1) the claimant was a customer based on the
various services it purchased from the respondents in exchange for compensation; (2) the forum
selection clause did not act as a waiver of the claimant’s right to arbitrate due to the language of
the agreement, the federal preference in favor of arbitration, and the respondents’ knowledge of
FINRA’s policy for choosing the site of arbitration; and (3) the respondents were unlikely to
succeed on the merits and failed to show that they would suffer irreparable harm.
N.4.c
Morgan Keegan & Co. v. Sturdivant, 2012 U.S. Dist. LEXIS 120295 (S.D. Miss. Aug. 24, 2012).
Claimants sought to vacate an arbitration award in favor of a brokerage firm on the
grounds that one of the three arbitrators was evidently partial to the brokerage firm because he
had extensive involvement with mortgage backed securities like those at issue but failed to
disclose such involvement, and on the grounds that the panel engaged in misconduct by (1) being
unprepared for the evidentiary hearing; (2) making inappropriate comments and posing improper
questions to a witness; and (3) improperly excluding evidence offered by the claimants. The
Court denied the motion to vacate. The Court found that claimants failed to establish any
evident partiality, as the arbitrator had disclosed the information in question and the claimants
had knowledge of such information and failed to object to his presence on the panel, effectively
waiving their argument as to his participation. Additionally, the claimants failed to demonstrate
any alleged unpreparedness on behalf of the panel, there was nothing objectionable about the
questions complained of to the witness, and the Court could not say that refusing to let the
claimants present certain evidence deprived them of a fair hearing.
N.4.c
Wealth Rescue Strategies, Inc. v. Thompson, 2012 U.S. Dist. LEXIS 157355 (S.D. Tex. Nov. 2,
2012).
An investment advisor sought to vacate an arbitration award on the grounds that the
panel’s erroneous failure to transfer venue substantially prejudiced his right to present evidence
and cross-examine witnesses. The Court denied the motion on the grounds that vacatur would be
appropriate under those circumstances only where the non-prevailing party was denied a fair
hearing. The investment advisor, however, did not argue that the arbitrators did not admit certain
evidence, but instead argued that live testimony would have had greater force. The Court found
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
witness participation, he failed to demonstrate that retention of venue in California substantially
prejudiced his rights.
Questar Capital Corp. v. Gorter, 2012 U.S. Dist. LEXIS 163380 (W.D. Ky. Nov. 14, 2012).
N.4.c
A brokerage firm filed a petition to vacate an arbitration award in favor of a former
employee on the grounds that the arbitration panel chair failed to disclose that he had arbitrated
cases in which the former employee’s former union was a party. The petition to vacate was
denied on the grounds that the brokerage firm waived its objection to the chair’s partiality by
failing to raise that objection at the hearing, and nonetheless failed to establish evident partiality
because (1) the brokerage firm established no specific facts showing that the chair had an
improper motive; (2) the former employee’s relationship with the union had ceased more than 30
years prior; and (3) the brokerage firm failed to establish why the connection between the chair
and the former union would lead a reasonable person to conclude that the chair was partial to the
former employee.
Fisher Asset Mgmt., LLC v. Rider, 2012 U.S. Dist. LEXIS 20703 (S.D. Ohio Feb. 17, 2012).
N.4.c
Pursuant to a client agreement between a brokerage firm and its customers, any claims
were required to be brought in arbitration and could not be joined with the claims of any other
individual or entity. Two customers jointly submitted a demand for arbitration and a statement
of claim to the Judicial Arbitration and Mediation Service (JAMS). The firm requested that the
JAMS panel make an administrative determination that the claims could not be joined in a single
action pursuant to the agreement between the parties. The arbitrators ruled that the claims should
be separated and decided that the appropriate procedural remedy was to assign a separate case
number to each claim, hear and judge each claim separately, and render separate decisions. The
firm sought to enjoin the hearings on the grounds that the panel’s ruling was in error because the
claims should have been dismissed and re-filed instead of heard separately. The Court denied
the request to enjoin and found that the arbitrator did not err in severing the cases, as opposed to
requiring the re-filing of one, and that the firm did not meet the burden required for injunctive
relief.
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 4955 (N.D. Ill. Jan. 17, 2012).
N.4.c
A respondent in a Financial Industry Regulatory Authority (FINRA) arbitration sought to
enjoin the action on the grounds that it did not enter into any arbitration agreement with the
claimant, did not have a customer relationship with claimant, and was not required to arbitrate
the claims in the proceeding. The Court found that the respondent had met the requirements for
a temporary injunction and noted that whether an entity was a customer under the FINRA code
446

involved a fact intensive inquiry, and that the parties would be able to more fully brief the issue
at the summary judgment stage.
447
N.4.c
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D. Ariz. May 14,
2012).
A claimant brought a Financial Industry Regulatory Authority (FINRA) arbitration action
against respondent securities firms asserting that he was the victim of identity fraud, that
someone stole his identity, opened an account with respondents using false information, and
authorized the selling of securities without his knowledge. The respondent securities firms filed
an action in federal court requesting a preliminary and permanent injunction, as well as
declaratory relief, to prohibit a claimant from pursuing arbitration claims with the Financial
Industry Regulatory Authority (FINRA) on the grounds that the claimant was not a customer of
the respondents and the parties did not sign an arbitration agreement. The court determined that
the issue of arbitrability was properly before it and granted the preliminary injunction. In doing
so, the Court noted that while the Ninth Circuit Court of Appeals had not yet addressed the issue
directly, a majority of circuit courts have held FINRA's rules do not evidence a clear and
unmistakable intent that the issue of arbitrability should be submitted to an arbitrator, and, as a
result, the court decided the question of arbitrability and granted the preliminary injunction.
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31, 2012).
N.4.c
An issuer of auction rate securities (ARS) brought a Financial Industry Regulatory
Authority (FINRA) claim against the underwriter of the ARS securities at issue. The underwriter
filed a complaint against the issuer in federal court requesting declaratory and injunctive relief
precluding the issuer from arbitrating the claims against it on the basis that (1) the parties were
not in a relationship that came within the scope of FINRA’s jurisdiction because the issuer was
not a “customer”; and (2) the underwriter did not consent to arbitrate claims with the issuer. The
Court determined that the issuer was likely a customer of the underwriter because it hired the
underwriter to perform the underwriting services on both of its ARS offerings, that the claims
were likely suitable for arbitration, and therefore the underwriter could not meet the requirements
for entry of a temporary injunction.
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12, 2012).
N.4.c
A financial advisor moved to vacate an arbitration award on the grounds that: (1) the
chairman of the panel failed to disclose information that might preclude him from being
impartial; (2) the panel manifestly disregarded the law by acting without jurisdiction over the
claimants’ claims, which were barred by the six year eligibility rule under the Financial Industry
Regulatory Authority (FINRA) rules; (3) the breach of fiduciary duty claim was barred by the
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
conflict occurred more than two decades prior to the arbitration, was unrelated to the subject of
the arbitration, and would not cause a person to reasonable entertain doubt that the arbitrator
would be impartial; (2) that the panel did not manifestly disregard the law in making the
eligibility and other claim determinations.
White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19, 2012).
448
N.4.c
A respondent brokerage firm in a Financial Industry Regulatory Authority (FINRA)
arbitration action brought filed suit injunctive and declaratory relief against the claimants in the
arbitration action to prevent them from continuing with their FINRA arbitration proceeding on
the grounds that the respondent could not be compelled to arbitrate the claims because the
claimants never entered into any arbitration agreement with the respondent and were not
“customers” of the respondent within the meaning of the FINRA rules. Although the claimants
invested with a broker that worked for the respondent, the respondent claimed that: (1) it did not
have any knowledge of the investments at issue, that the claimants never opened or maintained
accounts with the respondent; (2) it was never the broker-dealer of record for the investments at
issue; (3) it never participated in, supervised, or received compensation or commissions related
to the investment; and (4) the investment activities complained of were independent of the
respondent’s relationship with the broker. The Court denied the request for a preliminary
injunction on the grounds that the broker was an associated person of the respondent and there
was no authority presented to counter the argument that a customer of respondent’s associated
person is a “customer” of respondent. As such, the Court concluded that the respondent failed to
establish a likelihood of success on the merits.
Latour v. Citigroup Global Mkts., Inc., 2012 U.S. Dist. LEXIS 35976 (S.D. Cal. Mar. 15, 2012).
N.4.c
A former employee sought to vacate an arbitration award against her on the grounds that
the panel majority’ decision was made in manifest disregard of the law and the dissenting
arbitrator was correct in stating that because the brokerage firm was not a holder of the
promissory note at issue, under New York law, it was not entitled to enforce it. The Court
denied the motion on the grounds that the majority’s decision was well founded in the business
realities of the transaction, and the former employee had not shown that she brought to the
panel’s attention any controlling authority or even argument that would have prevented the panel
from reaching its conclusion.
Sawyer v. Horwitz & Assocs., 2012 U.S. Dist. LEXIS 11850 (S.D. Cal. Jan. 30, 2012).
N.4.c
A claimant moved to vacate an arbitration award dismissing all of her claims on the
grounds that: (1) the panel’s refusal to grant expungement of the Central Depository Records of
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
the claimant; (3) the panel’s decision was not unanimous; (4) the undisputed evidence showed
that the claimant’s financial advisor breached his fiduciary duties to the claimant; and (5) the
panel refused to hear pertinent and material evidence that was favorable to the claimant’s case.
The Court denied the motion to vacate on the grounds that claimant’s allegations in (1) through
(3) above did not support vacatur of an award, the claimant failed to show that it was completely
irrational for the panel to reach the conclusion that it did, and there was no prejudice or
affirmative misconduct as a result of the panel’s exclusion of particular evidence.
Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012).
N.4.c
A former employee respondent in a Financial Industry Regulatory Authority (FINRA)
arbitration action sought a preliminary injunction preventing his former employer brokerage firm
from pursuing the FINRA action against him for alleged violations of certain contracts between
the parties on the grounds that the former employee was not required to arbitrate under the
agreements. The Court denied the injunction because it determined that the contracts at issue
contained valid arbitration provisions and the former employee therefore could not establish that
he was likely to prevail on the merits of his challenge to the arbitration.
Stanchart Secs. Int'l, Inc. v. Galvadon, 2012 U.S. Dist. LEXIS 153046 (S.D. Cal. Oct. 24, 2012).
N.4.c
Respondent securities firms filed an emergency application for a temporary restraining
order (TRO) and noticed a motion for a preliminary injunction before the district court with the
immediate objective of avoiding an evidentiary merits hearing before a Financial Industry
Regulatory Authority (FINRA) arbitration panel. The securities firms argued that the TRO
should be entered because only one of the firms was a FINRA member, the claimants in the
underlying arbitration were not customers within the meaning of FINRA, and the claimants’
claims arose before the on FINRA member firm became a FINRA member. The Court denied
the TRO on the grounds that the securities firms could not meet the criteria necessary for its
entry, especially considering that the securities firms voluntarily continued to participate in the
arbitration process and only filed their TRO motion three days before the evidentiary hearing.
Stanchart Secs. Int'l v. Gavaldon, 2012 U.S. Dist. LEXIS 163631 (S.D. Cal. Nov. 9, 2012).
449
N.4.c
Defendant securities firms sought a preliminary injunction, seeking to have the Court to
enjoin the claimants from going forward with an arbitration evidentiary hearing scheduled on
October 25, 2012, three days after the motion was filed, despite the fact that the arbitration had
been ongoing since January 2011. The Court denied the preliminary injunction on the grounds
that (1) based on the filings, the only anticipated event the Court could enjoin would be the
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
panel’s issuance of a decision, the defendants could not show irreparable harm.
Waveland Capital Partners, LLC v. Tommerup, 840 F. Supp. 2d 1243 (D. Mont. 2012).
N.4.c
A respondent in a Financial Industry Regulatory Authority (FINRA) arbitration action
filed a motion for a temporary restraining order (TRO) to halt an arbitration hearing on the
grounds that the claim was not arbitrable and that that claimants were not customers within the
meaning of the FINRA rules. The respondent signed a submission agreement, participated in a
pre-hearing conference and discovery prior to filing a motion to dismiss with FINRA, arguing in
part that the dispute was not arbitrable. The Court found that although the respondent may have
wanted to renounce its decision to submit the dispute to arbitration, it could not subsequently
claim that the agreement was void or that it reserved its right to contest the arbitrability in the
courts. The Court additionally determined that the respondent had not met the criteria necessary
for entry of a TRO, including likelihood of success on the customer issue, and as a result, denied
the motion for a TRO.
Collins v. Chi. Inv. Group, LLC, 2012 U.S. Dist. LEXIS 37217 (D. Nev. Mar. 19, 2012).
N.4.c
A former employee moved to vacate a Financial Industry Regulatory Authority (FINRA)
award on the grounds that (1) the arbitrator abused his discretion in granting the employer’s
motion to change the arbitral venue; (2) the arbitrator came to the wrong substantive decision;
(3) the arbitrator erroneously characterized the sum alleged due and owing as a loan; and (4) the
employer owed the employee payment for her services during a specific time period. The Court
denied the motion on the grounds that the former employee was simply seeking to re-litigate the
issues decided by the arbitrator, failed to provide an appropriate basis for vacatur, and there was
no basis to conclude that the award was completely irrational.
Sunrise Trust v. Morgan Stanley & Co., 2012 U.S. Dist. LEXIS 148485 (D. Nev. Oct. 16, 2012).
N.4.c
A customer trust sought to vacate an arbitration award in favor of a brokerage firm on the
grounds that the arbitration panel engaged in misconduct by refusing to postpone the hearing and
because the panel reached the incorrect conclusion based on the facts. The district court denied
vacatur because the refusal to stay the arbitration proceedings did not prejudice the trust and
because the panel applied the correct law in the arbitration.
450

N.4.c
Tuminello v. Richards, 2012 U.S. Dist. LEXIS 30827 (W.D. Wash. Mar. 8, 2012).
A brokerage firm and financial advisor sought to enjoin a Financial Industry Regulatory
Authority (FINRA) arbitration initiated by a claimant in connection with investment accounts in
Switzerland held with an affiliate of the brokerage firm on the grounds that the claimant signed
account agreements with a Swiss affiliate that did not contain arbitration provisions, but rather a
forum selection clause, and that it was the Swiss accounts that sustained the losses alleged in the
statement of claim. At the outset of their relationship, the parties entered into a master account
agreement, which contained a broad and valid arbitration clause. The claimant subsequently
opened the Swiss accounts under a company he created and, in his capacity as manager of the
company, the claimant signed the Swiss account agreements. The Court denied the request to
enjoin the arbitration and found that the arbitration clause in the master account agreement was
enforceable.
Morgan Keegan & Co. v. Pessel, 2012 U.S. Dist. LEXIS 60465 (D. Colo. May 1, 2012).
451
N.4.c
A brokerage firm sought vacatur of a Financial Industry Regulatory Authority (FINRA)
award on the grounds that the arbitration panel exceeded its authority in rendering the award
because there was no business relationship between the brokerage firm and the claimants. The
court denied the motion to vacate on the grounds that the issue raised presented questions of fact
and law and that the statement of claim filed by the claimants contained many factual allegations
that would support a claim of liability. The Court determined, therefore, that it was not
empowered to vacate the award on the basis of a disagreement with the view of the law
apparently taken by the arbitration panel.
Ohlfs v. Charles Schwab & Co., 2012 U.S. Dist. LEXIS 7737 (D. Colo. Jan. 24, 2012).
N.4.c
A claimant sought to vacate a Financial Industry Regulatory Authority (FINRA)
arbitration award on the grounds that (1) the arbitration panel exceeded its powers by failing to
allow a stenographer to record the arbitration proceedings; (2) the panel was unfair to the
claimant and partial to the respondent in many respects; (3) the award violated the wellestablished
policy of the Uniformed Services Employment and Reemployment Rights Act
(USERRA); and (4) the panel manifestly disregarded the law. The Court denied vacatur of the
award on the grounds that: (1) denial of a request for a stenographer could not serve as a basis
for vacatur; (2) the claimant could not establish that any unfairness or partiality on behalf of the
arbitrators and failed to object to certain disclosures made by the arbitrators prior to moving to
vacate; (3) the panel necessarily had to consider the merits of the claimant’s USERRA claims to
reach its decision and plaintiff could therefore not show a violation of the public policy behind
USERRA; and (4) in absence of an explanation for the award, the plaintiff could not demonstrate
that the panel manifestly disregarded the law under USERRA based on the fact that it found for
the respondent on the claims.

Fisher v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 179691 (D. Kan. Dec. 17, 2012).
452
N.4.c
A claimant sought vacatur of a Financial Industry Regulatory Authority (FINRA)
arbitration award on the grounds that the arbitrators exceeded their powers under the FINRA
rules and conducted the hearing in such a way as to substantially prejudice the rights of the
claimant by allowing the respondent to present certain documents at the hearing that were not
produced to the claimant in accordance with FINRA’s rules. The Court denied the motion for
vacatur and found that the panel had not engaged in any behavior that would warrant vacatur and
the claimant offered little more than unsupported allegations of potentially incorrect discovery
decisions as support for his request to vacate.
N.4.c
Butterworth v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 140209 (N.D. Ala. Sept. 28,
2012).
A brokerage firm sought to vacate an arbitration award on the grounds that the arbitrators
exceeded their powers because (1) they considered derivative claims in violation of an internal
Financial Industry Regulatory Authority (FINRA) rule; (2) they heard claims of certain plaintiffs
who failed to comply with FINRA discovery rules; and (3) they made an alleged mistake in
calculating one of the individual awards. The Court denied the motion to vacate, finding that the
claimants’ statement of claim and the brokerage firms’ pre-hearing motions could be construed
as evincing that not only were the claimants’ claims direct as opposed to derivative, but that the
brokerage firm urged such position in the arbitration. The Court found that to say now that the
claims were derivative when there was evidence before the arbitrators that the claims were
direct, could not serve as a valid basis for vacatur. The Court additionally found there to be no
authority indicating that failure to enforce a motion to compel or aide by a FINRA discovery rule
can constitute a basis to vacate an award and determined that the award in the case did not evince
a patently obvious miscalculation such that it should be vacated.
Fornell v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 108677 (M.D. Fla. Aug. 3, 2012).
N.4.c
A brokerage firm sought vacatur of an arbitration award on the grounds that the arbitrator
chairperson failed to disclose two litigation matters in which he was involved and that this lack
of disclosure established partiality and misbehavior under the relevant statutory provisions. The
Court denied the motion to vacate because (1) the brokerage firm did not establish a basis for
concluding that the arbitrator was partial, corrupt, or engaged in misbehavior by not disclosing
the cases; (2) there was no evidence of an actual conflict; and (3) neither of the two matters
constituted information which would lead a reasonable person to believe that a potential conflict
exists. The Court also granted a motion for sanctions against the brokerage firm for filing a
baseless motion to vacate on the grounds they did not in good faith have an objectively
reasonable basis for challenging the award.

N.4.c
Citigroup Global Mkts., Inc. v. Berghorst, 2012 U.S. Dist. LEXIS 76459 (S.D. Fla. Jan. 20,
2012).
A brokerage firm sought to vacate an arbitration award against it on the basis of the
evident partiality of one of the arbitrators. The arbitrator at issue failed to disclose that after
being appointed to the panel, he initiated an arbitration proceeding against his employer
brokerage firm relating to investments in his individual retirement account. He also failed to
disclose that shortly thereafter, his employer brokerage firm terminated him for failure to follow
management directives and firm policy. The arbitrator subsequently amended his arbitration
action against his employer brokerage firm to assert new claims for retaliatory termination of
employment and defamation and sought $20 million in damages. The arbitrator failed to
disclose any of this information to the parties, despite making other selective disclosures to his
Financial Industry Regulatory Authority (FINRA) database profile. The arbitrator also
affirmatively stated that he had no additional disclosures to make at the outset of the final
arbitration hearing. The Court granted the motion to vacate and found that the facts at the very
least demonstrated an appearance of partiality and that the arbitrator’s failure to disclose his
conflicts of interest was directly prejudicial to the brokerage firm’s right to seek his recusal.
N.4.c
Gerardo Gerson & Rivadavia, S.A. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 128128 (S.D. Fla.
Sept. 10, 2012).
Claimants sought to vacate an arbitration award in favor of a brokerage firm on the
grounds that (1) the panel engaged in a pattern of procedural irregularities and aberrations that
deprived the claimants of any ability to have notice of the arbitration procedure in advance,
which violated the Panama Convention and (2) that the pre-hearing discussions with the
brokerage firm regarding the order and presentation of witnesses constituted a binding
agreement, though not signed in writing, and had the claimants known that the panel was going
to grant a directed verdict, they would have proposed a different witness list. The Court denied
the request to vacate and found that none of the claimants’ contentions satisfied the heavy burden
required to vacate the award, that claimants agreed to be bound by FINRA’s by-laws prior to the
hearing, and that the claimants did not cite to any specific FINRA rules that the panel actually
departed from during the hearing. The Court additionally found that even assuming there was an
agreement as to the order and presentation of witnesses, there was no evidence of an agreement
that the brokerage firm would not raise any motions in response to evidence that the claimants
may have raised at the hearing.
453

454
N.4.c
Merrill Lynch, Pierce, Fenner & Smith v. Smolchek, 2012 U.S. Dist. LEXIS 134089 (S.D. Fla.
Sept. 17, 2012).
A respondent brokerage firm sought to vacate an arbitration award on the grounds that (1)
the chairwoman of the arbitration panel failed to disclose the nature of her husband’s law
practice, the sizeable award he earned against the respondent in another case six years prior, or
comments that her husband made to a newspaper after the award to the effect that he was
particularly satisfied at having obtained an award against the respondent, which resulted in
evident partiality; (2) the panel engaged in misconduct in its decision to limit the respondent’s
presentation of its and case and in its decision impose sanctions against the respondent; and (3)
the panel exceeded its authority in imposing sanctions because it did not allow the respondent
sufficient notice or an opportunity to be heard. The district court denied the motion to vacate.
With respect to the partiality issue, the court determined that the brokerage firm had prior
knowledge of the information it alleged had not been disclosed and accepted the panel’s
composition nonetheless. With respect to the evidence limitations and sanctions award, the
Court further found that the panel had at least some reasonable basis for the actions it took and
while the decisions were in some cases detrimental to the respondent, the respondent had not
demonstrated that it was unfairly prejudiced to the point of being denied a fundamentally fair
hearing.
N.4.c
Spungin v. GenSpring Family Offices, LLC, 2012 U.S. Dist. LEXIS 113962 (S.D. Fla. May 25,
2012).
Three investors petitioned to vacate an arbitration award against them on the grounds that
the investors’ claim was dismissed without holding an evidentiary hearing and that the arbitrator
refused to hear the investors’ evidence regarding the intent of the parties when they executed a
prior settlement agreement. The district court denied the motion, finding that the arbitrator did
not exceed his powers by dismissing the claim without holding an evidentiary hearing because
the Judicial Arbitration and Mediation Services (JAMS) discovery protocols anticipate that
dispositive motions are sometimes appropriate and do not indicate that such motions are limited
to post-discovery, and the arbitrator did not engage in misconduct because he should not have
considered parol evidence if he found that the settlement agreement at issue was not ambiguous.
N.4.c
Abdelnour v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 29 Mass. L. Rep. 540 (Mass. Super.
Ct. 2012).
Claimants sought to vacate a Financial Industry Regulatory Authority (FINRA) award
against them on the grounds that FINRA engaged in misconduct and exhibits bias towards the
respondents, a financial adviser and brokerage firm. The claimants claimed that the arbitrators
and counsel for the defendants conspired through ex parte communications to cover up the
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
on their request to expedite the evidentiary hearing. The Court denied the claimants’ motion to
vacate on the grounds that the claimants’ assertions were without merit, the claimants did not
suffer any prejudice, and the claimants’ argument that the panel seriously prejudiced their right
to a fair arbitration hearing by not conducting it sooner was undermined by the claimants’ own
delays in providing discovery and their express agreement that, as a result, hearing dates had to
be adjourned.
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012).
455
N.4.c
Claimants in an underlying arbitration action appealed confirmation of arbitration award
in favor of the respondent brokerage firm on the grounds that the panel exceeded its authority by
recording findings on ineligible matters. The appellate court affirmed the lower court’s
confirmation of the award. During the arbitration hearing, the panel found that many of the
claimants’ claims were barred for lack of jurisdiction. The Court determined that although the
panel expounded in the award on matters that were not eligible for arbitration, they did not
exceed the scope of their authority because the plaintiffs brought the ineligible claims, thereby
giving the panel the power to discuss its dismissal of those matters.
N.4.c
Messier v. Merrill Lynch Int'l Fin., Inc., 2012 Conn. Super. LEXIS 3140 (Conn. Super. Ct. Dec.
28, 2012).
A former employee sought to vacate a Financial Industry Regulatory Authority (FINRA)
award against him regarding a promissory note between him and his former brokerage firm
employer on the grounds that the award denied his right to receive earned wages in contravention
of Connecticut public policy, as reflected in the state’s statutes. Although the Court stated that
the wage withholding complained of by the employee constituted an area of clear public policy
and the allegation of a violation of such policy carried with it the right to judicial review
notwithstanding an unrestricted referral to arbitration, the court was placed in the position of
speculating as to the rationale for the arbitrator’s decision. As such, the Court remanded the
matter to the arbitrator for an articulation of the basis for his rejection of the employee’s claim
for wages.
N.4.c
Baker v Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 N.Y. Misc. LEXIS 1123 (N.Y. Sup.
Ct. Mar. 9, 2012).
A brokerage firm sought to vacate an arbitration award on the grounds that the arbitration
panel engaged in prejudicial misconduct by ruling that all evidence following the claimants’
filing of their statement of claim on December 1, 2009 was irrelevant, including evidence as to
claimants’ later investments. The brokerage firm further asserted the fact that the arbitrators, and
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
the evidence to that which was relevant to the disputes and the brokerage firm failed to provide
clear and convincing evidence that the arbitrator habitually or repeatedly fell asleep during the
hearing.
456
N.4.c
Longfield v Financial Tech. Partners, 2012 N.Y. Misc. LEXIS 5497 (N.Y. Sup. Ct. Nov. 28,
2012).
A former employee of an investment firm sought to vacate an arbitration award on the
grounds that the arbitrator acted with manifest disregard of the law when he made a specific
finding that the former employee resigned and that as an at-will employee she was entitled to
resign at any time, yet subsequently determined that she was terminated by her former employer
for cause. The Court denied the motion to vacate on the grounds that the award was not totally
irrational and that a colorable basis for the award had been stated. The Court further determined
that while the former employee’s at-will right to resign was provided for in the agreement
between the parties, there was also language in the agreement which could specifically be found
applicable to the compensation due to a resigning employee, when the resignation was not made
for acceptable reasons, and where the employer reasonably found cause for termination of the
employee's right to certain compensation.
N.4.c
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45, 50
(App.Div. 2012).
Claimants filed a Financial Industry Regulatory Authority (FINRA) arbitration action
against several respondent broker-dealers. The claims against one broker-dealer were dismissed
by the Court on the grounds that the claimants were not customers of that broker-dealer. One of
the remaining respondents subsequently filed a third party claim against the broker-dealer in the
arbitration and the broker-dealer moved to enjoin the claims, which the lower court granted. The
respondent subsequently appealed the four orders enjoining them from pursuing their third party
arbitration claims for contribution and indemnification against the broker-dealer. The court
affirmed the orders on the grounds that the respondents could not be compelled to arbitration
absent an agreement or a covered, exchange-related transaction with the claimants. The account
with respondents was used by claimants as a personal depository of funds and claimants failed to
demonstrate that respondents acted in any way as a broker-dealer for any of the parties or that it
engaged in a covered, exchange-related transaction with claimants.
Schwarz v. Wells Fargo Advisors, LLC, 2012 PA Super 265 (Pa. Super. Ct. 2012).
N.4.c
After a plaintiff client filed suit, a defendant brokerage firm moved to compel arbitration.
The plaintiff denied the existence of an arbitration agreement, the trial court judge proceeded
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
arbitration panel and moved to vacate the award on the grounds that there was no agreement to
arbitrate. The trial court judge vacated the award, concluding that the parties did not enter into
an agreement to arbitrate and the judge who ruled on the initial motion to compel failed to afford
the plaintiff a hearing on the issue. The appellate court found that the trial court did not have the
statutory authority to vacate the award and that at the time the plaintiff sought to vacate, the issue
of whether an arbitration agreement existed had already been adversely determined in court
proceedings.
Carter v. Holdman, 95 So. 3d 560, 562 (La.App. 4 Cir. 2012).
457
N.4.c
A respondent firm unsuccessfully sought to vacate a Financial Industry Regulatory
Authority (FINRA) award on the grounds that the arbitration panel manifestly disregarded the
law of causation by awarding the claimant his total damages despite undisputed evidence that the
declining stock market contributed to his losses, and on the bases that the arbitration panel
disregarded Texas law by holding the responsible parties jointly and severally liable rather than
apportioning fault among them. The appellate court affirmed the district court’s denial of the
motion to vacate on the grounds that the evidence presented clearly supported the arbitration
panel’s majority decision and the fact that the dissenting arbitrator would have attributed some
liability to the claimant and reduced the total damages based on the stock market decline was not
a basis to vacate the award. Additionally, nothing in the record indicated that the arbitration
panel failed to apply Texas law as required under terms of the customer agreement between the
parties.
N.4.c
Hansalik v. Wells Fargo Advisors, 2012 Cal. App. Unpub. LEXIS 3145 (Cal. App. 2d Dist. Apr.
25, 2012).
A brokerage firm filed an arbitration action against a former employee regarding a
promissory note. After the former employee failed to appear or otherwise respond, the Financial
Industry Regulatory Authority (FINRA) entered a default award against the employee. The
employee filed a motion to vacate the award on the grounds that he had never received notice of
the arbitration action. The trial court granted the vacatur and found that the employee was not
properly served under the FINRA rules and was therefore denied due process. The appellate
court confirmed the vacatur and determined that the arbitrator’s determination as to proper
service was not dispositive, the arbitrator exceeded its authority by denying the employee a fair
hearing, and the award was properly vacated by the lower court.
Pemberton v. Citigroup Global Mkts., Inc., 268 P.3d 11 (Kan. Ct. App. 2012).
N.4.c
The appellate court affirmed denial of a former employee’s motion to vacate an
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
hearing was unfair; (3) there was no authority supporting the former employee’s argument that
the attorney for the employer and two of the arbitrators who were attorneys were required to be
licensed in Kansas in order to participate in the arbitration proceeding; and (4) there was no
evidence that the district court should have vacated the arbitration award for public policy
reasons under a Kansas statute prohibiting arbitration provisions in employment contracts.
O. Practice and Procedure
1. Rule 9(b) of the Fed. R. Civ. P.
O.1
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98, 108 (2d Cir. 2012)
Shareholder brought action against broker-dealer for offerings of auction rate securities
(ARS), and against agencies that assigned credit ratings to the ARS, asserting claims under
federal and state law for market manipulation, control person liability, fraud, and negligent
misrepresentation. After action was transferred from California to New York by Judicial Panel
on Multidistrict Litigation, defendants moved to dismiss. The United States District Court for the
Southern District of New York granted motions. Shareholder appealed. In affirming the 2nd
Circuit held that a complaint alleging securities fraud must also satisfy the heightened pleading
requirements set forth in Federal Rule of Civil Procedure 9(b) and the Private Securities
Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u–4(b). Rule 9(b) requires that
averments of fraud be “state[d] with particularity.” Fed.R.Civ.P. 9(b). To satisfy this requirement
the plaintiff must “(1) specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.2004) (internal
quotation marks omitted). The PSLRA expanded on the Rule 9(b) standard, requiring that
“securities fraud complaints ‘specify’ each misleading statement; that they set forth the facts ‘on
which [a] belief’ that a statement is misleading was ‘formed’; and that they ‘state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind.’ ” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627, 161 L.Ed.2d 577
(2005) (quoting 15 U.S.C. § 78u–4(b)(1), (2)).
Panther Partners Inc. v. Ikanos Communications, Inc., 681 F.3d 114 (2d Cir. 2012)
In securities fraud class action alleging that disclosures in semiconductor company's
offering statements for initial public offering (IPO) and secondary offering were inadequate, the
United States District Court for the Southern District of New York, dismissed complaint for
failure to state a claim, denied plaintiffs leave to amend, and denied motion for reconsideration
of that denial. After appeal and remand, plaintiff again appealed dismissal. The 2d Circuit, held
that complaint stated claim for inadequate disclosures in registration statement and prospectus
and vacated and remanded with instructions to grant leave to amend. In doing so the court held
458
O.1.

that neither scienter, reliance, nor loss causation is an element of claim for false or misleading
registration statement or prospectus under Securities Act, which, unless they are premised on
allegations of fraud, need not satisfy heightened particularity requirements of Fed. R. Civ. P.
9(b).
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (6th Cir. 2012).
Investor filed action against brokerage, its parent companies, and employee for fraud,
negligent misrepresentation, and violations of Kentucky's Blue Sky Law. Defendants moved to
dismiss. The United States District Court for the Western District of Kentucky granted the
motion and the Investor appealed. The 6th Cir. held although conditions of a person's mind may
be alleged generally, under the rule Fed. R. Civ. P. 9(b) the plaintiff still must plead facts about
the defendant's mental state, which, accepted as true, make the state-of-mind allegation plausible
on its face. Moreover, under Rule 9(b), investor's allegations that brokerage firm failed to inform
it that substantial number of loans underlying mortgage pass-through certificates had been made
without regard for “prudent underwriting standards” were not sufficiently particular to state a
claim of fraud by omission, where investor failed to specify the “who, what, when, where, and
how”; investor's allegations that brokerage firm omitted to state, first, that the loan originators
did not follow their own underwriting standards in making a substantial number of the mortgage
loans that back the certificates, and, second, that a substantial number of the mortgage loans
backing the certificates were inadequately secured because of inaccurate property valuations,
were not sufficiently particular to state a claim of fraud by omission, where claims involved only
probabilities; and, investor's allegations that broker made false representations that certificates
were reasonably safe investment products backed by mortgage loans made according to
reasonably prudent underwriting standards were not sufficiently particular to state a claim of
fraud, where investor failed to indicate when, where, or to whom the alleged misstatement was
made.
Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972 (8th Cir. 2012).
Investors brought class action against pharmaceutical company and its officers alleging
that company issued false and misleading statements regarding its compliance with Food and
Drug Administration (FDA) regulations and its financial condition, in violation of federal
securities laws. The United States District Court for the Eastern District of Missouri, granted
defendants' motions to dismiss, and the same court, subsequently denied investors' motions for
relief from judgment and to amend complaint. On appeal, the 8th Circuit held the investors who
alleged that chief administrative officer (CAO) and president of pharmaceutical company
“employed devices, schemes, and artifices to defraud” and “engaged in transactions, practices
and a course of conduct that operated as a fraud and deceit” upon purchasers of company's
securities, in violation of securities regulations, failed to allege with sufficient particularity how
scheme operated and how CAO and president were actually involved, and thus failed to state
scheme liability claim. 17 C.F.R. § 240.10b–5(a, c); Fed .R. Civ. R. P 9(b).
O.1.
O.1.
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O.1.
In re Rigel Pharmaceuticals, Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012)
Investor brought a securities fraud action individually and on behalf of all other persons
who purchased or otherwise acquired the common stock of issuer during a designated period.
Investor also brought claims on behalf of itself and persons who purchased stock traceable to the
registration statement and prospectus issued in connection with issuer's 2008 stock offering. The
United States District Court for the Northern District of California granted defendants' motion to
dismiss the complaint, and investor appealed. In affirming the decision the 9th Cir held that
Investor's claim under Securities Act provision creating liability for misstatements in registration
statements was grounded in fraud, and therefore subject to particularity requirements for
pleading fraud generally. This did not mean, as Plaintiff contends, that it may not plead
alternative theories of liability; it merely means that, with both the section 10(b) and the section
11 claims, Plaintiff must meet the pleading requirements of Rule 9(b). Plaintiff failed to meet
Rule 9(b)'s pleading requirements with respect to pleading a false or misleading statement.
In re China Valves Tech. Sec. Litig., 2012 WL 4039852 (S.D.N.Y. Sept. 12, 2012).
This putative class action arose from purchases of China Valves Technology, Inc. stock
between December 1, 2009 and January 13, 2011. Lead plaintiff alleged that China Valves, its
named officers and directors, and its auditor failed to disclose material adverse facts about two of
the company's acquisitions, including their related party nature, and materially overstated China
Valves' financial results in the registration statement made effective on December 14, 2009 and
in the January prospectus supplement in violation of the Securities Act of 1933 and Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934. Defendants moved for the securities
law claims to be dismissed for failure to sufficiently allege facts pursuant to Fed. Rule Civ. P.
9(b) and Private Securities Litigation Reform Act. The Court held that Plaintiffs’ Section 10(b)
claims failed to satisfy the Rule 9(b) and the PSLRA standards, because when a securities fraud
claim is based on discrepancies between AIC and SEC filings, the plaintiff must allege at least
some facts to support that (1) the SEC figures, and not the AIC filings, are false, and (2) any
variation is not attributable to variations in reporting rules or accounting standards. The Court
further noted that Plaintiffs noted discrepancy in figures are much smaller than other cases that
survived motions to dismiss, and that they allege only that differences exist in the SEC and AIC
filings and assume or conclude the SEC filings must therefore be false. Additionally, the Court
dismissed Plaintiffs’ claims related to related party transactions and failure to disclose an
acquisition’s possible FCPA violations because the amount of the payment to a related party was
disclosed and under $120,000 threshold and Plaintiffs’ fails to allege sufficient allegations that
any of the purported omissions were material when Plaintiffs bought the shares of China Valves.
The Court further dismissed the Securities Act claims because they sounded in fraud and not
negligence as Plaintiffs’ contended; therefore, they failed to meet the more stringent Rule 9(b)
pleading requirements. Moreover, Plaintiffs assert a Section 15 claim for control person liability
against the individual defendants. However, as the complaint fails to allege a primary violation
O.1.
460

of the Securities Act, no control person liability can exist under Section 15. Therefore, the claim
is dismissed.
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.
Sept. 27, 2012).
Plaintiffs’ brought this action in connection with their purchases of shares of Elixir
Gaming Technologies, Inc. Plaintiffs sue under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b–5 thereunder, the Nevada Uniform Securities Act, and on
various common law theories. They claim that the defendants made material misrepresentations
that (1) inflated EGT's share price, (2) caused them to purchase and hold EGT shares at that
inflated price, and (3) injured them when the truth was made public and led to a decline in EGT's
share price. Defendants moved to dismiss for failure to state a claim and/or sufficiently allege a
cause of action under Fed. R. Civ. P. 9(b). Defendants asserted that the Exchange Act claims
should be dismissed because many of the alleged misstatements were “forward-looking
statements” that fell within the safe harbor provision of the Private Securities Litigation Reform
Act and that plaintiffs fail adequately to allege materiality, scienter, and loss causation. They
argue that the Nevada Uniform Securities Act claims should be dismissed for substantially the
same reasons. The Court held, in part, that (1) the shareholders failed to adequately allege loss
causation, as required to state § 10(b) securities fraud claim; (2) certain of defendants forwardlooking
statements fell within Private Securities Litigation Reform Act safe-harbor provision;
and (3) shareholders failed to adequately allege that statements regarding number of electronic
gambling machines that corporation placed in Asian gaming venues were false, as required to
state § 10(b) securities fraud claim. Specifically, as to holdings (1) and (2), the Court noted that
none of the risk complain of in the action were concealed by the alleged inaccuracy of the $125
net-win figure. Indeed, the statements about the $125 net-win rate were forward-looking
statements that included cautionary language. Moreover, in its SEC filings and conference calls,
defendants repeatedly warned of risks that projections—including the $125 net-win rate—would
not be met. The Court further dismissed Plaintiffs’ claim under Nevada Revised Statutes—
Section 90.570, which parallels Rule 10b-5 claims, because the Court’s dismissal of Plaintiffs’
Rule 10b-5 claim was dispositive.
Dobina v. Weatherford Int’l Ltd., 2012 WL 5458148 (S.D.N.Y. Nov. 7, 2012).
This suit arises out of statements regarding the internal controls and accounting practices
of Weatherford International Ltd., after Weatherford announced in 2011 that it had understated
its tax expenses from 2007 through 2010 by over $500 million. Lead plaintiff American
Federation of Musicians and Employer's Pension Fund alleged that Weatherford and certain of
its officers, as well as its auditor Ernst & Young LLP, violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b–5 by knowingly issuing materially false
statements regarding the company's tax accounting for the relevant time period and omitting to
state facts necessary to make the statements that were made not misleading. Weatherford moved
O.1.
O.1.
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to dismiss for failure to allege sufficient facts under Fed. R. Civ. P. 9(b) and lead plaintiff moved
for leave to supplement amended complaint. The Court held that (1) allegations that corporate
officers delivered personally-held shares of corporation's stock back to corporation did not
sufficiently allege motive to commit fraud in support of scienter element of securities fraud
claim; (2) the complaint adequately alleged scienter with respect to statements made about
corporation's internal controls by corporation and its chief financial officer; (3) the complaint did
not adequately allege intentional scheme to manipulate corporation's tax expenses; (4) the
magnitude of tax expense understatement and focus on corporation's tax rates did not
demonstrate recklessness in making associated statements supporting inference of scienter; (5)
allegations that deficiencies in corporation's internal tax controls should have been revealed by
reasonable audit did not give rise to strong inference of scienter required to state claim against
auditor based on its statements regarding effectiveness of internal controls; (6) the complaint
stated claim for control person liability; and (7) denied lead plaintiff’s motion to supplement
complaint, as futile.
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799 (S.D.N.Y.
Sept. 27, 2012).
Plaintiffs’ brought this action in connection with their purchases of shares of Elixir
Gaming Technologies, Inc. Plaintiffs sue under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b–5 thereunder, the Nevada Uniform Securities Act, and on
various common law theories. They claim that the defendants made material misrepresentations
that (1) inflated EGT's share price, (2) caused them to purchase and hold EGT shares at that
inflated price, and (3) injured them when the truth was made public and led to a decline in EGT's
share price. Defendants moved to dismiss for failure to state a claim and/or sufficiently allege a
cause of action under Fed. R. Civ. P. 9(b). Defendants asserted that the Exchange Act claims
should be dismissed because many of the alleged misstatements were “forward-looking
statements” that fell within the safe harbor provision of the Private Securities Litigation Reform
Act and that plaintiffs fail adequately to allege materiality, scienter, and loss causation. They
argue that the Nevada Uniform Securities Act claims should be dismissed for substantially the
same reasons. The Court held, in part, that (1) the shareholders failed to adequately allege loss
causation, as required to state § 10(b) securities fraud claim; (2) certain of defendants forwardlooking
statements fell within Private Securities Litigation Reform Act safe-harbor provision;
and (3) shareholders failed to adequately allege that statements regarding number of electronic
gambling machines that corporation placed in Asian gaming venues were false, as required to
state § 10(b) securities fraud claim. Specifically, as to holdings (1) and (2), the Court noted that
none of the risk complain of in the action were concealed by the alleged inaccuracy of the $125
net-win figure. Indeed, the statements about the $125 net-win rate were forward-looking
statements that included cautionary language. Moreover, in its SEC filings and conference calls,
defendants repeatedly warned of risks that projections—including the $125 net-win rate—would
not be met. The Court further dismissed Plaintiffs’ claim under Nevada Revised Statutes—
Section 90.570, which parallels Rule 10b-5 claims, because the Court’s dismissal of Plaintiffs’
Rule 10b-5 claim was dispositive.
O.1.
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O.1.
In re Heckmann Corp. Sec. Litig., 869 F. Supp.2d 519 (D. Del. 2012).
Shareholder brought securities fraud class action against Heckmann Corporation and
officers on behalf of all shareholders who held stock in corporation and were entitled to vote on
merger with China Water and Drinks, Inc., and on behalf of investors who acquired securities in
corporation during class period, alleging fraud, recklessness, and materially false and misleading
statements. Defendants moved to dismiss for failure to adequately plead the securities fraud
allegations. In denying the motion to dismiss, the court held that the shareholder stated a claim
for false and misleading proxy statements proxy statements. The court reasoned that the
company’s statements reassuring investors that it was comfortable with possible misstatements
in China Water’s accounting were false and misleading, because the company admitted in a prior
litigation that it knew of red flags and indicators of fraud prior to and after the shareholder vote.
The court further noted that the company’s statement that its due diligence was extensive was
shown to be false by it not confirming the veracity of China Water’s operating results and
financial positions. Since the misstatements were contained in the management’s proxy
solicitation, the court held that each director was considered to be soliciting proxies, unless the
director formally dissented or dissociated himself from the solicitation; thus, each director was
liable for misstatements contained in the proxy materials.
Bruce v. Gore, et al., 2012 WL 987556, N.D. Tex. Mar. 22, 2012).
Bruce claimed that Defendants schemed to falsely market an investment named
“HotelGuide,” sell unregistered securities in this investment, and then bankrupt the investment
after stripping all equity from it. Defendants moved to dismiss the complaint for failure to
adequately plead under Fed. R. Civ. P. 9(b), or, in the alternative, Defendants move for a more
definite statement. The court granted Defendants’ motion for a more definite statement, but
denied its motion to dismiss. The court reasoned that the statements supporting its securities
fraud claims were vague even under the minimal Rule 8(a)’s requirements because they do not
provide enough information for the Defendants’ to adequately respond. Furthermore, the court
held that although Rule 10(c) authorizes adoption by reference in later proceedings, Bruce did
not do so with sufficient clarity which enabled the Defendants to ascertain the nature and extent
of the incorporation by merely stating that the third-party complaint incorporates “all or part” of
the eighty eight paragraph complaint.
U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., 2012 WL 3100778 (N.D. Tex. July 31, 2012).
This suit arises out of Verizon’s spin-off of its on-line directories business into an
independent stand-alone company, Idearc, Inc. Idearc subsequently filed for Chapter 11
bankruptcy and U.S. Bank National Association was appointed litigation trustee to pursue any
possible causes of action related to the alleged “scheme” devised by Verizon to “obtain
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approximately $9.5 billion-not in the marketplace, but through the use of lawyers and Wall Street
investment bankers.” The Trustee asserted numerous claims against Verizon and its affiliates,
including one for fraudulent transfer. Defendants moved to dismiss the fraudulent transfer claim
for failure to state a claim because it did not satisfy the Fed. R. Civ. P. 9(b) pleading
requirements. In denying Defendants’ motion to dismiss, the Court acknowledged that the 5 th
Circuit had yet to address whether the heightened Rule 9(b) pleading requirement applied to
fraudulent transfer. The Court held that the heightened pleading requirement does not apply to
fraudulent transfer because fraud is not an aspect of a fraudulent transfer claim. In a fraud claim,
the plaintiff must show that the defendant had both “knowledge” of the fraud and an “intention to
induce reliance.” In contrast, in a fraudulent transfer claim, the defendant's intent or conduct is
irrelevant. Finally, the policies behind the heightened pleading requirements for fraud claims do
not apply in the fraudulent transfer context. Unlike fraud claims, fraudulent transfer claims are
unlikely to cause defendants significant “harm to their reputation and goodwill .” Moreover,
fraudulent transfer claims are not subject to abusive use in “strike suits” and are unlikely to help
a plaintiff “in an attempt to discover unknown wrongs.”
In re BP P.L.C. Securities Litig., 853 F. Supp.2d 767 (S.D. Tex. 2012).
Purchasers of the oil company’s American Depository Shares brought a consolidated
class action asserting various securities fraud claims on behalf of themselves and similarly
situated purchasers of the company’s American Depository Receipts against British Petroleum
and certain directors following the largest oil spill in the nation’s history. The purchasers
claimed that BP’s repeated positive public statements concerning its process safety programs, its
risk management infrastructure, its spill response capabilities, and the company’s prioritization
of safety in the Gulf contained misrepresentations and omissions that were calculated to conceal
the true state of BP’s safety programs and its risk exposure in order to keep the value of BP’s
ADS’s artificially inflated. BP moved to dismiss the securities fraud allegations because the
statements in plaintiffs’ complaint did not satisfy the heighted pleading requirements of Fed. R.
Civ. P. 9(b). The court held that when pleading fraud claims against individuals under Section
10(b) and Rule 10b-5, plaintiffs must distinguish among the defendants and allege the role of
each. The court further held that plaintiffs pleaded with sufficient particularity the alleged falsity
of BP’s public statements regarding its operating management (“OMS”) systems because during
oral argument Defendants conceded that its statement that the OMS was fully implemented in
2008, was in fact still in its infancy in 2009-2010. Plaintiff also sufficiently pleaded facts to
demonstrate that BP materially misrepresented the size of the oil spill it was prepared to respond
to, which became apparent when BP was incapable of containing a spill amount only a fraction
of what was represented when the Deepwater Horizon spill occurred. However, numerous
statements were held to not be sufficiently plead, including the falsity of BP’s statement that
there was an identifiable reduction in the number of oil spills.
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Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, 2012 WL 5389734 (N.D. Ill. Nov. 2,
2012).
Based off the repeated advice and representations from Defendants Last Atlantis Capital
Management, LLC and others, Plaintiff Alpha Management Incorporated transferred its entire
investment to another class of investment with Defendant Last Atlantis. After Plaintiff was lead
to believe that the new class of investment stopped trading it requested redemption from
Defendant Last Atlantis, which led Plaintiff to file suit against Defendants alleging violations of
§ 10(b) of the Securities Exchange Act of 1934, as well as, other federal and state securities laws.
Defendants, with the exception of a former employee, moved to dismiss for failure to allege
sufficient facts under Fed. R. Civ. P. 9(b) and Plaintiff filed an amended complaint in response.
The court dismissed the federal securities law claims, but gave Plaintiff leave to replead the §
10(b) claim. The Court held that the § 10(b) claim did not raise sufficient facts under Fed. R.
Civ. P. 9(b) because the amended complaint never actually comes out and says any particular
statement was false or misleading. Further, because it is unclear whether subject matter
jurisdiction lies over the state law claims, the court will reserved judgment as to whether those
claims can survive dismissal.
Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D. Cal. Aug. 29, 2012).
Investors brought several putative class actions against corporation, its subsidiary, and its
officers and directors, alleging securities fraud and control person liability claims. Following
consolidation of the actions, and automatic stay of the actions as to corporation upon its
bankruptcy filing, defendants moved to dismiss. The court held that at the pleading stage, a
complaint stating claims under section 10(b) and Rule 10b–5 must satisfy the dual pleading
requirements of Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act
(“PSLRA”). Under the PSLRA, actions based on allegations of material misstatements or
omissions must “specify each statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding the statement or omission is
made on information and belief, the complaint shall state with particularity all facts on which
that belief is formed.” 15 U.S.C. § 78u–4(b)(1). The Court held the investors sufficiently alleged
particularized facts to support a strong inference of scienter with respect to corporation's former
CEO but failed to allege sufficient facts to support a strong inference of scienter with respect to
remaining officers and directors. Investors stated a securities fraud claim against subsidiary.
Investors stated a claim for control person liability against certain officers; but failed to state a
control person liability claim against corporation's first vice president and retail product
manager, and investors stated a control person liability claim against directors who signed
statements which contained alleged misrepresentations.
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Bamert v. Pulte Home Corp., 2012 WL 3292397 (M.D. Fla. June 11, 2012).
This suit arose out of Plaintiffs purchase of at least one condominium from Pulte Home
Corporation and entered into a separate management agreement with Osceola Management &
Consulting, Inc. Plaintiffs' allege that the Defendants committed securities fraud in conjunction
with the sale of investment contracts, which include the Plaintiffs' purchase of condominium
units and the subsequent inclusion of the units as part of an investment program where the units
could be rented on a short-term basis permitting investors to earn income from their investments.
Plaintiffs allege is the entire program offered by Defendant constitutes the investment contract.
Plaintiffs raise claim under the Securities Act of 1933, the Securities Exchange Act of 1934, as
well as, parallel Florida statutes found in Section 517, et seq., among other claims. Defendants
moved for a broad dismissal of the claims for various reasons, including the dismissal of
Plaintiffs' Rule 10b–5 claims because they fail to comply with the pleading requirements of Fed.
R. Civ. P. 9(b) and/or the Private Securities Litigation Reform Act. Defendants’ further move to
dismiss Plaintiffs' Florida securities fraud, common law fraud, fraud in the inducement, negligent
misrepresentation, and Florida's Deceptive and Unfair Trade Practices Act claims because they
are not pled with requisite specificity as required by Rule 9(b). Plaintiffs contend the heightened
pleading requirements of the PSLRA do not apply to individual private actions for securities
fraud. However, the Court found that the heightened pleading requirements apply for three
principal reasons: (1) the plain language of the statute; (2) the United States Supreme Court,
while not directly ruling upon the issue, has stated that the heightened pleading requirements of
the PSLRA apply in “ ‘any private action’ arising from the Securities Exchange Act;” and (3) the
District Courts that have directly addressed the issue have found that the PSLRA's heightened
pleading requirements apply to individual actions. Since this is an individual action by
numerous plaintiffs, and not a class action, the failure in any section to allege with particularity
the specific misrepresentations made, by whom, when, and in what manner as to each Plaintiff
and an explanation as to why each such statement is false is a fundamental flaw. Therefore, the
Court held that the federal and state securities law claims failed to meet the requisite specificity
of Rule 9(b), and in some instances Rule 8.
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug. 28, 2012).
Investor brought putative class action against bank, its accountant, and related
defendants, alleging securities violations in connection with bank's issuance of preferred
securities. Defendants moved for reconsideration of order denying their motions to dismiss. On
reconsideration, the court granted the accountant’s motion to dismiss, holding a plaintiff in a
securities fraud action who asserts claims against an accountant based on the accountant's audit
opinions is required to allege, with particularity, that the opinions issued were subjectively
false—that is that the accountants did not actually believe their opinions when they were issued.
The scant allegations in Plaintiff's Amended Complaint fail to state a claim that the E & Y audit
opinions were subjectively false when issued and fail to satisfy the requirements of Fed. R. Civ.
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P. 9(b) by failing to specify the who, what, where, when, and how regarding the development
and falsity of E & Y's audit opinions.
2. Rule 11 of the Fed. R. Civ. P.
Ly v. Solin, Inc., 2012 WL 6561557 (D.D.C. Dec. 17, 2012).
Shareholders brought action against corporations and their officers, asserting various
state law claims and violations of the Racketeer Influenced and Corrupt Organizations Act
(RICO). Plaintiff voluntarily dismissed the corporations, but former defendant LPK, Inc.,
opposed plaintiffs' voluntary dismissal of their claims against it, arguing for the imposition of
Fed. R. Civ. P. 11 sanctions against plaintiffs. LPK argued that plaintiffs' complaint was brought
in bad faith and in violation of Rule 11 by alleging diversity jurisdiction where none existed and
by raising frivolous RICO claims to establish federal subject matter jurisdiction. The court held
that LPK’s motion did not meet the requirements of Rule 11 because it did not make a separate
motion, serve it on plaintiffs, and allow 21 days before filing the motion with the Court.
Nevertheless, the court raised the issue of Rule 11 sua sponte because diversity between the
parties was so clearly lacking that even the most cursory of legal inquiries would have uncovered
the error. The court entered an order affording an opportunity for counsel for plaintiffs to show
cause why sanctions pursuant to Rule 11 should not be issued.
Dunleavy v. Gannon, 2012 WL 259382 (D. N.J. Jan. 26, 2012).
Dunleavy's claims stem from the allegation that he lost personal funds that were being
wrongfully handled by the Defendants as an investment. Plaintiff alleged that Defendants
fraudulently persuaded him to invest $25,000 in what Plaintiff believed to be a “health insurance
claims company,” but the invested funds were incorrectly or wrongfully deposited in another
account and then “fraudulently and clandestinely funneled to pay debts for a strip club in Florida.
Dunleavy has filed a multitude of lawsuits arising out of the same factual allegations, as well as,
grievances against the attorneys’ defending against his lawsuits. After Dunleavy’s claims were
dismissed again in the present lawsuit and his motion for reconsideration was denied, the only
remaining issues are Defendant’s claims for sanctions. The court granted Defendants’ request
for sanctions, awarding Defendants’ their respective attorneys’ fees and costs from the inception
of the first lawsuit. The court further enjoined Dunleavy sua sponte from filing any further
lawsuits without court approval.
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug. 28, 2012).
Investor brought putative class action against bank, its accountant, and related
defendants, alleging securities violations in connection with bank's issuance of preferred
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securities. Defendants moved for reconsideration of order denying their motions to dismiss and
bank defendants and accountant also moved for sanctions against investor and its counsel for
purposely including misleading information in its Amended Complaint. The Private Securities
Litigation Reform Act (PSLRA) requires that: “In any private action arising under this chapter,
upon final adjudication of the action, the court shall include in the record specific findings
regarding compliance by each party and each attorney representing any party with each
requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion.” 15 U.S.C. § 78u–4(c). If a party is determined to
have violated Rule 11, the PSLRA requires that sanctions be imposed after giving “such party or
attorney notice and an opportunity to respond.” Id. The court found that the positions Plaintiff
took in its Amended Complaint were misleading or, at least, unsupported. Yet, despite a close
and reluctant call, the Court was not able to conclude on the facts here that Plaintiff's conduct
violated Rule 11 or rises to the level of bad faith such that sanctions are appropriate.
3. Rule 23 of the Fed. R. Civ. P.
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City of Bristol Pension Fund v. Vertex Pharmaceuticals, 2012 WL 6681907 (D. Mass. Dec. 21,
2012).
The City of Bristol Pension Fund (“CBPF”) brought suit, on behalf of a class of similarly
situated persons, against Vertex Pharmaceuticals, Inc., and a number of Vertex employees.
Plaintiff contends that class members were harmed when they purchased Vertex's common stock
at prices that were artificially inflated by the company's false and misleading statements about its
products. Plaintiff also contends that a number of Vertex executives personally profited by
selling millions of dollars of Vertex stock while the stock's value was artificially inflated. The
court granted CBPF motions for (1) appointment as lead plaintiff and (2) approval of its selection
of Scott+Scott LLP as lead counsel. Under the PSLRA, the Court must presume that the lead
plaintiff is the person, or group of persons, who (1) filed the complaint or made a motion to be
lead plaintiff, (2) has the largest financial interest in the relief sought, and (3) otherwise satisfies
Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 78u–4(a)(3) (B)(iii)(I). CBFP
otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure, because
(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions
of law or fact common to the class; (3) the claims or defenses of the representative parties are
typical of the claims or defenses of the class; and (4) the representative parties will fairly and
adequately protect the interests of the class. Fed.R.Civ.P. 23(a).
In re Facebook, Inc. IPO Securities and Derivative Litigation, 2012 WL 6061862 (S.D.N.Y.
Dec. 6, 2012).
In several class actions, investors alleged that social networking corporation and certain
of its officers violated Securities Act and Securities Exchange Act, and they alleged that owner
of stock exchange violated federal securities laws and committed negligence, with all of those
claims arising from corporation's initial public offering (IPO). Following transfer order from
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United States Judicial Panel on Multidistrict Litigation (MDL Panel), 2012 WL 4748325, motion
was made to separately consolidate actions and to appoint and approve lead counsel in
consolidated action. The court held that per Fed. R. Civ. 42, consolidating claims against
corporation and its officers was warranted consolidating securities and negligence claims against
stock exchange owner was warranted, and per Fed. R. Civ. P. 23, institutional investor group was
appropriately named lead plaintiff in consolidated action against corporation and its officers, law
firms selected by group was appropriately named as co–lead counsel, appointing claimant group
and negligence plaintiff as co–lead plaintiffs was warranted, and law firms representing claimant
class and negligence plaintiffs were appropriately named co–lead counsel.
In re Indymac Mortg.-Backed Sec. Litg., 286 F.R.D. 226 (S.D.N.Y. 2012).
Investors in mortgage pass-through certificates filed putative class action against issuer,
former officers and directors, and underwriters alleging materially misleading offering
documents in violation of Securities Act. Plaintiffs moved for class certification. The court held
that per Fed. R. Civ. P. 23, putative class of 714 members met numerosity requirement, common
questions predominated, and class action was superior method of resolving claims, even though
some members were from foreign countries. However, named plaintiffs did not have standing to
pursue Securities Act of 1933 claim for misleading prospectus based on purchase which had
occurred in secondary market.
Hohenstein v. Behringer Harvard REIT 1, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20, 2012).
Plaintiff filed a putative securities class action on behalf of all persons and entities that
purchased or otherwise acquired BH REIT securities during the period between February 19,
2003 to the present. Plaintiff moved to appoint the Weiss Group as lead plaintiff, and Block &
Leviton LLP as lead counsel, in accord with the rules set forth in the Private Securities Litigation
Reform Act of 1995 (“PSLRA”). Fed. R. Civ. P. 23(a) generally provides that a class action may
proceed if the following four requirements are satisfied: (1) the class is so numerous that joinder
of all members is impracticable; (2) there are questions of law or fact common to the class; (3)
the claims or defenses of the representative parties are typical of the claims or defenses of the
class; and (4) the representative parties will fairly and adequately protect the interests of the
class. In making its determination that a proposed Lead Plaintiff satisfies the requirements of
Rule 23, a court need not raise its inquiry to the level required in ruling on a motion for class
certification; instead a prima facie showing that the movant satisfies the requirements of Rule 23
is sufficient. The court granted both motions.
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In re Apollo Group Inc. Securities Litig., 2012 WL 1378677 (D. Ariz. Apr. 20, 2012).
In a consolidated class action proceeding, wherein lead Plaintiff, on behalf of a class of
persons who purchased Apollo common stock between February 27, 2004 and September 14,
2004, alleged that Defendants violated section 10(b) of the Securities and Exchange Act of 1934
and Securities and Exchange Commission Rule 10(b)–5. On January 16, 2008, a jury verdict was
entered in favor of lead Plaintiff. (Doc. 490). On August 4, 2008, this Court granted Defendants'
motion for judgment as a matter of law and entered judgment in favor of Defendants. (Doc. 560).
On June 23, 2010, the Ninth Circuit Court of Appeals reversed the judgment in favor of
Defendants and remanded with instructions that this Court enter judgment in accordance with the
jury's verdict. (Doc. 679–1). On April 6, 2011, this Court entered that judgment. (Doc. 695). The
Parties then engaged in mediation in an attempt to resolve outstanding disputes regarding claims
administration procedures. As a result of this mediation, the Parties ultimately agreed to a
settlement. Rule 23(e) provides that a class action shall not be dismissed or compromised
without court approval following “a hearing and on finding that the [the compromise] is fair,
reasonable, and adequate.” Fed.R.Civ.P. 23(e). On this basis the court granted the settlement.
F.D.I.C. v. Countrywide Fin. Corp., 2012 WL 5900973 (C.D. Cal. Nov. 21, 2012).
F.D.I.C. as receiver for Strategic Capital Bank (“SCB”) brought the instant lawsuit on
May 18, 2012 alleging that the registration statements and prospectuses filed with the Securities
and Exchange Commission regarding four residential mortgage-backed securities included
untrue and misleading statements of material fact, and that SCB has suffered a loss on the
certificates, in violation of Section 11 of the Securities Act of 1933. However, the court held the
FDIC's claim is time-barred. The FDIC cannot rely on tolling per American Pipe & Constr. Co.
v. Utah, 414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974) (“The commencement of a class
action suspends the applicable statute of limitations as to all asserted members of the class who
would have been parties had the suit been permitted to continue as a class action) becauase the
named plaintiff in the class action cited to in the Amended Complaint did not purchase any of the
same tranches that SCB purchased. As a result, the FDIC's claims had expired when it took
receivership on May 22, 2009, and tolling does not render its claims timely.
Katz v. China Century Dragon Media, Inc., 2012 WL 6644353 (C.D. Cal. Dec. 18, 2012).
Shareholders brought putative class action against corporation, certain of its former
officers and directors, its former auditor, and underwriters of its initial public offering (IPO),
alleging that defendants made false and incomplete statements about corporation's revenues,
income, and cash position in the prospectus and registration statement issued in connection with
the IPO. Shareholders moved for class certification, and auditor moved to dismiss underwriters'
cross-claims for indemnity and contribution. Per Fed. R. Civ. P. 23(a)(1), the court held that
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underwriters were not entitled to indemnity for their own alleged violations of the Securities Act,
underwriters' contribution claim was premature; numerosity prerequisite for class certification
was met; commonality prerequisite for class certification was met; typicality prerequisite for
class certification was met; questions of law or fact common to class members predominated
over any questions affecting only individual members; and class action was superior to other
available methods for adjudicating the controversy.
In re Thornburg Mortg., Inc. Sec. Litig., 2012 WL 6004176 (D.N.M. Nov. 26, 2012).
Investors brought consolidated class action against corporation, officers, directors, and
underwriters, alleging violation of the Securities Exchange Act and the Securities Act. Investors
moved for final approval of proposed settlement, plan of allocation, and certification of class for
settlement purposes, and counsel sought award of attorneys' fees and expenses. Court certified
the class for settlement per Fed. R. Civ. P. 23.
Compsource Okla., Bd. of Tr. of the Elec. Workers Local No. 26 Pension Trust Fund v. BNY
Mellon, N.A., 2012 WL 6864701 (E.D. Okla. Oct. 25, 2012).
The parties entered into a stipulation of settlement that provides for payment of
$280,000,000 and a complete dismissal with prejudice of the claims asserted against Defendant.
The Court found that the prerequisites for a class action under Federal Rules of Civil Procedure
23(a) and (b)(3) have been satisfied in that: the number of Class Members is so numerous that
joinder of all Class Members is impracticable; there are questions of law and fact common to the
Class; the claims of the Named Plaintiffs are typical of the claims of the Class they seek to
represent; the Named Plaintiffs and Class Counsel have at all times fairly and adequately
represented the interests of the Class; and a class action is superior to other available methods for
the fair and efficient adjudication of the controversy. Pursuant to Federal Rule of Civil
Procedure 23(b)(3), the Court has certified, for settlement purposes only the class.
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4. Venue, Pendent Jurisdiction Removal and Other Issues
Allstate Ins. Co. v. CitiMortgage, Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012).
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Plaintiffs commenced the lawsuit in New York state court alleging fraud and negligent
misrepresentation claims as well as claims under the Securities Act of 1933. Following removal
to federal court pursuant to 28 U.S.C. § 1334(b), defendants later amended their notice of
removal to add the Edge Act as an alternative basis for jurisdiction. Plaintiffs moved to remand.
According to the Court, while one of the defendant trusts may be liable to plaintiffs with respect
to some of the securitizations, it would not be liable based on the securitization that the parties
have identified that includes mortgages in a foreign territory. Accordingly, the court found that a
nationally chartered bank must have potential liability on claims arising out of transactions
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involving international or foreign banking, or banking in a dependency or insular possession of
the United States in order to support jurisdiction under the Edge Act. Because the trust was not
involved in any territorial banking transactions relating to the litigation, the Edge Act did not
apply.
Young v. Pacific Biosciences of Cal., Inc., Fed. Sec. L. Rep. P 96,800, 2012 WL 851509
(N.D.Cal. Mar. 13, 2012).
In related securities actions alleging claims under the Securities Act of 1933, two
plaintiffs moved to remand their cases to state court. Defendants countered that removal was
proper because the district court has original jurisdiction pursuant to 15 U.S.C. §§ 77v(a) and
77v(c). The two moving plaintiffs’ complaints each raised a federal question considering only
violations of federal securities laws. Accordingly, plaintiffs contend that their claims may not be
removed form state court due to the express restriction on removal contained in § 77v.
Defendants countered that the language of § 77b vested federal courts with exclusive jurisdiction
over “covered class actions” and the moving plaintiffs’ cases allow for their removal.
Recognizing that the issue has eluded definitive resolution by the appellate courts, the plaintiffs’
actions do not rely on state law they are not the type of covered class actions capable of being
removed pursuant to § 77p and therefore are prohibited from removal pursuant to § 77v.
Because defendant removed the two actions in contravention of these sections, the court granted
the motions to remand.
Desyatnikov v. Credit Suisse Group, Inc., Fed. Sec. L. Rep. P 96,777, 2012 WL 1019990
(E.D.N.Y. March 26, 2012).
An individual investor brought suit against an investment bank located in Switzerland
alleging various violations of federal securities law and New York state law arising out of a
purchase of securities transaction. The defendant bank moved to dismiss for lack of personal
jurisdiction. Plaintiff pleaded personal jurisdiction “upon information and belief” which the
court found to be deficient. The court further found the defendant presented sufficient credible
evidence to support finding that the exercise of jurisdiction over the defendant would be
improper. For example, the bank was located in Switzerland with its headquarters in Zurich and
it did not have a place of business located in the United States. In fact, plaintiff opened the
account with the bank’s Singapore branch and certified that he was not a resident of the United
States at the time of the account’s opening. Finally, the court dismissed for the additional reason
that the forum selection clause found in the asset management agreement between the parties
required litigation of all disputes in Singapore.
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Brady v. Kosmos Energy, 2012 WL 6204247 (N.D.Tex. July 10, 2012).
Plaintiff brought a putative class action asserting violations of the Securities Act of 1933
and no causes of action based on state law. Before the court was plaintiff’s motion to remand.
The complaint asserted claims on behalf of all purchasers of defendant’s common stock. The
question at issue was whether removal of the case from state court was proper under the 1933
Act, the PSLRA and the SLUSA because the parties disputed whether purported class actions
brought in state court but solely asserting claims under the 1933 Act are removable to federal
court under the SLUSA. Noting the question had been analyzed extensively by various courts
without consensus or a clear majority, the court found convincing the authorities finding that
removal is proper. In support, the court noted that this interpretation of the SLUSA is consistent
with Congress’s broad goal of making federal court the exclusive venue for the bulk of securities
class actions.
FDIC v. Banc of America Securities LLC, 2012 WL 2904310 (D. Nev. July 16, 2012).
Before the court was plaintiff FDIC’s motion for remand. Alleging violations of the
Nevada Securities Act and the Securities Act of 1933, the FDIC contended defendants made
several false statements in connection with the sale of pooled mortgage backed securities to
Seriurity Savings Bank with FDIC acting as a receiver. Defendant filed a motion for removal
arguing that the court had federal question jurisdiction as well as related-to bankruptcy
jurisdiction over the FDIC’s claims. Citing § 22(a) of the 1933 Act, the FDIC argued that
removal was inappropriate because that section provides that no case arising under the 1933 Act
and brought in a state court of competent jurisdiction shall be removed to any federal court. The
court disagreed with the FDIC finding remand inappropriate as a result of the plain text of the
statute. In addition, the court found it was proper to exercise related-to-bankruptcy jurisdiction
because defendants claim to have indemnity rights that could affect the rights or liabilities of
certain originators that are currently in bankruptcy proceedings. Rejecting the FDIC’s argument
that the defendants did not have direct indemnification rights against any bankruptcy debtors, the
court found that related-to-bankruptcy jurisdiction existed as an alternative basis for removal.
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012).
In this putative class action brought exclusively under the Securities Act of 1933,
plaintiffs moved to remand the case to state court. The issue at bar was whether, in light of the
1998 amendments to the SLUSA, class actions arising under the 1933 Act are now removable.
Pointing out neither the Supreme Court nor any Circuit Court of Appeals have examined the
issue, the court first analyzed other district courts reaching different conclusions. The Court
concluded that the effect of the amendments is that the non-removal provision in § 77v(a) no
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longer applies to a covered class action alleging claims under the 1933 Act and, consequently, a
class action brought under the 1933 Act is removable pursuant to 28 U.S.C. § 1441(a).
Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., No. 652996/2011, 2012 WL
5187653 (N.Y. Sup. Ct., N.Y. County Oct. 18, 2012).
This securities action arises from allegedly false and misleading statements made by
defendant to plaintiff leading to the sale of a security based upon a CDO arising from subprime
residential mortgages and two credit default swaps. After evaluating the factors considered in
evaluating a motion to dismiss for forum non conveniens, the court concluded defendants did not
meet their burden. Specifically, the court found defendant did not demonstrate that it would
suffer undue hardship by litigating the case in the e court. Important to the court was the fact
that the underlying transactions involved international companies and defendant’s headquarters
was located in the county of the court as are many of defendant’s witnesses. Under wellestablished
precedent, the ruling in the dismissed federal action had no bearing on whether New
York was an appropriate venue because the fact the underlying transactions were not considered
domestic securities transactions for the purposes of federal securities law.
Grail Semiconductor, Inc. v. Stern, 2012 WL 5903817 (S.D.Fla. Nov.26, 2012).
The lawsuit filed in Florida federal court arose from defendant’s attempts to transfer or
sell restricted stock shares in plaintiff to third parties. Plaintiff filed suit alleging defendant’s
attempted sales and transfers violated the Securities Act of 1933 and the Securities Exchange Act
of 1934. Defendant was a California citizen while plaintiff was a California corporation with its
principle place of business in Florida. Defendant never lived or worked in Florida nor owned
property in Florida. Defendant sought dismissal of the claim for lack of personal jurisdiction.
The court stressed that because the federal securities laws provided for worldwide service of
process, the applicable forum for personal jurisdiction purposes is the United States as a whole,
not Florida. Following an analysis of the defendant’s aggregate contacts with the nation as a
whole rather than his contacts with the forum state, the Court found that this was not one of the
highly unusual cases where inconvenience rose to a constitutional concern and therefore the
court denied defendant’s motion to dismiss. However, the plaintiff’s pendent state law claims
were dismissed because they had nothing to do with defendant’s allegedly unlawful stock
transfers.
Viking Global Equities LP et al. v. Porsche Automobil Holding SE et al., No. 650435/11, 2012
WL 6699216 (N.Y. App. Div., 1st Dep't Dec. 27, 2012).
In an action brought by plaintiff hedge funds for fraud and unjust enrichment against a
defendant company in which plaintiffs invested funds, defendants moved to dismiss the
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complaint on the ground of forum non conveniens. The only connections between the action and
the forum New York were phone calls between the plaintiffs in New York and a representative
of defendants located in Germany. The court also cited emails sent to plaintiffs in New York but
were generally disseminated to parties elsewhere, which allegedly contained the
misrepresentations of defendants’ intent to acquire a company. The court concluded that those
contentions failed to create the necessary substantial nexus with New York, given that the events
of the underlying transaction occurred entirely in a foreign jurisdiction. In addition, the court
noted that defendants’ stock was only traded on foreign exchanges and defendants’ witnesses
and documents were located in Germany.
Prudential Ins. Co. v. J.P. Morgan Securities, LLC, 2012 WL 6771977 (D.N.J. Dec. 20, 2012).
Plaintiffs moved to remand their state and federal law causes of action to New Jersey
state court. Their claims include state claims of common law fraud, fraudulent inducement,
aiding and abetting fraud, negligent misrepresentations as well as federal claims under the 1933
Securities Act. Defendants contended the action was removable because it is “related to”
pending bankruptcy proceedings arising out of the United States Code. Defendants further urged
the court to deny the plaintiff’s motion arguing there is jurisdiction under the Edge Act as the
suit arises out of international or foreign financial operations. Several of the $523 million in
residential mortgage backed securities purchased by plaintiffs were backed by entities that have
filed bankruptcy petitions. The court rejected defendants’ argument, reasoning the suit before
the court involved alleged untrue statements by the defendants; it did not involve alleged untrue
statements by the bankrupt originators. In addition, the court held the legal expense
indemnification agreements did not confer “related-to” jurisdiction. Finally, the court held that
abstention was inappropriate under the facts at issue because state law issues predominated and
also because the New Jersey RICO count was significantly different than the comparable federal
RICO statute.
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Brown v. China Integrated Energy, Inc., 2012 WL 1129909 (C.D. Cal. April 2, 2012).
In a putative securities fraud class action brought under the Securities Exchange Act of
1934, the court consolidated a number of state and federal court actions filed by plaintiffs
seeking to represent individuals who purchased defendant’s common stock. Defendant
subsequently moved to stay discovery in three derivative state court lawsuits pending in the
Delaware Court of Chancery pursuant to the Securities Litigation Uniform Standards Act
(SLUSA). Plaintiffs opposed the stay, contending the focus of the state derivative action was
different than the federal action because the federal action was based upon fraudulent statements
concerning the sales of securities while the state derivative action focused on allegations of
breach of fiduciary duty, waste and unjust enrichment by the company’s officers and directors.
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The court held that allowing discovery to proceed in the state court action would create
an unacceptable risk that the federal plaintiffs will obtain discovery before the court determines
the sufficiency of the pending motion to dismiss. The court first noted that some courts have
entered a stay even if the state plaintiffs are members of the putative federal class. The court
found plaintiffs’ argument unpersuasive because the gravamen of the statement and federal
allegations was the same: defendants misled investors about its financial stability and production
capacity and those investors suffered damage when the company’s decision was uncovered.
Accordingly, the court ordered that a stay should be granted because of the strong factual overlap
between the cases without ultimately opining on the burden of state court discovery factor
finding that it was not able to evaluate the risk of burdensome discovery the state court actions
pose at this time.
Gardner v. Major Automotive Companies, 2012 WL 1230135 (E.D.N.Y. April 12, 2012).
The plaintiffs brought claims alleging violations of the Securities Exchange Act of 1934
arising out of an allegedly improper management buyout transaction of a publicly traded
company defendant. Plaintiffs filed a motion to compel defendants to produce documents and
respond to interrogatories while defendants cross-moved to stay discovery pending resolution of
their motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil
Procedure. The issue at hand was whether the automatic stay provision of the PSLRA mandates
a stay of discovery pending the defendants’ dispositive motion. Plaintiffs argued that a stay was
inappropriate because the automatic stay provision of the PSLRA applies only to pre-answer
motions to dismiss and not to post-answer motions for judgment on the pleadings. Defendants in
turn argued that a motion for judgment on the pleadings is in essence a motion to dismiss.
Following an analysis of the dispute and the goals of the PSLRA, the court determined that the
automatic stay does apply to each of plaintiffs’ claims under the plain language of the statute.
In re MGM Mirage Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. June 21, 2008).
Plaintiffs alleging violations of the Securities Exchange Act of 1934 sought an order to
permit the lead plaintiffs to conduct limited disocovery concerning defendants’ alleged destroyed
documents. The plaintiffs asserted defendants knew about 500 boxes of highly relevant evidence
that was destroyed. Because of the destroyed evidence, plaintiffs claimed they were concerned
with the safety of the remaining relevant documents and accordingly moved the court for an
order lifting the mandatory stay under the PSLRA. Following an examination of the PSLRA
factors, the court found that lifting the stay was unwarranted. According to the court, plaintiffs’
proposed discovery plan was unspecified in scope and open-ended. Reasoning that destroyed
evidence cannot be undone by discovery, the court found the plaintiffs were not prejudiced by
the destruction in a manner that could be cured by conducting discovery at the stage of the case.
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SEC v. Bankatlantic Bancorp, 285 F.R.D. 661 (S.D. Florida June 26, 2012).
In a SEC enforcement action against a bank, its holding company and the chief executive
officer alleging false statements and omissions concerning the treatment of a real estate loan
portfolio, defendants moved to compel production of documents from the SEC. Defendants
sought discovery geared towards identifying any disclosure requirements that the SEC might
have in place regarding downgrading of individual loans and whether the SEC treats entities
receiving funds from the federal government differently than institutions such as the defendant
bank which accepted no such funds. The court concluded that those documents were not
relevant to the allegations against the defendants and thus the SEC was not required to produce
because none of the documents bore on the issue of materiality of any alleged omissions and
statements. According to the Court, unless the defendants knew of the SEC’s internal policies
and investigations and relied upon them in deciding to omit the information about the allegedly
known trend of downgrades of commercial loans, the SEC’s internal policies and investigation of
other entities had no bearing on the issue of scienter. And only the defendants—not the SEC—
can identify what they relied upon in making disclosure decisions relevant to the matter.
In re Dot Hill Sys. Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. Sept. 2, 2008).
In a securities putative class action brought by a shareholder against a corporation and its
officers, the defendants moved to stay discovery as to a state court derivative action under the
Securities Litigation Uniform Standards Act (SLUSA). The court first discussed how the
SLUSA amended the federal securities laws to empower a federal court to stay such discovery
proceedings in any private action in a state court. Recognizing Congress’s intent for a liberal
application of the SLUSA’s discovery stay provision, the court concluded a stay of the statecourt
derivative action was necessary. Although represented by different counsel in state and
federal court, the derivative plaintiffs were members of the putative federal class and therefore
their receipt of discovery would violate the PSLRA. Rejecting plaintiffs’ “undue prejudice”
argument, the Court ordered that the stay remain in effect until the court ruled on the pending
motion to dismiss. The court specifically noted that although the derivative plaintiffs owed a
fiduciary duty to the defendant and would not necessarily intend to circumvent the PSLRA, the
court remained concerned that some form of discovery would reach plaintiffs before this court
has decided the dismissal motion.
Louisiana Pacific Corp. v. Money Market 1 Institutional Investment Dealer, 285 F.R.D. 481
(N.D. Cal. Sept. 10, 2012).
In case where plaintiff investor brought suit against investment banks and a broker-dealer
alleging violations of federal and state securities laws in connection with Dutch auctions of
auction rate securities, defendants moved for a protective order and for an order requiring
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investor to adequately respond to discovery. Among other things, defendants moved to compel
answers to contention interrogatories served upon plaintiff. The court ordered supplemental
responses to contention interrogatories rejecting plaintiff’s claims that there was fact discovery
outstanding which should allow plaintiff more time to respond to the contention interrogatories.
The court further ruled on a number of disputes regarding the plaintiff’s designation of
confidential documents under the parties’ protective order.
SEC v. Kovzan, 2012 WL 4819011 (D. Kan. Oct. 10, 2012).
Resolving a discovery dispute, the district court rejected a magistrate judge’s ruling and
granted the defendants’ motion to compel. Through the motion in this SEC enforcement action,
defendant sought documents concerning the interpretation of and SEC interpretive guidance
regarding Item 402 of Regulation S-K, 17 C.F.R. § 229.402 which provides detailed instructions
for the disclosure of executive compensation in reports filed with the SEC. Defendants also
sought to compel a response to document requests suggesting any internal controls related to the
documentation of expenses that had no impact on the ability of a company to incorporate those
expenses into its financial statements. After producing several purportedly responsive
documents, the SEC refused to undertake any additional search. In rejecting the magistrate’s
initial ruling the district court found the documents sought would be relevant evidence to the
applicable standard of care in the industry. The court further ordered production of documents
relating to defendants’ fair notice defense.
In re GMR Securities Litigation, 2012 WL 5457534 (S.D.N.Y. Nov. 8, 2012).
The plaintiffs moved to lift the Private Securities Litigation Reform Act of 1995
discovery stay in order to access certain of defendants’ documents. Plaintiffs contended that
absent the lifting of the stay, they would be the only stakeholders without access to the relevant
documents. According to the court, whether other individuals had access to the documents
sought was not, however, controlling for purposes of determining prejudice to plaintiffs. Instead,
plaintiffs must demonstrate that claimants in other ongoing proceedings possessed the documents
placing them at a marked disadvantage in the litigation. Here, however, the court found no
prejudice because there were no other claimants competing with the plaintiffs’ claims and thus
the automatic stay was not prejudicial.
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P. Failure to Supervise
1. SEC Enforcement Actions
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In re Application of World Trade Financial Corp., Release No. 66114, 2012 SEC LEXIS 56
(Jan. 6, 2012).
Applicants World Trade Financial Corporation, Michel, its president, and Adams, its
trade desk supervisor, appealed from a FINRA disciplinary action, which sanctioned them for
supervisory violations arising from the sale of securities without registration or an available
exemption in violation of Section 5 of the Securities Act of 1933 and NASD Conduct Rule 2110.
FINRA found that World Trade, Michel, and Adams failed reasonably to supervise one of the
firm’s registered representatives, and that World Trade and Michel failed to maintain adequate
written supervisory procedures in violation of NASD Conduct Rules 3010 and 2110. FINRA
fined World Trade $30,000, fined Michel $30,000 and suspended him for 45 calendar days, and
fined Adams $20,000 and suspended him for 30 business days.
There was no dispute that Michel and Adams shared responsibility for supervising the
Firm’s registered representatives’ trading activities, and that, as the firm’s president, Michel was
responsible for developing the Firm’s written procedures. The SEC found that Applicants
“ignored key ‘red flags’ that should have prompted them to investigate” whether the
representative was participating in distribution of unregistered securities. Applicants were in
possession of information which should have prompted them to inquire further, but none did.
The SEC found that the firm’s written procedures were also deficient. Even though a large
portion of the firm’s business comprised unregistered stock sales on the Pink Sheets, the Firm’s
procedures were not sufficiently designed to supervise this type of business. The Supervisory
Manual lacked meaningful guidance setting forth “reasonable inquiry” procedures for registered
representatives to follow when customers sought to sell large amounts of an unknown stock to
the public without registration. Although World Trade had minimal procedures in place for
selling “control” or “restricted” stock, these procedures erroneously assumed that such stock
could be easily identified by checking whether the stock certificate bore a restrictive legend. The
SEC sustained the result and the sanctions entered by FINRA without modification.
In re Axa Advisors, LLC, Release No. 34-66206, 2012 SEC LEXIS 206 (Jan. 20, 2012).
The SEC charged the firm with failing reasonably to supervise one of its registered
representatives with a view to preventing and detecting his violations of the federal securities
laws during a four year period. The representative fraudulently induced customers to redeem
securities held at the firm under the false representation that the proceeds from such redemptions
would be invested in other securities. Instead, the representative misappropriated the funds.
This conduct was criminal, in that the representative pleaded guilty to mail fraud, wire fraud, and
money laundering and was sentenced to 46 months in prison followed by three years of
supervised probation. The SEC found that the firm did not establish adequate procedures for the
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eview of redemptions of variable annuities occurring in the accounts of the representative’s
customers, particularly in light of the fact that the redemptions were partial redemptions.
Further, the firm failed to have reasonable procedures to supervise registered representatives who
were on leave for an extended period of time, including absences due to disability. The
representative at issue was “disabled” several times during the period the scheme was operating,
during which times he was not in the office.
In settlement of the matter, the firm consented to a censure and a civil penalty of
$100,000. The firm also represented that it had retained an Independent Compliance Consultant
having substantial regulatory and industry experience to evaluate and recommend enhancements
to its supervisory and compliance practices. The SEC noted that in considering the settlement, it
considered the remedial acts undertaken by Respondent to make improvements to its supervisory
system. The SEC also considered the cooperation afforded to its staff and criminal authorities in
their investigation of this matter and the firm’s prompt reimbursement of all customer losses.
Indeed, shortly after the representative was terminated, the firm contacted all the representative’s
clients to assure that no other substantive concerns were identified.
In re Application of Midas Sec., LLC, Release No. 34-66200, 2012 SEC LEXIS 199 (Jan. 20,
2012).
Applicants Midas Securities and Lee, the firm’s president and CEO, appealed from a
FINRA disciplinary finding that the firm violated Section 5 of the Securities Act and NASD
Conduct Rule 2110 by unlawfully selling securities without a registration statement in effect or
an available exemption. FINRA also found that Applicants violated NASD Conduct Rules 3010
and 2110 by failing to maintain adequate written supervisory procedures and to supervise
reasonably the firm’s registered representatives who engaged in unregistered sales. FINRA fined
Midas $80,000, fined Lee $50,000, and suspended Lee in all principal capacities for two years.
The Commission agreed with FINRA’s determination that Midas lacked an adequate
supervisory system. Midas’s system of supervision consisted solely of relying on transfer agents
and clearing firms to ensure that its unregistered sales complied with the Securities Act, which
was unreasonable. The Commission emphasized that the representatives who sold the
unregistered stock had minimal experience in the securities industry and therefore should have
been “under close surveillance.” Further, although dealing with unregistered securities sales in
the over-the-counter markets made up a significant amount of the firm’s business, Midas’s
written procedures were “poorly designed” to deter and detect violations of the Securities Act’s
registration requirements. The procedures lacked a listing of specific risk factors that might have
assisted registered representatives in recognizing an unlawful distribution or guidance to
determine whether any exemptions from registration requirements applied. The procedures also
failed to enable supervisors to identify sales that should be investigated or halted.
Respondent Lee claimed he delegated his authority with respect to supervision of trading
and registered representatives to another employee. The SEC found that the record did not
support a finding that he effectively or reasonably so delegated his authority, in light of, among
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other things, credible testimony from the other employee that he was not the responsible
supervisor and clear identification in the firm’s Supervisory Manual that Lee, not the other
employee, was reasonable for supervising the trading department and approving transactions in
restricted securities. The firm withdrew its membership from FINRA. The SEC found that
FINRA’s two-year suspension of Lee “in all principal capacities” was not excessive or
oppressive. As such, FINRA’s action was sustained in all respects.
In re 1st Discount Brokerage, Inc., Release No. 33-66212A, 2012 SEC LEXIS 220 (Jan. 23,
2012).
The SEC charged the firm and Fisher, the firm’s executive vice president, with failing
reasonably to supervise one of the firm’s representatives with a view to preventing and detecting
a fraudulent Ponzi scheme. The SEC found that the firm did not have policies and procedures
reasonably designed to detect and prevent violations of the securities laws by its registered
representatives. Specifically, the representative maintained a “doing business as” account, which
he used to collect money from customers of the firm, and through which he operated his Ponzi
scheme. The representative also had a history of insufficient or absent signage associating his
place of business with the firm. The firm, however, did not require compliance auditors to
review work papers and reports of previous audits, from which they might have identified the
recurring issue with signage, which reflected the representative’s desire to conceal from his
customers his association with the firm to prevent customer complaints to the firm. Further,
while the firm did have procedures calling for unannounced audits, it failed to conduct any in the
office where the representative resided.
Fisher was responsible for having a system to implement the firm’s policies and
procedures regarding the periodic review of all activities of the firm’s registered representatives.
The SEC found that such a system was not developed and that if it had been, the Committee
would have found the red flags discussed above, together with a customer complaint of
unauthorized trading and a history of declining commissions, that would have prompted further
investigation into the representative’s business. Thus, Fisher failed reasonably to supervise the
representative with a view to preventing and detecting his violative conduct. In settlement of the
charges, the firm consented to a censure and agreed to pay a civil penalty of $40,000. Fisher
consented to a suspension from association in a supervisory capacity with any broker, dealer, or
investment adviser with the right to reapply for association in a supervisory capacity after nine
months, and agreed to pay a civil penalty of $10,000.
In re Urban, Release No. 34-66259, 2012 SEC LEXIS 346 (Jan. 26, 2012).
The Division of Enforcement appealed an initial decision by an ALJ dismissing failure to
supervise charges against Urban. While the ALJ determined that Urban was a supervisor, she
dismissed the proceeding against Urban because she found that Urban did not fail to exercise that
supervision reasonably. On appeal to the Commission, the two Commissioners hearing the case
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were evenly divided, with three not participating in the decision, as to whether the allegations in
the Order Instituting Proceedings against Urban had been proven. As such, the initial decision
was deemed to be of no effect, as part the Commission’s Rules of Practice, and the case against
Urban was dismissed.
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In re Brown, Release No. 34-66469, 2012 SEC LEXIS 636 (Feb. 27, 2012).
Respondents appealed the decision of an ALJ, which found, among other things, that a
Respondent Collins, who was not a primary violator, failed reasonably to supervise sales
activities of another salesperson by allowing him to sell variable annuities with a suspended
license. He was also found to be the cause of the salesman’s antifraud violations and aided and
abetted the firm’s books and records violations by falsifying customer account forms. The ALJ
found that it was in the public interest to bar Collins with a right to reapply in a non-supervisory
capacity after two years, to impose a cease and desist order, a civil penalty of $310,000, and
disgorgement. On appeal the SEC noted that Collins allowed the other salesperson to conceal
and circumvent Florida’s licensing restrictions by falsifying customer account forms to indicate
that he, not the unlicensed salesperson, was the customers’ account representative. Moreover,
the SEC argued Collins, whose sole supervisory obligation was over the salesperson, continued
to allow the salesperson to sell variable annuities even upon learning first of a “mishap” with his
Massachusetts license, and later that Florida had suspended his license for an unauthorized
transaction and misrepresentations. The evidence established that there were insufficient
documents in the office, including missing files, from which adequate supervision could be
conducted. In sum, the SEC stated that Collins “was in a position to stop Brown’s misconduct,
but his complete failure to supervise Brown, including falsifying documents that misled his
employer and the issuing insurance companies about what Brown was doing, created an
environment where Brown could defraud his clients with impunity.” The Commission imposed
the sanctions recommended by the ALJ.
In re Rizzo, Release No. 34-67479, 2012 SEC LEXIS 2299 (July 20, 2012).
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The SEC charged Respondents Rizzo and Hornbogen with failing reasonably to supervise
a representative who, while acting as an investment advisor, misappropriated $7 million from
fifteen clients. The SEC alleged that Respondents failed to investigate numerous red flags which
would have indicated misconduct. Specifically, Respondents were alerted to suspicious
transactions in the representative’s client accounts, including a forged client signature.
Respondents received daily emails from the firm’s operations department listing large
withdrawals from client accounts, but did not investigate or follow-up. At one point, after being
contacted about certain customer transactions being initiated by the representative, Rizzo
developed concerns that the representative might be operating a Ponzi scheme, but took
insufficient steps to investigate the matter. When Respondents received advice from the firm’s
attorney to contact all clients whose accounts contained the suspicious transactions, they did not
follow the advice. As characterized by the SEC, Respondents “did virtually nothing” to follow
up on the red flags and other indications of fraud for more than 5 years, permitting the
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epresentative’s fraud to continue. In settlement of the charges, Respondents consented to be
barred from associating in a supervisory capacity with any broker, dealer, investment adviser,
municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical
rating organization. Rizzo agreed to pay disgorgement of $35,079, prejudgment interest of
$7,731, and civil penalties of $130,000. Hornbogen agreed to pay disgorgement of $15,592,
prejudgment interest of $3,467, and civil penalties of $25,000 (her financial obligations having
been limited by her demonstrated inability to pay).
In re JP Turner & Co., LLC, Release No. 34-67808, 2012 SEC LEXIS 2852 (Sept. 10, 2012).
The firm and Mello, its then president, were charged with failing reasonably to supervise
three registered representatives with a view to preventing and detecting their violations of federal
securities laws. The SEC alleged that during a two year period, the registered representatives
“churned” the accounts of seven customers by engaging in excessive trading. Mello, as the
firm’s president, was ultimately responsible for establishing the firm’s supervisory policies and
procedures, and a system to implement these policies and procedures designed to prevent and
detect violations. While the firm had a monitoring system to identify actively traded accounts
based primarily on the level of fees and commissions as a percentage of account equity, the
system did not adequately provide for the methods by which supervisors would recognize or
address anomalies or take meaningful action to investigate the trading activity.
In settlement of the charges, the firm consented to a censure and agreed to pay $200,000
in disgorgement and a $200,000 civil penalty. The firm also agreed to retain an independent
consultant to review the firm’s written supervisory policies and procedures designed to prevent
and detect churning, including review of the firm’s monitoring system for actively traded
accounts and related procedures. Mello consented to a suspension from association in a
supervisory capacity with any broker, dealer, or investment adviser for a period of five months,
and agreed to pay a civil penalty of $45,000.
In re Advanced Equities, Inc., Release No. 34-67878, 2012 SEC LEXIS 2958 (Sept. 18, 2012).
Keith Daubenspeck was charged with a failure to respond to red flags that indicated that
certain of the firm’s principals and brokers were making misstatements to investors in
connection with private equity offerings, and therefore failed reasonably to supervise with a view
toward preventing and detecting their violations of federal securities laws. The underlying
conduct involved misstatements regarding financial information and business prospects of the
issuer company. The SEC found that Daubenspeck supervised the principal who was at the
center of the misstatements and had the ability and authority to affect his conduct, including
hiring and firing authority. Daubenspeck also had final approval for all management decisions
within the firm, and directly supervised the firm’s investment bankers/brokers. Because
Daubenspeck was also involved with communications with the issuers in connection with due
diligence on the offerings, he was in a position to know the true facts regarding the companies’
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finances and performance. Thus, when he participated in internal sales calls he was in a position
to recognize misstatements, which constituted a red flag that such information might be
disseminated further to investors. Daubenspeck, however, did not take reasonable steps to
correct the misstatements or prevent such statements from being repeated. Had he responded to
the red flags, it was likely that he could have prevented and detected certain of the violations of
the antifraud provisions.
Although the firm was not charged with failure to supervise, it consented to retain an
independent consultant to review and recommend changes to procedures regarding sales
practices, due diligence practices, and supervision. For other violations, the firm consented to a
civil penalty of $1,000,000. Daubenspeck consented to a suspension from association in a
supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer or
transfer agent for a period of twelve months, and agreed to pay a $50,000 civil penalty.
In re Hold Brothers On-Line Inv. Servs., LLC, Release No. 34-67924, 2012 SEC LEXIS 3029
(Sept. 25, 2012).
This settled administrative proceeding against respondent Hold Brothers and various
individual employees and officers of the firm arose from the SEC’s allegation that the firm was
engaged in a manipulative trading strategy typically referred to as “layering” or “spoofing.” The
SEC alleged that the firm and Steve Hold, its president, failed adequately to supervise, and in the
case of red flags, investigate, the manipulative trading by the firm’s overseas traders.
Specifically, three individual Respondents, Steve Hold, Vallone, and Tobias, became aware of
red flags, including several emails, suggesting that the overseas traders who traded through Hold
Brothers were engaging in manipulative trading. The SEC found that these individual
Respondents recklessly continued to provide traders with buying power and/or access to the U.S.
markets, and failed to conduct adequate follow-up despite these warnings.
In settlement of the charges, Steve Hold consented to be barred from association with any
broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent,
or nationally recognized statistical rating organization; prohibited from serving or acting as an
employee, officer, director, member of an advisory board, investment adviser or depositor of, or
principal underwriter for, a registered investment company or affiliated person of such
investment adviser, depositor, or principal underwriter; and barred from participating in any
offering of penny stock, including: acting as a promoter, finder, consultant, agent or other person
who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in
any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock
with the right to apply for reentry after two years. Steve Hold also consented to be barred from
association in a supervisory capacity with any broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating
organization, with the right to apply for reentry after three years. Steve Hold also agreed to pay a
civil penalty of $75,000. For all its violations, including underlying violations not described
here, the firm consented to a censure and agreed to pay disgorgement of over $600,000, plus a
civil penalty of $1,896,785.22, including interest.
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In re Biremis Corp., Release No. 34-68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).
The SEC charged Respondents Beck, the firm’s President and CEO, and Kim, the firm’s
vice president, with failing reasonably to supervise certain of the firm’s associated persons who
engaged in a manipulative trading practice known as “layering” on U.S. securities markets. The
associated persons were day traders who repeatedly used the firm’s order management system to
trade. The SEC alleged that despite receiving indications that layering was occurring, which
constituted “red flags” of the misconduct, Beck and Kim failed to establish procedures or a
system for applying procedures that would reasonably be expected to prevent and detect the
traders’ manipulative trading, and despite having supervisory authority over the associated
persons, failed to respond to the red flags. In settlement of the charges, Beck and Kim consented
to be barred from association with any broker, dealer, investment adviser, municipal securities
dealer, or transfer agent, and barred from participating in any offering of a penny stock,
including: acting as a promoter, finder, consultant, agent or other person who engages in
activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny
stock, or inducing or attempting to induce the purchase or sale of any penny stock. In addition,
Beck and Kim agreed to each pay a civil penalty of $250,000.
2. FINRA Enforcement Actions
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Department of Enforcement v. Daniel James Gallagher, Complaint No. 2008011701203, 2012
FINRA Discip. LEXIS 61 (Nat’l Adj. Council, Dec. 12, 2012).
Gallagher appealed a hearing panel decision issued in 2011, which determined that he
violated various FINRA rules, including acting as an unregistered principal, failing to respond to
questions during on-the-record testimony, failing to disclose a complaint and judgment on his
Form U-4, circumventing heightened supervision requirements, and failing to adopt a
supervisory control system and conduct an annual certification of the supervisory control system.
For the most severe of his violations, Gallagher was barred. The panel, however, noted that
sanctions of less than a bar would have been attributable to lesser violations, including his failure
to adopt and certify the supervisory system.
The National Adjudicatory Council (“NAC”) generally upheld the panel’s decision. With
respect to the supervisory violations, the NAC affirmed the panel’s finding that Gallagher failed
to adopt a supervisory control system for the member firm he controlled as its president, and
failed to conduct an annual certification of such system. Specifically, the NAC found that the
record supported the finding that the firm did not have any policies or procedures in place to
monitor, review or supervise the firm’s managers, producing mangers or supervisors.
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The NAC rejected Gallagher’s argument that he did not control or manage the firm,
finding that from his assumption of the title of “president” he was responsible for executing or
delegating supervisory functions.
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Department of Enforcement v. Hedge Fund Capital Partners, LLC, and Howard G. Jahre,
Complaint No. 2006004122402, 2012 FINRA Discip. LEXIS 42 (Nat’l Adj. Council, May 1,
2012).
Respondents appealed a hearing panel decision issued in 2011, which found that the firm
and Jahre, its president and majority owner, violated various FINRA Rules and provisions of the
Securities Exchange Act of 1934, in connection with the dissemination of exaggerated,
misleading and unbalanced sales material, as well as registration, recordkeeping, and supervisory
violations. The panel expelled the firm and barred Jahre in all capacities.
With respect to supervisory violations, the panel had found that respondents failed to
establish and maintain an adequate supervisory system with respect to retention of email and
instance message retention, and by failing to hold annual compliance meetings. The NAC
upheld the panel’s findings, noting that although the firm had provisions in its written
supervisory procedures regarding the retention of email and instant messages, the firm had no
actual retention system in place for a period of more than a year, and that no one at the firm
performed a semi-annual review of the firm’s email and message archiving process as required
by the procedures. Moreover, Jahre had knowledge that a retention system was required, and as
the firm’s president was responsible for supervision, in the absence of any effective delegation of
that responsibility to someone else.
Department of Enforcement v. Hugh Vincent Murray III, Discip. Proc. No. 2008016437801,
2012 FINRA Discip. LEXIS 64 (Office of Hearing Officers, Oct. 25, 2012).
Murray, the president and compliance officer of Forsyth Securities, Inc. was charged with
failing to supervise three registered representatives – two in connection with failure to file
required amendments to their Forms U4, and the third with respect to allegedly excessive trading
in discretionary accounts.
The hearing panel found that Murray failed to supervise the first representative, who had
plead guilty to a criminal charge of failing to pay child support. The panel rejected Murray’s
argument that he misunderstood the nature of the guilty plea as not being a felony, noting that he
should have investigated further, but in any event, he later learned definitively that the conviction
was a felony and still waited months to ensure that the Form U4 was updated.
The hearing panel found that Murray also failed to supervise the second representative,
who was charged with felony DUI, and which charge should have been reported on an amended
Form U4 within 30 days. The panel rejected Murray’s argument that the representative was not
forthcoming regarding information about the status of the matter, because Murray was, in fact,
familiar with the existence of the arrest and should have taken “more decisive measures” to keep
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current on the status, and in any event, neglected to report for nearly a month even after he
received a copy of the representative’s arraignment record.
The hearing panel, however, found that Murray adequately supervised the discretionary
trading by the third representative. The panel disagreed with the staff’s view that the frequency
of trading in the accounts was a red flag. Rather, the panel found that Murray monitored both
accounts closely. Notably, the panel pointed out that a decline in value in one of the accounts,
during a declining market, did not demonstrate that trading was excessive.
Murray was suspended in all supervisory capacities for 90 days and ordered to re-qualify
by examination as a principal before serving in any supervisory capacity. He was also required
to pay costs of $4,600, but was not fined.
Matters of Citigroup Global Markets, Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC,
Merrill Lynch, Pierce , Fenner & Smith, Inc., Morgan Stanley & Co., FINRA Press Release,
available at: http://www.finra.org/Newsroom/NewsReleases/2012/P197554 (Dec. 27, 2012).
FINRA reported that it entered into Letters of Acceptance, Waiver and Consent with five
member firms, fining them a total of more than $3.35 million for allegedly unfairly obtaining the
reimbursement of fees they paid to the California Public Securities Association (Cal PSA) from
the proceeds of municipal and state bond offerings. According to FINRA, the firms violated
MSRB rules regarding fair dealing and supervision in connection with obtaining reimbursement
for such voluntary payments to pay the lobbying group. The firms were also required to pay a
total of $1.13 million in restitution to certain issuers in California.
Without admitting nor denying the allegations, the firms were sanctioned in the following
amounts:
• Citigroup – $888,000 fine and $391,106 in restitution
• Goldman Sachs – $568,000 fine and $115,997 in restitution
• JP Morgan – $465,700 fine and $166,676 in restitution
• Merrill Lynch – $787,000 fine and $287,200 in restitution
• Morgan Stanley – $647,700 fine and $170,054 in restitution
According to FINRA, the firms failed to establish reasonable procedures to govern the
conduct of their employees with respect to such reimbursements. In addition, four of the firms,
Citigroup, Goldman, Merrill Lynch and Morgan Stanley, were cited for failing to have adequate
systems and written supervisory procedures reasonably designed to monitor how municipal
securities associations used the funds that the firms paid.
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Matter of Pruco Securities, LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P197541 (Dec. 26, 2012).
FINRA reported that it entered into a Letter of Acceptance, Waiver and Consent with
Pruco Securities, LLC, in connection with conduct surrounding pricing of mutual fund orders
that were placed by facsimile or mail and received inferior prices. FINRA alleged that the firm
had an inadequate supervisory system and written procedures to ensure that the orders received
the correct price. According to FINRA, Pruco’s employees believed, mistakenly, that they could
use “best efforts” of up to two business days to process mutual fund paper orders. In addition to
findings regarding the supervisory systems and procedures, FINRA noted that Pruco failed to
provide its employees with any training or training materials regarding paper mutual fund pricing
requirements. Without admitting or denying the charges, Pruco consented to pay $10.7 million
in restitution, plus interest, to customers, together with a $550,000 fine. Notably, in determining
the sanction, FINRA took into consideration that the pricing issue was self-reported by the firm
after an internal review, and that the firm revised its policies and procedures and made restitution
to the affected customers.
Department of Enforcement v. Wedbush Securities, Inc. and Edward William Wedbush, Discip.
Proc. No. 20070094044, 2012 FINRA Discip. LEXIS 59 (Office of Hearing Officers, Aug, 2,
2012).
The firm was charged with failure to file, late filing and inaccurate registration filings
(i.e., forms U-4, U-5, RE-3 and statistical reports) with FINRA and NYSE. The firm and
Edward Wedbush, the firm’s president, were charged with failure to supervise the registration
filings. After a hearing, the hearing panel found that both the firm and Edward Wedbush had
failed to supervise. It found that the fact that reporting problems persisted over several years was
“sufficient to establish that supervision of the reporting process was inadequate.” It also cited
Edward Wedbush’s role as head of the compliance department for about a year, and as president
of the firm thereafter, in finding that he failed to supervise.
The firm was fined $100,000 for its supervisory violations, the hearing panel having
found that the violations were “egregious.” Edward Wedbush was fined $25,000 and suspended
from all supervisory activities, other than the supervision of trading and order entry, for 31 days.
Department of Market Regulation v. Robert N. Drake, Discip. Proc. No. 20060053785-02, 2012
FINRA Discip. LEXIS 48 (Office of Hearing Officers, May 3, 2012).
Respondent, who was Chief Compliance Officer of Kuhns Brothers Securities
Corporation, was charged with failure to supervise in connection with excessive markups and
markdowns on corporate bond transactions and the firm’s failure to file timely and accurate trade
reporting of such transactions. After a hearing, Respondent was found to have violated NASD
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Rule 3010 and 2001, by failing to prevent the firm from charging excessive and unfair markups
and markdowns in 30 corporate bond transactions. In addition, he was deemed responsible for
the failure to establish, maintain and enforce written supervisory procedures to comply with
reporting obligations on TRACE. The hearing panel noted that the trader who charged the
markups and markdowns had a prior disciplinary history and should have been subject to greater
oversight, but none of his orders were reviewed before they were executed. Further, the firm had
the same markup policy for equity and debt, incorrectly presuming that markups of 5% or less
were within a safe harbor. With respect to the lack of TRACE reporting, the panel found that the
firm lacked any procedures for TRACE reporting, and rejected Respondent’s excuse that the firm
had purchased "boilerplate" procedures from a company that it eventually fired.
As a result, Respondent was barred from association with a member firm in a supervisory
capacity.
Matter of Hudson Valley Capital Management, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P196921 (Nov. 8, 2012).
FINRA announced that it expelled member firm Hudson Valley Capital Management and
barred its Chief Executive Officer, Mark Gillis, for defrauding Hudson’s clearing firm and its
customers by using their funds and securities to cover losses caused by Gillis' manipulative day
trading. Specifically, Gillis used the firm’s average price account to day trade; when he made
profits he withdrew the proceeds and when he incurred losses, he covered them by making
unauthorized trades in customer accounts. According to FINRA, Gillis lied to his customers and
FINRA staff in an attempt to conceal his conduct. FINRA charged the firm with failing to
supervise Gillis' trading at the firm, thereby enabling his fraudulent trading scheme.
Matter of David Lerner Associates, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P191729 (Oct. 22, 2012).
David Lerner Associates, Inc. and its founder, president and CEO David Lerner
submitted in Offer of Settlement in a pending disciplinary proceeding before FINRA’s Office of
Hearing Officers to resolve charges that they engaged in misrepresentations, unsuitable sales
transactions and excessive markups in connection with the sales of shares in a non-traded REIT,
as well as charging unfair prices on municipal bonds and collateralized mortgage obligations. In
addition, the firm and Lerner were charged with supervisory violations.
In settling the matter, the firm agreed to pay $12 million in restitution to affected
customers and paid a fine of $2.3 million. Lerner agreed to pay a fine of $250,000, and accepted
a one-year suspension from the securities industry, followed by a two-year suspension from
association in a principal capacity.
The firm agreed to retain an independent consultants to review and propose changes to its
supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and
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municipal bonds. The firm also agreed to revise its advertising procedures, and for a period of
three years will videotape sales seminars attended by 50 or more people and will pre-file all
advertisements and sales literature with FINRA at least 10 days prior to use.
Matter of Guggenheim Securities, LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P187302 (Oct. 11, 2012).
FINRA charged Guggenheim Securities, LLC with failing to supervise two traders who
engaged in activities to hide a trading loss in collateralized loan obligations (“CLOs”). FINRA
determined that the traders deceived their customer and supported their scheme through the use
of inaccurate books and records. Specifically, as a result of a failed trade, the firm’s CDO desk
acquired a large quantity of CLOs, which it could not sell. The firm’s traders convinced a hedge
fund customer to buy the position at a significantly higher price than the customer had agreed to
pay, by making certain false representations, including falsifying order tickets to conceal the true
price of the position. The traders thereafter engaged in an elaborate system of misrepresentations
and falsification of records to satisfy the customer’s questions regarding seemingly anomalous
prices and assuage other suspicions. FINRA found that the firm had failed to supervise in that it
did not adequately review the CDO desk's trades, as well as documentation of the transactions,
and the traders' email communications.
The firm concluded the settlement by accepting a fine of $800,000. The firm also agreed
to retain an independent consultant to review and make recommendations concerning the
adequacy of the firm’s supervisory procedures.
Matter of Hold Brothers On-Line Investment Services, LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P178687 (Sept. 25, 2012).
FINRA announced a joint settlement, together with NYSE Arca, Inc., The NASDAQ
Stock Market LLC, NASDAQ OMX BX, Inc., and BATS Exchange, Inc. with Hold Brothers
On-Line Investment Services, LLC in connection with charges that the firm engaged in
manipulative trading and failing to comply with anti-money laundering rules. The charges
stemmed from the firm having allowed a significant volume of overseas day trading to pass
through its systems on a regular basis without supervising the business properly. According to
FINRA, the firm “was actively involved in running the operations of these foreign entities, yet
turned a blind eye to their manipulative trading activities.” Certain of the firm’s affiliates used
sponsored access relationships with the firm to connect to exchanges in the U.S. and manipulate
the prices of securities, using such techniques as “spoofing” and “layering” to induce other
market participants to provide favorable executions that would not have been available in the
absence of the manipulative activities. FINRA also found thousands of instances where the
traders engaged in pre-arranged trades and wash sales.
FINRA charged the firm with a failure to establish and maintain a supervisory system and
written procedures that were reasonably designed to supervise the firm's trading activities.
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FINRA noted that numerous "red flags" indicating suspicious trading existed, but were not
detected or investigated. FINRA also noted that the firm’s AML policies, procedures and
controls were inadequate, including the fact that they failed to trigger reporting of suspicious
activity. Despite a high volume of trading, the firm’s monitoring for suspicious trading for AML
trading was not automated. Moreover, in certain instances where suspicious or manipulative
trading was identified by the firm’s compliance department, the activity was not brought to the
attention of the firm’s AML compliance officer, and therefore the firm never considered filing a
suspicious activity report.
As part of the disciplinary action, FINRA and the exchanges also ordered Hold Brothers
to retain an independent consultant to conduct a comprehensive review of the adequacy of the
firm's policies, systems and procedures, and training related to AML, trading, day trading,
compliance with SEC Rule 15c3-5, and the use of foreign traders. The firm consented to a fine
of $5.9 million.
Matter of Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P177007 (Sept. 24, 2012).
Merrill Lynch consented to a fine of $500,000 for supervisory failures in connection with
the firm’s failure to make required reports and disclosures regarding customer complaints and
arbitration claims. FINRA found that the deficiencies lasted for several years. Specifically,
FINRA found that the firm failed to adequately train and supervise its personnel who were
responsible for customer complaint tracking and reporting, and lacked systems to identify the
high volume of customer complaints that were not being acknowledged or reported as required.
Matter of Rodman & Renshaw LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P154856 (Aug. 22, 2012).
FINRA announced that it reached a settlement with Rodman & Renshaw LLC, and its
former CCO, William A. Iommi Sr., for supervisory and other violations related to the
compliance with rules governing the scope of permissible interaction between the firm's research
and investment banking functions. Specifically, the firm’s supervisory system was found to be
inadequate in that it permitted at least two incidents to occur where a research analyst was
permitted to participate in solicitation of investment banking services. In addition, FINRA found
that the firm had compensated a research analyst for his contribution to the firm's investment
banking business and failed to prevent the firm’s CEO from simultaneously engaging in
investment banking activities, while having influence or control over research analysts'
evaluations and compensation. The firm consented to a fine of $315,000, and Rodman's was
fined $15,000, suspended from acting in a principal capacity for 90 days and must re-qualify as a
general securities principal.
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Matter of Biremis Corp. f/k/a Swift Trade Securities USA, Inc., FINRA Press Release, available
at: http://www.finra.org/Newsroom/NewsReleases/2012/P127253 (July 31, 2012).
FINRA announced that it reached a settlement with Biremis, Corp., formerly known as
Swift Trade Securities USA, Inc., and barred its President and Chief Executive Officer, Peter
Beck, for supervisory violations related to their failure to detect and prevent manipulative trading
activities and their failure to implement an adequate anti-money laundering program, as well as
other violations.
Specifically, FINRA found that, among other things, the firm failed to have policies and
procedures designed to detect and prevent layering and other manipulative activity designed to
affect the closing price of securities traded on U.S. markets. Even though the firm’s only
business was to execute transactions on behalf of day traders around the world, the firm and
Beck also failed to implement an adequate anti-money laundering program, failing to detect
suspicious activities and file suspicious activity reports. In addition, the individual supervising
the firm’s AML compliance program was unqualified and untrained and the firm failed to
adequately train its employees regarding AML obligations.
Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P127129 (June 21, 2012).
FINRA announced a settlement with Merrill Lynch, Pierce, Fenner & Smith, Inc. in
connection with supervisory failures that resulted in overcharging customers for fees in advisory
accounts, and for failing to provide timely confirmations, accurate confirmations and account
statements with respect to the firm’s capacity as either principal or agent. The firm was also
cited for failing to deliver proxy and voting materials, margin risk disclosure statements and
business continuity plans.
FINRA found that over an eight and a half year period, Merrill Lynch failed to have an
adequate supervisory system to ensure that customers in certain investment advisory programs
were charged fees consistent with contract and disclosure documents. 95,000 customer accounts
were involved and the overcharges amounted to approximately $32 million, which was refunded
to the affected customers.
In settlement of the matter, Merrill Lynch consented to a fine of $2.8 million.
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P126482 (May 22, 2012).
Citigroup Global Markets, Inc. settled failure to supervise charges stemming form its
provision of inaccurate mortgage performance information to investors in connection with
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subprime residential mortgage-backed securitizations (RMBS). FINRA noted that “Citigroup
posted data for its RMBS deals that it should have known was inaccurate; and even after they
learned that the data was inaccurate, Citigroup did not correct the problem until years later.
Investors use this data to inform their decisions and in this case, for over six years, investors
potentially used faulty data to assess the value of the RMBS." According to FINRA, the
inaccurate information was disseminated over a 22 month period, and remained posted on the
firm’s website for nearly five years, despite notice that the information was inaccurate. FINRA
noted that Citigroup failed to supervise mortgage-backed securities pricing in that the firm did
not have procedures to verify the pricing of these securities and did not document sufficiently the
steps taken to assess the reasonableness of traders' prices.
For all its violations, the firm consented to a fine of $3.5 million, but FINRA did not
specify the portion of the fine attributable to failure to supervise.
Matter of Goldman, Sachs & Co., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125974 (April 12, 2012).
FINRA announced that it concluded a settlement, in conjunction with the SEC, with
Goldman, Sachs & Co. pertaining to the firm’s failure to supervise equity research analyst
communications with traders and clients and its failure to review adequately trading by analysts
prior to publication of research changes in order to detect and prevent possible information
breaches by the analysts. The conduct in question stemmed form a business process at Goldman
known as "trading huddles," by which research analysts were permitted to meet on a weekly
basis to share trading ideas with the firm's traders, who – in turn -- interfaced with the firm’s
clients and equity salespersons. During these meetings, analysts would discuss specific
securities at times during which they were considering making changes to the rating and/or other
opinions regarding the security. Clients could access the meetings directly, and certain highpriority
clients would receive information directly from the analysts. FINRA found that
Goldman did not have adequate controls in place to monitor communications during the trading
huddles themselves and the further dissemination of the information by analysts thereafter.
FINRA also found that Goldman had not established an adequate system to monitor for
possible trading in advance of research rating or “conviction list” changes in employee or
proprietary trading, institutional customer, or market-making and client-facilitation accounts.
FINRA noted that as a result the firm was not in a position to notice spikes in trading volume or
other atypical trading that might have preceded a change in rating or the addition of securities to
the firm’s “conviction list.”
In concluding this settlement, Goldman neither admitted nor denied the charges, but
consented to the entry of the SEC's and FINRA's findings and agreed to pay $11 million to the
SEC and $11 million to FINRA.
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Matter of Citi International Financial Services LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125821 (March 19, 2012).
Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., reached a
settlement with FINAR arising allegedly excessive markups and markdowns on corporate and
agency bond transactions. The firm also settled charges that it failed to supervise with respect to
such activity.
FINRA found that during a period of approximately three years, the firm charged
excessive markups and markdowns on corporate and agency bond transactions, ranging from
2.73 percent to over 10 percent. In addition, FINRA found that during a different three month
period, the firm failed to use reasonable diligence to buy or sell corporate bonds so that the
resulting price to its customers was as favorable as possible under prevailing market conditions.
FINRA noted certain deficiencies in the firm’s supervisory system, including the reliance on a
5% threshold for review of markups, and the use of a pricing grid for markups that was based on
par value rather than the actual value of the bonds.
The firm consented to a fine of $600,000 and undertaking to provided $648,000 in
restitution and interest to more than 3,600 customers. The firm also undertook to revise its
written supervisory procedures regarding markups and markdowns, as well as best execution in
fixed income transactions with customers.
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125369 (Jan. 18, 2012).
Citigroup Global Markets, Inc. settled charges stemming from its failure to disclose
conflicts of interest in its research reports and in connection with public appearances by its
analysts during approximately a four year period. The missing disclosures included the fact that
Citigroup and/or its affiliates managed or co-managed public securities offerings, received
investment banking or other revenue from, made a market in the securities of and/or had a 1
percent or greater beneficial ownership in covered companies.
FINRA found that the firm’s failures were caused by the database it used to identify and
create the disclosures, which was inaccurate and/or incomplete due primarily to technical
deficiencies. FINRA also charged the firm with failing to have reasonable supervisory
procedures in place to ensure that the firm was populating its research reports with required
disclosures.
In concluding this settlement, the firm neither admitted nor denied the charges, but
consented to the entry of FINRA's findings. In settlement of all violations, the firm consented to
a fine of $725,000.
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3. NYSE Enforcement Actions
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In re Murphy & Durieu, FINRA Proc. No. 20110270062, NYSE Disc. Action 2012-9, 2012
NYSE Disc. Action LEXIS 9 (Oct. 15, 2012).
The firm settled underling charges stemming from the firm’s failure to create records of
arbitrage orders received on the floor of the exchange from off the floor, recordkeeping and other
violations regarding transactions in the firm’s error account, failing to mark agency orders “held”
or “not held,” and other trade reporting violations. The firm also settled charges that it violated
NYSE Rule 342 in that the firm failed reasonably to supervise, including a failure to adopt a
separate system of follow-up and review, reasonably designed to achieve compliance with SEC
and NYSE Rules pertaining to the underlying violations, and specifically with respect to
documenting arbitrage orders, processing and documenting error transactions, and refraining
from using its error account to give its customers executions. The firm consented to a censure
and a $45,000 fine.
In re Hold Brother Execution Services, LLC, FINRA Proc. Nos. 20110270318, 20110270169,
and 20110297129, NYSE Disc. Action 2012-8, 2012 NYSE Disc. Action LEXIS 8 (Oct. 5,
2012).
The firm settled underlying charges in connection with its failure to comply with
requirements for entering and cancelling of market-on-close and limit-on-close orders and
executing short sales in financial institution stocks in violation of the temporary rule forbidding
same. The NYSE also alleged that the firm violated Rule 342 in that it lacked written
supervisory procedures, did not have a reasonable system of follow-up and review, and did not
delegate supervisory authority to qualified individuals. To settle all of the charges, the firm
consented to a censure and a $100,000 fine.
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Proc. No. 20110270034, NYSE Disc.
Action 2012-7, 2012 NYSE Disc. Action LEXIS 7 (Sept. 13, 2012).
NYSE charged the firm with various trading violations, including trading ahead of a
customer order, failing to document trade along permission, and failing to comply with
requirements regarding entry and cancelation of market-on-close and limit-on-close orders. The
firm’s supervisory violations, however, were limited to failing reasonably to supervise and
implement adequate controls, including a separate system of follow-up and review, with respect
to cancellation of certain market-on-close and limit-on-close orders after prescribed cutoff times.
Specifically, the NYSE found that while the firm had in place adequate policies and procedures
during a prior review period, during the more recent period, the firm failed to adequately
supervise certain system upgrades, which resulted in the firm’s failure to recognize violative
cancellations when conducting its reviews. The firm settled all the charges by consenting to a
censure and a $150,000 fine.
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In re Morgan Stanley & Co., LLC, FINRA Proceeding No. 20110270171, 2012 NYSE Disc.
Action LEXIS 6 (Aug. 10, 2012).
NYSE charged the firm with underling charges stemming from entering and cancelling
market-on-close, limit-on-close and closing offset orders, in violation of NYSE Rule 123C. The
firm was also charged with violations of Rule 342 in connection with its lack of adequate
controls designed to achieve compliance with the requirements for such orders. Specifically,
NYSE found that the firm’s written procedures were not sufficiently clear, causing a
misunderstanding regarding whether market-on-close and limit-on-close orders could be used to
offset imbalances subject to mandatory publication. Further, NYSE also found that during a
particular period of time, the firm did not have any mechanism in place to prevent late entry of
market-on-close and limit-on-close orders. Finally, NYSE found that at a certain point in time
the firm became aware that it has been entering or cancelling market-on-close and limit-on-close
orders after prescribed deadlines, both through the firm’s own discovery through exception
reports, and the receipt of regulatory inquiries. In response, the firm attempted to prevent future
late entries and cancelations, but the measured employed were insufficient to prevent subsequent
violations. In settlement of all charges, the firm consented to a censure and a $150,000 fine,
which was imposed jointly by NYSE and NYSE MKT LLC.
In re Goldman Sachs Execution & Clearing, L.P., FINRA Proc. No. 20110270059, 2012 NYSE
Disc. Action LEXIS 5 (July 23, 2012).
The firm settled charges that it violated NYSE Rule 342 in that it failed to maintain
supervisory procedures and controls, including a system of follow-up and review, that were
reasonably designed to detect and prevent potentially manipulative trading activity through the
transmission of orders to the NYSE at or near the close of the market. NYSE found that a
customer of the firm purchased shares of two particular stocks on 21 trade dates over a four
month period at or near the close, by using the firm’s electronic order entry and routing system.
These order, NYSE noted, had the “potential to artificially impact the stock’s closing price (i.e.,
‘mark the close’).”
While the firm had written policies and procedures to address marking-the-close activity,
and surveillance programs designed to detect such activity by customers using its electronic
order entry and routing system with respect to small cap and over-the-counter stocks, the
surveillance program did not extend to trading by customers on the NYSE. Subsequent to
receipt of the inquiry letter from the NYSE, the firm expanded its surveillance system to include
trading in NYSE securities.
In settlement of the failure to supervise charge, the firm consented to a censure and a
$75,000 fine.
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In re Electronic Brokerage Systems, LLC, FINRA Proc. Nos. 20110270289 (ARCA), and
20110302093 and 20110270122 (NYSE), NYSE Disc. Action 2012-4, 2012 NYSE Disc. Action
LEXIS 4 (May 1, 2012).
NYSE alleged that the firm committed 162 underlying violations of the SEC’s emergency
order prohibiting short-sales in certain financial stocks. The NYSE also charged the firm with
failing to preserve memoranda of over 32 million brokerage orders and cancellations.
With respect to supervisory violations, NYSE charged the firm with failing to supervise
marking the close and wash sales activity. Specifically, NYSE noted that during a particular
period of time, the firm did not have a specific surveillance report to monitor for marking the
close activity, as the firm only reviewed the activity of its traders, not the activity of its brokerdealer
clients who made up 95% of its order flow activity. The firm also failed to have written
supervisory period during the same period of time with respect to supervision of its sponsored
access participants for marking the close activity.
With respect to wash sales activity, the NYSE found that during a second period of time,
the firm had a report to identify potential wash sales, but was unable to provide evidence that it
reviewed the report or conducted appropriate follow-up. Rather, the firm relied upon its
awareness of its customers’ and broker-dealer clients’ trading strategies to supervise for wash
sales and matched orders, which the NYSE found to be insufficient.
Moreover, NYSE noted that the firm improperly relied upon an “Electronic Execution
Agreement” with its broker-dealer clients as the basis for the firm’s position that the brokerdealer
clients, not the firm, were solely responsible for compliance with respect to orders routed
to ArcaEx using the firm’s order handling, routing and execution system. Citing RBE-07-01,
NYSE noted that a firm must have a supervisory system in place with respect to any access it
offers to ArcaEx designed, at a minimum, to prevent erroneous orders and review all trading for
“manipulative or improper trading practices.” Subsequent to the supervisory failures, the firm
changed its business model, terminated relationships with certain customers, and developed no
surveillance and pre-trade systems.
In settlement of all charges, the firm accepted a censure and fines of $185,000 by NYSE
Arca and $65,000 by NYSE.
In re Goldman, Sachs & Co., FINRA Proceeding No. 20110270394, NYSE Disc. Action 2012-
12; 2012 NYSE Disc. Action LEXIS 3 (April 4, 2012).
The firm consented to a censure and fine of $85,000 to settled charges that it failed to
establish and maintain supervisory procedures, including a system of follow-up and review,
reasonably designed to detect and prevent potentially violative wash trades executed on the
NYSE. The trades at issue were generated from SLP orders by the firm’s “Quant Cash” desk,
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which was a proprietary algorithmic trading desk conducting the firm’s SLP trading on the
NYSE.
The NYSE found that during the review period, 250,000 SLP orders entered by Quant
Cash resulted in executions against other SLP orders entered by Quant Cash, representing less
than 1% of the overall trading volume executed by Quant Cash during the period. The firm
maintained a daily report that identified potential self-trades, which was reviewed the next day
by a supervisor. Later in the period, the firm developed three additional reports to identify
potential wash trades. NYSE, however, found that the reports were not capable of reasonably
detecting or preventing violative SLP trades. For example, one of the reports was too
discriminatory and, therefore, failed to detect many potential self-trades. NYSE also cited the
firm’s failure to utilize “the DBK Link Identifier,” an identifier provided by the NYSE to assist
SLP firms in identifying contra parties, until a year into the review period, when it was available
the entire time.
Notably, the firm was not charged with an underling wash sale violation. NYSE noted
that it took into consideration that the firm had made technological changes to prevent routing
orders that might result in self-trades, and that the firm agreed to implement self-trade prevention
tools, once they are made available by the NYSE.
In re Goldman, Sachs & Co., FINRA Proceeding Nos. 20110270256, 20110270345,
20110270250, NYSE Disc. Action 2012-1, 2012 NYSE Disc. Action LEXIS 1 (Jan. 9, 2012).
In a joint settlement of a FINRA investigation pertaining to violations of NYSE Arca and
NYSE Rules, Goldman Sachs consented to charges that, among other things, it failed to maintain
an adequate supervisory system and failed to supervise in connection with Regulation M and
certain notification requirements to NYSE while managing an offering and with respect to
securities for which its affiliated Direct Market Manager was registered.
As to the supervisory failures pertaining to Regulation M, Goldman Sachs was found to
have had surveillance in place to detect potential violations, but at a certain point reprogrammed
those systems to reflect changes in the Rule. The firm’s technology staff made a programming
error such that the system would only detect short sales or short positions on the day of pricing
rather than for the entire five-day restricted period. While the firm corrected the mistake less
than a year later, the erroneous system was found to violated NYSE Arca Rule 6.18(b), which
requires the establishment of supervisory systems by member firms. For the underlying and
supervisory violations, NYSE Arca censured the firm and fined it $40,000.
With respect to failure to supervise the notification requirements, while Goldman Sachs
was found to have had written policies and procedure in place with respect to notification
requirements, it did not have a reasonable system of follow up or review to determine that its
policies and procedures were followed, in violation of Exchange Rule 342. For the underlying
and supervisory violations, NYSE censured the firm and fined it $10,000.
P.3
498

Q. SEC Litigation Affecting Broker-Dealers
1. Direct SEC Proceedings
a. Sales Practice Violations
Q.1.a
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012).
The Commission accepted an offer of settlement from Comeaux, president and executive
director of Stanford Group Company, a former dually registered broker-dealer and investment
adviser. The Firm was a wholly-owned subsidiary of Stanford Group Holdings, Inc. (“SGH”),
which was controlled by Allen Stanford, who also controlled Stanford International Bank, a
private international bank (“SIB”). The Commission alleged that Comeaux, together with the
registered representatives he supervised, recommended and sold certificates of deposits (“CDs”)
that SIB had issued without a reasonable basis for making those recommendations. Additionally,
the Commission alleged that Comeaux and the registered representatives made materially false
and misleading representations concerning the CDs and failed to disclose material conflicts of
interest. The Commission ordered Comeaux to cease and desist from future violations of Section
17(a) 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 Advisers Act of 1940.
It further barred him from association and from participating in any penny stock offering, and
prohibited him from serving or acting as an employee, officer, director, member of an advisory
board, investment adviser or depositor of, or principal underwriter for, a registered investment
company or affiliated person of such investment adviser, depositor or principal underwriter.
Comeaux agreed to additional proceedings to determine disgorgement and civil penalties and to
cooperate with the Commission in further related proceedings or investigations.
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012).
Q.1.a
The Commission accepted an offer of settlement from Martinez, the owner, CEO, and
chief compliance officer of a former registered broker-dealer and state registered investment
adviser. In a related civil action brought by the Commission, a federal district court entered a
judgment by consent against Martinez, permanently enjoining him from violating Section 17(a)
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
Commission’s complaint alleged that Martinez knowingly and recklessly misrepresented to the
Firm’s advisory clients the safety and liquidity of a real estate fund, and further used his
discretionary authority to invest substantial client assets into the fund. In total, Martinez and his
co-defendant invested approximately $10.3 million of their advisory clients’ funds into the fund,
in breach of their fiduciary duty given the unsuitability of the investment for their clients. The
Commission barred Martinez from association and from participating in any penny stock
offering.
499

Q.1.a
In re Wells Fargo Sec., LLC, Release No. 67649, 2012 SEC LEXIS 2626 (Aug. 14, 2012).
The Commission accepted an offer of settlement from Well Fargo Securities, LLC, a
registered broker-dealer, and McMurtry, a vice president and registered representative with the
Firm. The Commission alleged that the Firm and certain of its registered representatives
including McMurtry recommended and sold complex forms of asset-backed commercial paper
issued by Structured Investment Vehicles (“SIV”) to institutional customers without
understanding the nature and risk of these products. Additionally, the Commission alleged that
the Firm failed to establish any procedures to ensure that its personnel adequately reviewed and
understood the nature and risks of these products. The Commission alleged that McMurtry
exercised discretionary authority in the account of one municipal customer, in violation of the
Firm’s internal policy requiring express written authorization to do so, and purchased for that
customer a SIV-issued commercial paper program backed by mortgage-backed securities
(“MBS”) and related high-risk mortgage-backed derivatives. Internal records for the customer’s
account stated that the account should not invest in MBS, and applicable state law prohibited
municipal entities such as the customer from investing in certain high-risk MBS. The
Commission further alleged that Respondents were, at a minimum, negligent in recommending
the relevant products without obtaining adequate information about them to form a reasonable
basis for recommending them and without disclosing the material risks of these products.
The Commission ordered Respondents to cease and desist from violating Sections
17(a)(2) and 17(a)(3) of the Securities Act of 1933. The Commission censured the Firm and
ordered it to pay disgorgement of $65,000 plus prejudgment interest of $16,572 and a $6,500,000
penalty. The Commission ordered McMurtry to pay a $25,000 penalty, suspended him from
association and from participating in any penny stock offering, and prohibited him from serving
as an employee, officer, director, board member, investment adviser, depositor or principal
underwriter for a registered investment company or affiliated person of such investment adviser,
depositor, or principal underwriter for six months.
b. Unfair/Fraudulent Markups or Commissions
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012).
500
Q.1.b
The Commission accepted an offer of settlement from Finger, the CEO and majority
owner of a registered broker-dealer and former registered representative of several other brokerdealers.
In a related criminal proceeding, Finger pleaded guilty to one count of wire fraud. The
federal district court sentenced him to 54 months in prison and three years of supervised release.
The criminal indictment alleged that Finger caused significant trading losses in accounts that he
managed and diverted funds to his personal benefit by charging excessive commissions. Finger
concealed the losses and excessive commissions through falsified customer account statements.
The Commission barred Finger from association and from participating in any penny stock
offering.

c. Other Fraudulent Practices
(i)
Misappropriation
Q.1.c.(i)
In re Allen, Release No. 67744, 2012 SEC LEXIS 2775 (Aug. 12, 2012).
The Commission accepted an offer of settlement from Allen, a former registered
representative of a registered broker-dealer and former chief executive officer of a limited
liability company (the “Company”). In a related action brought by the Commission, a federal
district court entered a final judgment against Allen, enjoining him 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
Exchange Act of 1934 and Rule 10b-5 thereunder. In a related criminal action, Allen pleaded
guilty to conspiracy to commit wire and mail fraud and conspiracy to launder money. The
Commission’s complaint alleged that Allen and his business partner raised approximately $14.8
million through the offer and sale of unregistered promissory notes issued by the Company and
several related entities to at least 100 investors. The complaint alleged that Allen knowingly
made misrepresentations to investors and used investor funds to operate a Ponzi scheme and pay
personal expenses. The Commission barred Allen from association and from participating in any
penny stock offering.
In re Barriger, Release No. 66142, 2012 SEC LEXIS 105 (Jan. 26, 2012).
Q.1.c.(i)
The Commission accepted an offer of settlement from Barriger, a registered
representative, chairman, CEO, and principal of Barriger & Barriger, Inc., a registered brokerdealer.
Barringer was also an unregistered investment adviser who was the president of an
unregistered investment company (the “Fund”); the principal shareholder, director and officer of
the Fund’s managing member and sole common shareholder; the sole owner of the purported
investment manager to the Fund; and an indirect owner of the entity that underwrote and
serviced the Fund’s loans. In an earlier action brought by the Commission in federal court, the
court entered a consent judgment against Barriger, permanently enjoining him from future
violations of Sections 5(a), 5(c), and 17(a) 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 Advisers Act of 1940. The Commission’s complaint alleged that Barriger
fraudulently offered and sold unregistered securities in two upstate New York real estate funds
he managed and defrauded the funds themselves by misusing fund assets, including paying cash
distributions not justified by the Fund’s performance, and redeeming investors at inflated values.
The Commission barred Barriger from association and from participating in any offering of
penny stock.
501

Q.1.c.(i)
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012).
The Commission accepted an offer of settlement from Blankenship, a former registered
representative of a registered broker-dealer and investment adviser. In a related criminal action,
Blankenship pleaded guilty to one count of mail fraud and one count of securities fraud. The
criminal indictment alleged that Blankenship raised approximately $800,000 from customers and
misrepresented that the funds would be used to purchase certain securities, when instead he
diverted the funds to pay for personal and business expenses. Additionally, to hide his
misconduct, Blankenship sent fraudulent account statements to customers. The Commission
barred Blankenship from association and from participating in any penny stock offering.
In re Campbell, Release No. 67770, 2012 SEC LEXIS 2790 (Aug. 31, 2012).
Q.1.c.(i)
An administrative law judge entered a default order against Campbell, a former associated
person of a registered broker-dealer and a registered investment adviser and managing director of
a subsidiary of a bank that used the services of the broker-dealer and investment advisor. In a
related action, a federal district court convicted Campbell of mail fraud, sentenced him to six
months in prison and three years of supervised release, and ordered him to pay restitution of
$300,758 and to forfeit $571,105. The Commission alleged that Campbell caused commission
checks, owed by the broker-dealer and investment adviser to the bank subsidiary, to be paid
directly to him and that he diverted the funds to his own personal bank account. The ALJ barred
Campbell from association.
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012).
Q.1.c.(i)
The Commission accepted an offer of settlement from Eschbach, a former registered
representative of a dually registered broker-dealer and investment adviser. In an earlier
proceeding brought by the Commission, a federal district court entered a final judgment by
consent against Eschbach, permanently enjoining her from future violations of the antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that Eschbach
misappropriated over $3 million from several clients, concealed her misappropriation by issuing
and mailing false and misleading account statements, and effected transactions in securities
without the knowledge and outside the supervision or control of the broker-dealer with which she
was associated. The Commission barred Eschbach from association and prohibited her from
participating in any penny stock offering.
502

Q.1.c.(i)
In re Labineri, Release No. 66318, 2012 SEC LEXIS 404 (Feb. 3, 2012).
The Commission accepted an offer of settlement from Labineri, a former registered
representative of several registered broker-dealers. In a previous action brought by the
Commission, a federal district court entered judgment against Labineri, permanently enjoining
him from future violations of the antifraud provisions of the federal securities laws and from
participating in offerings of penny stock. In a subsequent criminal proceedings in federal district
court, Labineri pleaded guilty to mail fraud and conspiracy to commit securities, mail and wire
fraud. The criminal indictment alleged that Labineri and his co-defendant defrauded investors in
purported private offerings of securities by misrepresenting the use of the offering proceeds,
most of which they used for their own benefit. The Commission’s complaint made similar
allegations and further alleged that Labineri failed to disclose his disciplinary history. The
Commission barred Labineri from association.
In re Passaro, Release No. 68477, 2012 SEC LEXIS 4023 (Dec. 19, 2012).
Q.1.c.(i)
The Commission accepted an offer of settlement from Passaro, a former registered
representative of two registered broker-dealers. In an earlier proceeding in federal district court,
Passaro pleaded guilty to wire fraud, mail fraud and securities fraud, as well as conspiracy to
commit wire fraud, mail fraud, and fraud in connection with the purchase or sale of securities.
As of the date of the release, Passaro’s sentencing was pending. The criminal indictment alleged
that Passaro and others participated in a securities fraud scheme through the two broker-dealers
by soliciting millions of dollars from investors under false pretenses, thereby raising
approximately $140 million. It further alleged that Passaro and others failed to use investors’
funds as promised, misappropriated and converted investors’ funds without their knowledge, and
manipulated the market for certain affiliated companies’ stocks. The Commission barred
Passaro from association.
In re Ramsey, Release No. 66744, 2012 SEC LEXIS 1117 (Apr. 5, 2012).
Q.1.c.(i)
The Commission accepted an offer of settlement from Ramsey, a former registered
representative associated with a dually registered broker-dealer and investment adviser. In an
earlier criminal proceeding in federal court, Ramsey pleaded guilty to one count of mail fraud
and was sentenced to 50 months in prison followed by three years of supervised release and
ordered to make restitution of $494,000. According to the allegations in the criminal action,
from June 2005 to January 2008, Ramsey knowingly and willfully defrauded and
misappropriated more than $400,000 from a customer. The Commission barred Ramsey from
association and from participating in any penny stock offering.
503

Q.1.c.(i)
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012).
The Commission accepted an offer of settlement from Sekaran, a manager and control
person of an unregistered investment adviser and former associated person of a registered
broker-dealer. In a related action brought by the Commission, a federal district court entered a
judgment by consent against Sekaran, permanently enjoining him from future violations of
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 Advisers Act of 1940. In related criminal proceedings in
federal district court, Sekaran pleaded guilty to one count of securities fraud. The Commission’s
complaint alleged that Sekaran made material misrepresentations to clients, provided fabricated
and misleading account statements to clients, and misappropriated client funds. The
Commission barred Sekaran from association and from participating in any penny stock offering.
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012).
Q.1.c.(i)
The Commission accepted an offer of settlement from Slowey, a former registered
representative of a registered broker-dealer. In a related action brought by the Commission, a
federal district court entered a judgment by consent against Slowey, permanently enjoining him
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 Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission
alleged that Slowey made materially misleading statements to investors, misappropriated
investor funds, and participated in an unregistered offering. The Commission barred Slowey
from association and from participating in any penny stock offering.
(ii)
Misrepresentation
Q.1.c.(ii)
In re Advanced Equities, Inc., Release No. 67878, 2012 SEC LEXIS 2958 (Sept. 18, 2012).
The Commission accepted offers of settlement from Advanced Equities, Inc., a registered
broker-dealer, and Badger and Daubenspeck, co-founders and registered principals of the Firm.
The Commission alleged that, in connection with the offering of an alternative energy company
in 2009, Badger repeatedly made misrepresentations about the company to potential investors.
The Commission further alleged that Daubenspeck, who supervised Badger, witnessed Badger’s
misstatements during internal sales calls yet failed to correct them or take steps to prevent
Badger from making further misstatements to the Firm’ registered representatives and potential
investors. Ultimately, the Firm raised $122 million in the offering.
The Commission ordered Badger to cease and desist from future violations of Sections
17(a)(2) and 17(a)(3) of the Securities Act of 1933 and to pay a $100,000 penalty, and barred
him from association with the right to reapply after one year. The Commission ordered
Daubenspeck to pay a $50,000 penalty and suspended him from association in any supervisory
capacity for twelve months. The Commission censured the Firm and ordered it to cease and
504

desist from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and to pay a
$1,000,000 penalty. Additionally, the Firm undertook to hire an independent consultant to
review and improve its policies and procedures relating to sales, due diligence, and supervisory
practices, and to provide a copy of the Commission’s order to its customers. The Firm further
undertook to implement a new internal training program covering sales practices, and to use its
best efforts to locate purchasers for any of its customers wishing to sell shares of the company.
All Respondents undertook to cooperate with the Commission, including in future related
investigations or proceedings.
In re Blimline, Release No. 68347, 2012 SEC LEXIS 3733 (Dec. 4, 2012).
505
Q.1.c.(ii)
An administrative law judge entered an order by default against Blimline, an undisclosed
and unlicensed principal of a registered broker-dealer. In a related criminal case, Blimline was
convicted of conspiracy to commit mail fraud and was sentenced to 240 months in prison
followed by three years of supervised release and ordered to pay restitution of $407,552,919.
According to his factual statement from that proceeding, Blimline sold oil and gas investments
using materially false representations and omissions. The ALJ barred Blimline from association
and from participating in any penny stock offering.
In re Buggy, Release No. 66205, 2012 SEC LEXIS 211 (Jan. 20, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Buggy, a former registered
representative of a registered broker-dealer. In a prior criminal proceeding, Buggy pleaded
guilty to one count each of mail fraud, wire fraud, and money laundering. The federal district
court ordered him to pay $1,220,068 in restitution and sentenced him to 46 months in prison and
three years of supervised release. The criminal indictment alleged that Buggy knowingly
devised a scheme to defraud and obtain money from his clients by means of false and fraudulent
pretenses. The Commission barred Buggy from association and from participating in any penny
stock offering.
Q.1.c.(ii)
In re Cioffi, Release No. 67250, 2012 SEC LEXIS 1967 (June 25, 2012); In re Tannin, Release
No. 67249, 2012 SEC LEXIS 1968 (June 25, 2012).
The Commission accepted offers of settlement from Cioffi, a former senior managing
director, portfolio manager, and member of the board of directors at a registered investment
adviser, and Tannin, a former senior managing director, chief operating officer and portfolio
manager at the Firm. Respondents were also former registered representatives associated with
registered broker-dealers. In a related action brought by the Commission, a federal district court
entered final judgments by consent against Respondents, permanently enjoining them from
future violations of Section 17(a)(2) of the Securities Act of 1933. The Commission’s complaint
alleged that, in connection with the offer or sale of interests in two hedge funds, the Respondents
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
right to reapply after three years and two years, respectively.
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012).
506
Q.1.c.(ii)
The Commission accepted an offer of settlement from Comeaux, president and executive
director of Stanford Group Company, a former dually registered broker-dealer and investment
adviser. The Firm was a wholly-owned subsidiary of Stanford Group Holdings, Inc. (“SGH”),
which was controlled by Allen Stanford, who also controlled Stanford International Bank, a
private international bank (“SIB”). The Commission alleged that Comeaux, together with the
registered representatives he supervised, recommended and sold certificates of deposits (“CDs”)
that SIB had issued without a reasonable basis for making those recommendations. Additionally,
the Commission alleged that Comeaux and the registered representatives made materially false
and misleading representations concerning the CDs and failed to disclose material conflicts of
interest. The Commission ordered Comeaux to cease and desist from future violations of Section
17(a) 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 Advisers Act of 1940.
It further barred him from association and from participating in any penny stock offering, and
prohibited him from serving or acting as an employee, officer, director, member of an advisory
board, investment adviser or depositor of, or principal underwriter for, a registered investment
company or affiliated person of such investment adviser, depositor or principal underwriter.
Comeaux agreed to additional proceedings to determine disgorgement and civil penalties and to
cooperate with the Commission in further related proceedings or investigations.
In re Dent, Release No. 68223, 2012 SEC LEXIS 3511 (Nov. 14, 2012).
Q.1.c.(ii)
An administrative law judge entered an order by default against Dent, a registered
representative of a registered broker-dealer. In an earlier proceeding in federal district court,
Dent was convicted of securities fraud and was sentenced to thirty months in prison followed by
two years of supervised release and ordered to pay restitution of $126,000. The conviction
related to creating losing trades in a customer account to offset losses in proprietary accounts that
resulted from Dent’s unauthorized day trading in those accounts. The ALJ barred Dent from
association.
In re Folan, Release No. 66127, 2012 SEC LEXIS 1003 (Jan. 10, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Folan, a registered representative of
a registered broker-dealer (the “Firm”) and a registered municipal securities dealer. In a related
action brought by the Commission, a federal district court entered a judgment by consent
permanently enjoining Folan from aiding and abetting future violations of Section 206(2) of the
Investment Advisers Act of 1940. The Commission’s complaint alleged that in a 2006
repurchase transaction between the Firm and a registered investment adviser, the investment

adviser provided materially misleading financial statements and other misleading statements to
its clients. The Commission further alleged that Folan aided and abetted the investment
adviser’s violations of Section 206(2). The Commission barred Folan from association and from
participating in any penny stock offering, with the right to reapply after three years.
In re Gengler, Release No. 67918, 2012 SEC LEXIS 3027 (Sept. 24, 2012).
507
Q.1.c.(ii)
The Commission accepted an offer of settlement from Gengler, a former registered
representative of registered broker-dealers. In an earlier action brought by the Commission, a
federal district court entered a final judgment by consent against Gengler. The Commission’s
complaint alleged that, from 2002 to 2007, Gengler sold personal mentoring, software, and class
packages on securities trading to often inexperienced investors, and misrepresented to these
investors that using the packages would result in extraordinary profits. The Commission further
alleged that Gengler encouraged investors to engage in securities transactions and advised
investors with respect to such transactions. The court permanently enjoined Gengler from future
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The Commission barred Gengler from association and from participating in any penny stock
offering.
In re Marks, Release No. 68275, 2012 SEC LEXIS 3616 (Nov. 20, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Marks, the chief executive officer
and sole owner of a former registered investment adviser and associated person of a brokerdealer.
In an earlier proceeding brought by the Commission, a federal district court entered a
final judgment by consent against Marks, permanently enjoining him from future violations of
Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8
thereunder, and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The Commission’s
complaint alleged that Marks negligently misrepresented the level of correlation and
diversification among certain hedge funds of the investment adviser, made unsuitable investment
recommendations to certain advisory clients, negligently failed to disclose that one hedge fund
invested significantly in a purported sub-adviser’s fund and negligently provided misleading
information to certain investors about the liquidity problems at another hedge fund. The
Commission barred Marks from association and prohibited him from participating in any penny
stock offering.
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Martinez, the owner, CEO, and
chief compliance officer of a former registered broker-dealer and state registered investment
adviser. In a related civil action brought by the Commission, a federal district court entered a
judgment by consent against Martinez, permanently enjoining him from violating Section 17(a)
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
Commission’s complaint alleged that Martinez knowingly and recklessly misrepresented to the
Firm’s advisory clients the safety and liquidity of a real estate fund, and further used his
discretionary authority to invest substantial client assets into the fund. In total, Martinez and his
co-defendant invested approximately $10.3 million of their advisory clients’ funds into the fund,
in breach of their fiduciary duty given the unsuitability of the investment for their clients. The
Commission barred Martinez from association and from participating in any penny stock
offering.
In re Ruiz, Release No. 66573, 2012 SEC LEXIS 792 (Mar. 12, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Ruiz, a registered representative
associated with a registered broker-dealer who also controlled a limited liability company. The
Commission alleged that Ruiz made materially false and misleading statements in the offer and
sale of securities of his limited liability company. Ruiz told investors they were purchasing an
equity interest in the company, and told some of them that the equity interest they were
purchasing was preferred stock, but never issued membership interests to investors. Additionally,
Ruiz told investors that the funds would be used to develop the company’s purported business,
but in fact commingled them with his own and used much of them to fund personal expenses.
The Commission ordered Ruiz to cease and desist from committing or causing violations or
future violations of Section 17(a)(2) of the Securities Act of 1933 and Section 15(a) of the
Securities Exchange Act of 1934, and his limited liability company to cease and desist from
committing or causing violations or future violations of Section 17(a)(2) of the Securities Act.
The Commission also censured Ruiz, barred him from association or from affiliation with any
registered investment company or affiliated person of any investment adviser, depositor or
principal underwriter, and barred him from participating in any penny stock offering, with a right
to reapply after three years. The Commission ordered Ruiz to pay a $75,000 civil penalty and
disgorgement of $112,500, plus post-judgment interest of $2,076.
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Slowey, a former registered
representative of a registered broker-dealer. In a related action brought by the Commission, a
federal district court entered a judgment by consent against Slowey, permanently enjoining him
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 Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission
alleged that Slowey made materially misleading statements to investors, misappropriated
investor funds, and participated in an unregistered offering. The Commission barred Slowey
from association and from participating in any penny stock offering.
508

Q.1.c.(ii)
In re UBS Fin. Serv. Inc. of Puerto Rico, Release No. 66893, 2012 SEC LEXIS 1394 (May 1,
2012).
The Commission accepted an offer of settlement from UBS Financial Services, Inc. of
Puerto Rico, a registered broker-dealer. According to the Commission, the Firm, through its
chief executive officer and head of capital markets, misrepresented to its financial advisors the
primary offering price and secondary market liquidity of non-exchange-traded, closed-end funds
(“CEFs”) it offered. The Commission alleged that as early as May 2008, the Firm knew that the
market for CEFs was imbalanced due to greater supply than demand, and that subsequent
liquidity was largely dependent on the Firm’s support of the secondary market for CEFs. From
2008 to 2009, the Firm encouraged its sales force and financial advisers to continue marketing
CEFs to customers despite its knowledge of the market imbalance. After the Firm was directed
by its parent company’s senior risk officer to reduce its inventory of CEFs, the Firm engaged in a
practice designed to undercut customers’ sell orders such that the Firm’s CEF inventory would
be sold first. The Firm did not disclose that it was reducing its inventory to support the
secondary market or that customer sell orders would be subordinated to allow the Firm to sell its
inventory first.
The Commission censured the Firm and ordered it to cease and desist from future
violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the
Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The Commission ordered the Firm
to disgorge $11,500,000 plus prejudgment interest of $1,109,730 and to pay a $14,000,000
penalty. The Commission established a Fair Fund for the distribution of the settlement proceeds,
and the Firm agreed not to seek any offset of any award of compensatory damages in any related
investor action. The Firm further undertook to retain an independent consultant to review and
improve its disclosures and trading policies and procedures related to CEFs, with annual reviews
by the consultant to occur for three years from the date of the consultant’s initial report.
In re Tak, Release No. 66147, 2012 SEC LEXIS 121 (Jan. 12, 2012).
Q.1.c.(ii)
The Commission accepted an offer of settlement from Tak, a registered representative
with a registered broker-dealer. In an earlier proceeding brought by the Commission, a federal
district court entered a final judgment by consent against Tak, permanently enjoining him from
future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections
10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
Commission’s complaint alleged that Tak raised over $9.8 million from 36 investors,
misrepresenting to them that a registered broker-dealer would be selling interests in the
investment fund he was offering and that the source of the fund’s distributions to investors would
relate to the fund’s accrued net profits. Instead, the fund was an unregistered security, not sold
through a broker-dealer, with no accrued net profits, and thus paid investor distributions with
money from investors’ capital contributions. The Commission barred Tak from association and
from participating in any offering of penny stock.
509

Q.1.c.(ii)
In re Western Pacific Capital Management, LLC, Release No. 67890, 2012 SEC LEXIS 2962
(Sep. 19, 2012); In re Western Pacific Capital Management, LLC, Release No. 67891, 2012 SEC
LEXIS 2963 (Sep. 19, 2012).
The Commission accepted offers of settlement from Western Pacific Capital
Management, LLC (“Western Pacific”), an investment advisor that was registered with the State
of California from June 2004 to May 13, 2009, and registered with the Commission thereafter,
and O’Rourke, Western Pacific’s founder, president, and sole control person. The Commission
alleged that Western Pacific and O’Rourke, with scienter, failed to disclose to investors in an
unregistered offering that Western Pacific would receive a 10% success fee for serving as a
placement agent for the offering; that O’Rourke improperly used funds in an unregistered pooled
investment vehicle he managed to resolve client disputes; and that O’Rourke misrepresented the
pooled investment vehicle’s liquidity to its investors. The Commission ordered Western Pacific
and O’Rourke to cease and desist from committing or causing any violations and future
violations of Section 15(a) of the Exchange Act of 1934, and Sections 206(1), 206(2), 206(3),
and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-(8) promulgated
thereunder. Western Pacific and O’Rourke were each ordered to pay disgorgement of $482,745,
prejudgment interest of $169,195.85, and a $130,000 civil penalty. Western Pacific’s
registration was revoked. O’Rourke was barred from association, barred from participating in
any offering of penny stock, and prohibited from serving as an employee, officer, director, board
member, investment adviser, depositor or principal underwriter for a registered investment
company, with a right to reapply after two years.
Q.1.c.(ii)
In re Yamashiro, Release No. 67789, 2012 SEC LEXIS 2839 (Sept. 5, 2012).
The Commission accepted an offer of settlement from Yamashiro, a former registered
representative of a registered broker-dealer and former associated person of a registered
investment adviser. In a related criminal proceeding, Yamashiro pleaded guilty to two counts of
wire fraud and one count of money laundering. Under the plea agreement, Yamashiro agreed to
pay full restitution, estimated at $3,765,725, and faces a possible prison sentence of sixty-three to
seventy-eight months. The indictment alleged that Yamashiro knowingly and with the intent to
defraud participated in and executed a scheme to defraud his clients and obtain money and
property from them by making materially false and misleading representations and promises.
The Commission barred Yamashiro from association and from participating in any penny stock
offering.
(iii)
Falsification of Documents
Q.1.c.(iii)
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012).
The Commission accepted an offer of settlement from Blankenship, a former registered
representative of a registered broker-dealer and investment adviser. In a related criminal action,
Blankenship pleaded guilty to one count of mail fraud and one count of securities fraud. The
510

criminal indictment alleged that Blankenship raised approximately $800,000 from customers and
misrepresented that the funds would be used to purchase certain securities, when instead he
diverted the funds to pay for personal and business expenses. Additionally, to hide his
misconduct, Blankenship sent fraudulent account statements to customers. The Commission
barred Blankenship from association and from participating in any penny stock offering.
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012).
511
Q.1.c.(iii)
The Commission accepted an offer of settlement from Eschbach, a former registered
representative of a dually registered broker-dealer and investment adviser. In an earlier
proceeding brought by the Commission, a federal district court entered a final judgment by
consent against Eschbach, permanently enjoining her from future violations of the antifraud
provisions of the federal securities laws. The Commission’s complaint alleged that Eschbach
misappropriated over $3 million from several clients, concealed her misappropriation by issuing
and mailing false and misleading account statements, and effected transactions in securities
without the knowledge and outside the supervision or control of the broker-dealer with which she
was associated. The Commission barred Eschbach from association and prohibited her from
participating in any penny stock offering.
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012).
Q.1.c.(iii)
The Commission accepted an offer of settlement from Finger, the CEO and majority
owner of a registered broker-dealer and former registered representative of several other brokerdealers.
In a related criminal proceeding, Finger pleaded guilty to one count of wire fraud. The
federal district court sentenced him to 54 months in prison and three years of supervised release.
The criminal indictment alleged that Finger caused significant trading losses in accounts that he
managed and diverted funds to his personal benefit by charging excessive commissions. Finger
concealed the losses and excessive commissions through falsified customer account statements.
The Commission barred Finger from association and from participating in any penny stock
offering.
In re Madoff, Release No. 67512, 2012 SEC LEXIS 2367 (July 26, 2012).
Q.1.c.(iii)
The Commission accepted an offer of settlement from Peter Madoff, an attorney and
former chief compliance officer of a registered broker-dealer and investment adviser. In a
related criminal proceeding in state court, Respondent pleaded guilty to (1) conspiracy to (a)
commit securities fraud; (b) falsify records of an investment adviser; (c) falsify records of a
broker-dealer; (d) make false filings with the Commission; (e) commit mail fraud; (f) falsify
statements in relation to documents required by ERISA; and (g) obstruct and impede the lawful
governmental function of the IRS; and (2) falsifying records of an investment adviser. The
criminal indictment alleged, inter alia, that Bernard Madoff, Respondent’s brother and the sole
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
compliance reviews; that he created annual reports which falsely stated that he had performed a
comprehensive compliance review of the firm’s operations; and that he created and caused to be
filed with the Commission false and misleading Forms ADV. The Commission barred
Respondent from association and from participating in any penny stock offering.
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012).
Q.1.c.(iii)
The Commission accepted an offer of settlement from Sekaran, a manager and control
person of an unregistered investment adviser and former associated person of a registered
broker-dealer. In a related action brought by the Commission, a federal district court entered a
judgment by consent against Sekaran, permanently enjoining him from future violations of
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 Advisers Act of 1940.
In related criminal proceedings in federal district court, Sekaran pleaded guilty to one count of
securities fraud. The Commission’s complaint alleged that Sekaran made material
misrepresentations to clients, provided fabricated and misleading account statements to clients,
and misappropriated client funds. The Commission barred Sekaran from association and from
participating in any penny stock offering.
(iv)
Failure to Maintain Accurate Books and Records
In re MidSouth Capital, Inc., Release No. 66828, 2012 SEC LEXIS 1254 (Apr. 18, 2012).
Q.1.c.(iv)
The Commission accepted an offer of settlement from MidSouth Capital, Inc., a registered
broker-dealer, and Hill, the Firm’s largest shareholder, CEO, and Financial and Operations
Principal. The Commission alleged that on seven occasions between December 2008 and
October 2011, the Firm effected transactions in securities while failing to maintain sufficient net
capital. During certain of these times, FINRA and/or the Commission warned the Firm that
continuing to effect transactions in securities would violate Section 15(c)(3) of the Securities
Exchange Act of 1934 and Rule 15c3-1 thereunder. Despite these warnings, the Firm did not
suspend operations. FINRA sent three of the deficiency notifications directly to Hill, who had
primary responsibility for addressing the Firm’s net capital obligations and was aware of the
Firm’s past violations. The Firm also failed to file on a timely basis the required Rule 17a-11
notifications with FINRA and the Commission regarding its net capital deficiencies. One
deficiency arose because the Firm had improperly included “an aged unsecured receivable” from
an affiliated entity in its net capital. In so doing, the Firm also failed to maintain accurate books
and records. The Commission censured the Firm and ordered it to cease and desist from
violating Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-11, and 17a-
3 thereunder. The Commission ordered Hill to cease and desist from willfully aiding and
abetting violations of the same provisions, suspended him from association for six months,
prohibited him from acting as an employee, officer, or member of an advisory board, investment
512

adviser or depositor of, or principal underwriter for, a registered investment company for six
months, and ordered him to pay a $15,000 civil penalty.
(v)
Selling Away
Q.1.c.(v)
In re Mazuchowski, Release No. 67532, 2012 SEC LEXIS 2387 (July 30, 2012).
The Commission accepted an offer of settlement from Mazuchowski, a/k/a Mazur, a former
registered representative associated with a registered broker-dealer. The Commission alleged
that Mazur willfully violated Section 15(a) of the Securities Exchange Act of 1934 by acting as
an unregistered broker selling away from the firm with which he was associated. According to
the Commission, Mazur solicited investors for private offerings involving two separate Chinese
reverse merger companies. Mazur had reached an agreement with the companies whereby he
would be compensated based on the dollar amount of investments he introduced to the deals.
After the deals closed, Mazur executed backdated “consulting” agreements with the companies,
which generically referred to consulting services he would provide rather than sales services.
Mazur’s broker-dealer also executed the agreements despite not knowing about or supervising
Mazur’s involvement in the deals. The companies then paid Mazur’s broker-dealer for his
services and the broker-dealer retained 60% and 65% of the total compensation from the two
deals, while Mazur retained the balance.
The Commission ordered Mazur to cease and desist from committing future violations of
Section 15(a), barred him from association and from participating in any offering of a penny
stock with the right to apply for reentry after two years, and prohibited him from acting as an
employee, officer, or member of an advisory board, investment adviser or depositor of, or
principal underwriter for, a registered investment company, also with the right to apply for
reentry after two years. Additionally, the Commission ordered Mazur to pay $126,800 in
disgorgement plus $25,550 in prejudgment interest and a $25,000 civil penalty.
d. Mutual Fund Trading and Disclosure Violations
Q.1.d
In re OppenheimerFunds, Inc., Release No. 67142, 2012 LEXIS 1765 (June 6, 2012).
The Commission accepted offers of settlement from OppenheimerFunds, Inc. (“OFI”), a
registered investment adviser, and OppenheimerFunds Distributor, Inc., a registered brokerdealer.
The Commission alleged that Respondents misrepresented to financial advisors and fund
shareholders the losses caused in two mutual funds by exposure to commercial mortgage-backed
securities (“CMBS”). In particular, the Commission alleged that the funds gained exposure to
CMBS through swap transactions involving substantial leverage. When the CMBS market
collapsed in late 2008, large liabilities were incurred arising out of that leverage, resulting in
significant fund net asset value (“NAV”) declines. The Commission alleged that in response to
advisers’ and shareholders’ questions about the funds’ performance and NAV decline,
Respondents made materially misleading statements that misrepresented the extent of the effect
513

of CMBS exposure on the funds’ assets. The Commission further alleged that Respondents
offered one of the funds’ shares under a materially misleading prospectus that did not adequately
disclose the significant leverage associated with the swap transactions.
The Commission censured Respondents and ordered them to cease and desist from future
violations of Section 17(a)(2) and (3) of the Securities Act of 1933, Section 206(4) of the
Investment Advisers Act of 1940 and related rules thereunder, and Section 34(b) of the
Investment Company Act of 1940. The Commission further ordered OFI to pay a $24,000,000
civil penalty and disgorge $9,879,706, representing management fees obtained during the
relevant time period, plus prejudgment interest of $1,487,190. Respondents further undertook to
cooperate fully with the Commission in further related investigations or proceedings.
e. Trading Practice Violations
(i)
Insider Trading
Q.1.e.(i)
In re Bauer, Release No. 67205, 2012 SEC LEXIS 1865 (June 14, 2011).
The Commission accepted an offer of settlement from Bauer, a former trader for several
registered broker-dealers. In an earlier action brought by the Commission, a federal district court
entered a final judgment by consent against Bauer. The Commission’s complaint alleged that
Bauer traded in advance of at least nine pending mergers and acquisitions based on tips from a
lawyer who had accessed material nonpublic information regarding the transactions from his
firm’s computer system. Bauer traded on the tips in accounts for himself, the attorney, and an
intermediary who passed the tips on from the attorney to Bauer. The final judgment permanently
enjoined Bauer from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act
of 1934 and Rules 10b-5 and 14e-3 thereunder, and ordered him to pay disgorgement of
$30,812,796 and prejudgment interest of $859,135. The disgorgement order was partially
satisfied and offset by a Final Order of Forfeiture entered in a related criminal proceeding in
federal district court seizing various assets at the direction of the U.S. Attorney’s Office. In that
proceeding, Bauer pleaded guilty to one count of securities fraud, conspiracy to commit
securities fraud, conspiracy to commit money laundering, and obstruction of justice. The
Commission barred Bauer from association and from participating in any offering of a penny
stock.
In re Brogger, Release No. 66594, 2012 SEC LEXIS 821 (Mar. 14, 2012).
514
Q.1.e.(i)
The Commission accepted an offer of settlement from Brogger, the president of
SharesPost, Inc., which, following the Commission’s alleged conduct, acquired a registered
broker-dealer. The Commission alleged that SharesPost willfully violated Section 15(a) of the
Securities Exchange Act of 1934 and that Brogger caused this violation. The Commission
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
an online service to help match buyers and sellers of pre-IPO stock, and charged commissions
through affiliated broker dealers for effecting such transactions. SharesPost also used its website
to sell interests in pooled investment vehicles that were managed by a SharesPost affiliate.
SharesPost was ordered to pay an $80,000 civil penalty and Brogger was ordered to pay a
$20,000 civil penalty.
In re Drimal, Release No. 66314, 2012 SEC LEXIS 1001 (Feb. 2, 2012).
515
Q.1.e.(i)
The Commission accepted an offer of settlement from Drimal, a former trader for several
registered broker-dealers. In an earlier action brought by the Commission, a federal district court
entered a final judgment by consent against Drimal, enjoining him from future violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
Commission’s complaint alleged that Drimal was tipped material nonpublic information
concerning three companies and that he traded on that information and tipped it to others. In a
related criminal proceeding in federal district court, Drimal pleaded guilty to five counts of
securities fraud and one count of conspiracy to commit securities fraud. The Commission barred
Drimal from association and from participating in any penny stock offering.
In re Echeverri, Release No. 66088, 2012 SEC LEXIS 1000 (Jan. 3, 2012).
Q.1.e.(i)
The Commission accepted an offer of settlement from Echeverri, a former registered
representative associated with registered broker-dealers. In a related action brought by the
Commission, a federal district court entered a judgment by consent against Echeverri,
permanently enjoining him from future violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. The Commission’s complaint alleged that Echeverri
received material non-public information concerning the proposed acquisition of a company and,
based on that information, purchased stock of the company. The Commission further alleged
that Echeverri knew or should have known that the officer of the company who provided him
with the information did so in breach of the duty of trust and confidence the officer owed to the
company. Additionally, the complaint alleged that Echeverri tipped the information to five other
people, and sold his stock of the company after the acquisition was announced for a $150,121
profit. The Commission barred Echeverri from association and from participating in any penny
stock offering.
In re Fleishman, Release No. 67190, 2012 SEC LEXIS 1849 (June 12, 2012).
Q.1.e.(i)
The Commission accepted an offer of settlement from Fleishman, a sales manager and
registered representative with a broker-dealer. In an earlier action brought by the Commission, a
federal district court entered a final judgment by consent against Fleishman, permanently
enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934
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
to commit wire fraud. The criminal indictment alleged that Fleishman obtained material
nonpublic information from public companies and tipped that information to clients, as well as
facilitated communications between employees of public companies and clients knowing that
material, nonpublic information would be divulged. The Commission barred Fleishman from
association and from participating in any penny stock.
In re Kimelman, Release No. 66626, 2012 SEC LEXIS 889 (Mar. 20, 2012).
516
Q.1.e.(i)
The Commission accepted an offer of settlement from Kimelman, a former trader at a
registered broker-dealer. In a related action brought by the Commission, a federal district court
entered a judgment by consent against Kimelman, permanently enjoining him from future
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
In a related criminal action, Kimelman was convicted of one count of conspiracy to commit
securities fraud and two counts of securities fraud. The Commission’s complaint alleged that
Kimelman received material non-public information concerning the acquisition of a company
and used the information to trade in the company’s securities. The Commission further alleged
that Kimelman knew or should have known that the information was obtained in breach of a
fiduciary or other duty of trust and confidence owed to the source of the information. The
Commission barred Kimelman from association and from participating in any penny stock
offering.
In re Kueng, Release No. 66585, 2012 SEC LEXIS 815 (Mar. 13, 2012).
Q.1.e.(i)
The Commission accepted an offer of settlement from Kueng, a former sales specialist of a
dually registered broker-dealer and investment adviser. In an earlier proceeding brought by the
Commission, a federal district court entered a final judgment by consent against Kueng,
permanently enjoining her from future violations of the antifraud provisions of the federal
securities laws. The Commission’s complaint alleged that Kueng received material nonpublic
information regarding an issuer, and that she tipped information regarding the issuer’s
acquisition to a trader at her firm and to her clients, resulting in trading in the issuer’s securities.
The Commission barred Kueng from association and prohibited her from participating in any
penny stock offering.
In re Mindlin, Release No. 66246, 2012 SEC LEXIS 335 (Jan. 26, 2012)
Q.1.e.(i)
The Commission accepted offers of settlement from Spencer Mindlin, who was affiliated
with a dually-registered broker-dealer and investment adviser, and Alfred Mindlin, a certified
public accountant. The Commission’s complaint alleged that Spencer Mindlin, while working
on his firm’s Exchange-Traded Funds Desk (“ETF Desk”), obtained material nonpublic
information concerning the plans of certain firm employees to purchase and sell large amounts of
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
exchange-traded fund while in possession of this non-public information, resulting in profits in
excess of $57,000. The Mindlins were ordered to cease and desist from committing or causing
any violations of the anti-fraud provisions of the federal securities laws, and to jointly and
severally pay disgorgement of $57,481 and prejudgment interest of $10,081. Spencer Mindlin
was also barred from association and from participating in any offering of penny stock,
prohibited from serving as an employee, officer, director, board member, investment adviser,
depositor or principal underwriter for a registered investment company, and ordered to pay a
$25,000 civil penalty.
In re Plate, Release No. 66313, 2012 SEC LEXIS 1005 (Feb. 2, 2012).
Q.1.e.(i)
The Commission accepted an offer of settlement from Plate, a former registered
representative and proprietary trader at a registered broker-dealer. In two separate civil actions
brought by the Commission in federal district court, judgments by consent were entered against
Plate, permanently enjoining him from future violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. In related criminal proceedings in federal
district court, Plate pleaded guilty to one count of conspiracy to commit securities fraud and one
count of securities fraud. The Commission’s complaints alleged that Plate, while working as a
trader for the Firm, was tipped material, nonpublic information regarding two issuers, and both
traded in the securities of those issuers based on such information and tipped others. The
Commission barred Plate from association and from participating in an offering of penny stock.
(ii)
Market Manipulation
Q.1.e.(ii)
In re Berger, Release No. 66365, 2012 SEC LEXIS 1006 (Feb. 9, 2012).
The Commission accepted an offer of settlement from Berger, a former registered
representative. In an earlier action brought by the Commission, a federal district court entered a
final judgment by consent against Berger, permanently enjoining him 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
Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission’s complaint alleged that,
between 2005 and 2007, Berger and others engaged in a manipulative scheme to pump and dump
the securities of at least eight U.S. microcap stocks of issuers primarily headquartered in China,
and facilitated unregistered sales totaling $33 million of these securities. The Commission
further alleged that Berger organized the pump and dump of one of the issuers’ shares. In a
separate criminal proceeding, Berger pleaded guilty to one count of conspiracy to commit wire
fraud and securities fraud, and was sentenced to two years in prison and ordered to forfeit
$600,000. The Commission barred Berger from association.
517

Q.1.e.(ii)
In re Bravo, Release No. 67805, 2012 SEC LEXIS 2854 (Sept. 7, 2012).
The Commission accepted an offer of settlement from Bravo, the chief operating officer,
senior vice president, and head of equity trading of a registered broker-dealer, and secretary and
assistant treasurer of a registered investment adviser. In a related action brought by the
Commission, a federal district court entered a judgment by consent against Bravo, permanently
enjoining him from future violations of Section 17(a) 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), 206(2),
and 206(3) of the Investment Advisers Act of 1940. The Commission alleged that Bravo and
others engaged in a fraudulent scheme involving the initial public offering of and subsequent
trading in the common stock of a company. The Commission alleged that, among other
fraudulent acts, Bravo and others backdated transactions such that the company’s shares were
sold to one of the investment adviser’s clients at higher prices, and otherwise illegally supported
the price of the stock. The Commission barred Bravo from association and from participating in
any penny stock offering.
Q.1.e.(ii)
In re Hold Brothers On-Line Investment Services, LLC, et. al., Release No. 67924, 2012 SEC
LEXIS 3029 (Sep. 25, 2012).
The Commission accepted an offer of settlement from Hold Brothers On-Line Investment
Services, LLC (“Hold Brothers”), a registered broker-dealer; Hold, the president and co-founder
of Hold Brothers; Vallone, the former CCO and CFO of Hold Brothers; Tobias, an associated
person of Hold Brothers and the managing member of Demonstrate LLC (“Demonstrate”);
Demonstrate, a company organized under Nevis law and owned by Hold; and Trade Alpha
Corporate, Ltd (“Trade Alpha,”), a company organized under British Virgin Island Law and
owned by Hold. The Commission alleged that from at least January 2009 through September
2010 overseas traders who traded through Hold Brothers engaged in a manipulative trading
strategy known as “spoofing” or “layering”. These overseas traders used accounts that were set
up by Demonstrate and Alpha, and that were funded by Hold. Hold Brothers controlled the
overseas traders by, among other things, determining and allocating buying power, establishing
stop loss limits and dictating the profit distribution between Demonstrate and Trade Alpha and
the traders.
The Commission alleged that Hold Brothers failed to adequately monitor and investigate
the trading despite red flags, including emails describing the trading strategy as an attempt to
“push the price down, and then up” and complaints from trading exchanges relating to “massive”
amounts of order cancelations. The Commission alleged that Hold Brothers lacked adequate
surveillance systems and reasonable procedures to prevent or detect the manipulative layering
trading by the overseas traders, that Hold failed to adequately supervise Vallone, and that Hold
Brothers failed to file suspicious activity reports for suspicious trading and failed to preserve and
furnish order information.
518

The Commission ordered Demonstrate and Trade Alpha to cease and desist from
committing or causing any violations and any future violations of Section 9(a)(2) of the
Securities Exchange Act of 1934 and ordered Demonstrate to pay disgorgement of $1,258,333.
The Commission censured Hold Brothers, ordered it to cease and desist from committing or
causing any violations and any future violations of Section 9(a)(2) and Section 17(a) of the
Exchange Act and Rules 17a-4 and 17a-8 thereunder, and ordered it to pay disgorgement of
$629,167 plus post-Order interest of $9,285.22 and a $1,887,500 civil penalty plus post-Order
interest of $9,285.22. The Commission ordered Hold, Vallone, and Tobias to cease and desist
from committing or causing any violations and any future violations of Section 9(a)(2) of the
Exchange Act and ordered each to pay a $75,000 civil penalty. Vallone and Tobias were barred
from association, barred from participating in any offering of penny stock, and prohibited from
serving as an employee, officer, director, board member, investment adviser, depositor or
principal underwriter for a registered investment company, with a right to reapply in three years.
Hold was barred from association, barred from participating in any offering of penny stock, and
prohibited from serving as an employee, officer, director, board member, investment adviser,
depositor or principal underwriter for a registered investment company, with a right to reapply in
two years and barred from association in a supervisory capacity with a right to reapply in three
years.
In re Hunter Adams, Release No. 67019, 2012 SEC LEXIS 1564 (May 18, 2012).
519
Q.1.e.(ii)
An administrative law judge entered a default order against Berkun, who was associated
with a registered broker-dealer in various capacities. In a parallel criminal proceeding, Berkun
was convicted of conspiracy to commit securities, mail and wire fraud and conspiracy to commit
money laundering. The federal court ordered him to pay restitution of $3,684,199 and to serve
seventy-two months in prison. The Commission alleged that Berkun and others instructed
registered representatives to use various fraudulent sales practices designed to inflate the price
and market demand for a penny stock and allowed the firm to sell the stock to customers at
artificially high prices. Berkun also paid registered representatives additional, undisclosed
compensation in connection with sales of the stock. The administrative law judge ordered
Berkun to cease and desist from future violations of Sections 5(a), 5(c), and 17(a) of the
Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5
thereunder, and from aiding and abetting future violations of Section 15(c) of the Exchange Act,
and Rules 15c1-2 and 15c1-8 thereunder.
In re Lopez, Release No. 66638, 2012 SEC LEXIS 907 (Mar. 21, 2012).
Q.1.e.(ii)
The Commission accepted an offer of settlement from Lopez, a former registered
representative of registered broker-dealers. In an earlier action brought by the Commission, a
federal district court entered a final judgment by consent against Lopez. The Commission’s
complaint alleged that Lopez sold numerous microcap stocks in unregistered offerings, and that
he and others manipulated the markets of those stocks, yielding substantial gains for Lopez when
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
Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission barred Lopez from
association.
(iii)
Securities Offering Violations
Q.1.e.(iii)
In re Puttick, Release No. 66879, 2012 SEC LEXIS 2089 (Apr. 30, 2012).
The Commission accepted an offer of settlement from Puttick, president of a formerly
registered broker-dealer. In a related action brought by the Commission, a federal district court
entered a final judgment by consent against Puttick, permanently enjoining him from future
violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission’s complaint
alleged that Puttick authorized registered representatives to sell interests in three real estate funds
with respect to which there were no registration statements in effect or exemptions from
registration requirements. The Commission suspended Puttick from association and from
participating in any offering of a penny stock for twelve months.
In re Ritchie, Release No. 66684, 2012 SEC LEXIS 1016 (Mar. 29, 2012).
Q.1.e.(iii)
The Commission accepted an offer of settlement from Ritchie, a registered representative
associated with a registered broker-dealer. In an earlier proceeding brought by the Commission,
a federal district court entered a final judgment by consent against Ritchie, permanently
enjoining her from future violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The
Commission alleged that Ritchie facilitated a scheme to distribute unregistered securities. The
Commission barred Ritchie from association with the right to reapply after three years.
In re Riviello, Release No. 66374, 2012 SEC LEXIS 466 (Feb. 10, 2012).
Q.1.e.(iii)
The Commission accepted an offer of settlement from Riviello, the majority owner of a
registered broker-dealer. In an earlier action brought by the Commission, a federal district court
entered a final judgment by consent against Riviello, permanently enjoining him 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 Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission alleged that
Ritchie knowingly or recklessly facilitated a fraudulent scheme to sell unregistered shares of a
security. In an earlier criminal action in federal district court, Riviello pleaded guilty to one
count of conspiracy to engage in monetary transactions in property derived from unlawful
activity and was sentenced to eight months in prison and ordered to pay a forfeiture of $107,000.
The Commission barred Riviello from association.
520

(iv)
Trading Rules Violations
Q.1.e.(iv)
In re Wolfson, Release No. 67450, 2012 SEC LEXIS 2266 (July 17, 2012); In re Wolfson,
Release No. 67451, 2012 SEC LEXIS 2265 (July 17, 2012).
The Commission accepted offers of settlement from J. Wolfson, a sole proprietor of a
registered broker-dealer, Golden Anchor Trading II, LLC, a registered broker-dealer, and R.
Wolfson, a market maker for Golden Anchor. The Commission alleged that Respondents,
purported options market makers, violated the locate and close-out requirements of Regulation
SHO under the Securities Exchange Act of 1934 by improperly relying on the market maker
exception to avoid locating shares before effecting short sales. The Commission also alleged
that Respondents engaged in a series of sham reset transactions that employed short-term, paired
stock and options positions, which enabled them to circumvent their close-out obligations.
Additionally, Respondents assisted other options market makers who were executing their own
sham reset transactions by acting as a counterparty to the sham transactions. As a result of these
activities, Respondents caused large persistent fail to deliver positions in SHO threshold
securities. The Commission ordered Respondents to cease and desist from committing or
causing any current or future violations of Exchange Act Rules 203(b)(1) and 203(b)(3). The
Commission also suspended J. Wolfson from association and from participating in any offering
of a penny stock for twelve months, and ordered him to pay disgorgement of $8,771,432,
prejudgment interest of $2,153,568, and a $2,500,000 civil penalty. The Commission suspended
R. Wolfson from association and from participating in any offering of a penny stock for four
months, and ordered him and Golden Anchor, on a joint and several basis, to pay disgorgement
of $722,589, prejudgment interest of $177,411, and a $200,000 civil penalty. The Commission
also censured Golden Anchor.
f. Failure to Supervise
Q.1.f
In re AXA Advisors, LLC, Release No. 66206, 2012 SEC Lexis 206 (Jan. 20, 2012).
The Commission accepted an offer of settlement from AXA Advisors, LLC, a registered
broker-dealer, in connection with allegations that the Firm failed reasonably to supervise a
former registered representative of the Firm. The registered representative fraudulently induced
customers to redeem securities, including variable annuities and mutual funds, by representing
that the proceeds would be invested in other securities, when he instead misappropriated the
proceeds. The registered representative at issue perpetrated his fraud in part during his disability
leave. The Commission alleged that the Firm failed to implement adequate procedures regarding
the review of redemptions by customers of variable annuities and that the Firm failed to establish
reasonable procedures to supervise registered representatives who were on leave for an extended
period of time, including absences due to disability. The Commission censured the Firm and
ordered it to pay a $100,000 civil penalty. The Commission considered the remedial acts
undertaken by the Firm, including improved systems for supervising customer redemptions of
variable annuities, in entering into the settlement. Additionally, the Firm undertook to engage an
521

independent compliance consultant to improve its supervisory and compliance practices for
circumstances where registered representatives are on extended leave.
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012).
Q.1.f
The Commission accepted an offer of settlement from Biremis, a registered broker-dealer,
Beck, the President and sole director of Biremis, and Kim, the Vice President of Biremis.
Through Biremis and its affiliates, Beck and Kim operated a worldwide day trading business that
included 4,000 to 5,000 day traders in over 30 different nations. The Commission alleged that
Respondents violated Sections 15(b)(4)(E) and 17(a) of the Securities Exchange Act of 1934 and
that the Firm violated Section 17(a) of the Exchange Act and Rules 17a-8 and 17a-4(b)(4).
According to the Commission, Respondents failed to supervise reasonably certain associated day
traders who used the Firm’s order system to engage in layering. The Commission further alleged
that Respondents failed to establish procedures that would reasonably be expected to prevent and
detect the manipulative trading and that Beck and Kim failed to respond to red flags indicative of
it, including warnings from other U.S. broker-dealers that certain Biremis day traders were
engaging in layering. Additionally, the Commission alleged that the Firm failed to file
suspicious activity reports regarding the layering and failed to retain instant messages related to
its broker-dealer business. Biremis and Beck had a lengthy prior disciplinary history. The
Commission ordered that the Firm cease and desist from current or future violations of Section
17(a) of the Exchange Act and Rules 17a-8 and 17a-4(b)(4) thereunder and revoked its
registration. The Commission barred Beck and Kim from association and from participating in
any offering of a penny stock, and ordered them to each pay a $250,000 civil penalty.
In re 1st Discount Brokerage, Inc., Release No. 66212, 2012 SEC LEXIS 220 (Jan. 23, 2012).
Q.1.f
The Commission accepted an offer of settlement from 1st Discount Brokerage, Inc., a
registered broker-dealer, and its executive vice-president Fisher. The Commission alleged that
Respondents violated Section 15(b)(4)(E) of the Securities Exchange Act of 1934 and Section
203(e) and 203(f) of the Investment Advisers Act of 1940 by failing to supervise Park, a
registered representative who conducted a Ponzi scheme. According to the Commission, the
Firm did not have reasonable policies and procedures in place for compliance audits or for
review of the “doing business as” business accounts of its registered representatives.
Additionally, Fisher, who had been delegated responsibilities over the Firm’s heightened
supervision committee, failed to conduct periodic reviews of registered representatives as was
required by Firm procedure. The Commission alleged that had the Firm, through Fisher,
conducted such reviews, it would have detected several red flags, such as a substantial influx of
money from its customers into Park’s business account, inadequate or missing signage, a
customer complaint of unauthorized trading, and declining commissions. The inadequate
signage persisted for years, indicating a desire by Park to conceal his affiliation with the Firm
from any of his Ponzi scheme victims who might complain. The Commission censured the Firm
and ordered it to pay a $40,000 civil penalty. The Commission suspended Fisher from
522

association in a supervisory capacity with the right to reapply after nine months and ordered him
to pay a $10,000 civil penalty.
In re JP Turner & Co., LLC, Release No. 67808, 2012 SEC LEXIS 2852 (Sep. 10, 2012).
Q.1.f
The Commission accepted offers of settlement from JP Turner & Company, LLC, a
registered broker-dealer, and Mello, a co-founder, former president, and substantial stakeholder
of the Firm. The Commission alleged that Respondents failed reasonably to supervise three
registered representatives who churned the accounts of seven customers. The Commission
further alleged that Respondents failed to establish procedures and systems reasonably designed
to prevent and detect the churning. Although the Firm had a monitoring system to identify
actively traded accounts based primarily on “return on investment” levels, the system imposed
few requirements on, and provided no meaningful guidance to, supervisors reviewing these
accounts. For instance, according to the Commission, the Firm’s system did not require contact
with the customer even if the account was repeatedly flagged as actively traded. The
Commission censured the Firm and ordered it to pay disgorgement of $200,000 plus
prejudgment interest of $16,051 and a $200,000 penalty. The Firm also undertook to retain an
independent consultant to review its written supervisory policies and procedures designed to
prevent and detect churning. The Commission ordered Mello to pay a $45,000 penalty and
suspended him from association in a supervisory capacity for five months.
In re Rizzo, Release No. 67479, 2012 SEC LEXIS 2299 (July 20, 2012).
Q.1.f
The Commission accepted an offer of settlement from Rizzo, co-founder of a former
registered investment adviser, and Hornbogen, its chief compliance officer. The Commission’s
complaint alleged that Rizzo and Hornbogen failed reasonably to supervise Salutric, a registered
representative and investment adviser who misappropriated $7 million from fifteen clients.
Specifically, the Commission’s complaint alleged that Rizzo and Hornbogen failed to investigate
numerous red flags such as forged client signatures and suspicious patterns of successive large
withdrawals and deposits in client accounts, and that they ignored the advice of the firm’s
attorney that they contact all clients in whose accounts the suspicious transactions were made.
The Commission barred Rizzo and Hornbogen from association in a supervisory capacity,
ordered Rizzo to pay $35,079 in disgorgement, $7,731 in prejudgment interest, and a $130,000
civil penalty, and ordered Hornbogen to pay $15,592 in disgorgement, $3,467 in prejudgment
interest and a $25,000 civil penalty.
g. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed
No cases decided in 2012.
523

h. Procedural Issues
(i)
Jurisdiction and Time Bars
No cases decided in 2012.
(ii)
Standard of Review
. No cases decided in 2012.
(iii)
Due Process
. No cases decided in 2012.
(iv)
Prior Disciplinary Histories
.. No cases decided in 2012.
(v)
Selective Prosecution
. No cases decided in 2012.
(vi)
Sanctions
Q.1.h(vi)
In re Morgan, Release No. 67974, 2012 SEC LEXIS 3138 (Oct. 3, 2012).
An administrative law judge entered a default order against Morgan, an unregistered
broker-dealer and fund manager with an unregistered firm, and Woodcock, an unregistered
broker-dealer. In related criminal proceedings, Morgan pleaded guilty to defraud the United
States and money laundering. The federal district court entered a final judgment against him and
sentenced him to 121 months in prison. It further ordered him to pay total restitution, jointly and
severally with others, of $17,360,850. In a related civil action brought by the Commission, a
federal district court entered a final judgment against Morgan, permanently enjoining him from
future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Sections 10(b)
and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In a separate,
related civil action brought by the Commission, a federal district court entered a final judgment
by default against Woodlock, and ordered him to pay disgorgement of $7,758,346 plus
prejudgment interest of $1,120,599 and a $130,000 penalty. The Commission had alleged that
Morgan and Woodlock participated in a fraudulent scheme by offering and selling investments in
a fictitious prime bank instrument trading program. The ALJ determined that collateral bar
sanctions added to the Exchange Act by the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which authorized the Commission to suspend or bar individuals from association
with an investment advisor, broker, dealer, municipal securities dealer, municipal advisor,
transfer agent, or NRSRO without showing a specific nexus between the misconduct and the
branch of the securities industry as to which the bar was sought, could be applied retroactively in
524

all cases except as to the municipal advisor bar, because no such bar or similar provision had
previously existed as to the municipal advisor registration.
i. Broker/Dealer Registration Violations
Q.1.i
In re Alchemy Ventures, Inc., Release No. 67206, 2012 SEC LEXIS 1866 (June 15, 2012).
The Commission accepted an offer of settlement from Alchemy Ventures, Inc., the
unregistered parent to a registered broker-dealer, its president, Rogers, and its vice president,
Hotovec, both of whom were also associated with the registered subsidiary. The Commission
alleged that Alchemy received sponsored market access through a registered broker-dealer and
passed that access to traders through a Canadian entity that solicited traders through its website
and referred them to Alchemy. As part of this arrangement, Alchemy participated in the ordertaking
and order-routing process, extended credit to traders in connection with securities
transactions, and handled customer funds and securities. Alchemy received transaction-based
compensation from, and split trader-generated profits with, the Canadian entity. The
Commission further alleged that a Latvian trader who received sponsored market access used
Alchemy’s account to further an illegal trading scheme involving account intrusion. The
Commission ordered Alchemy to pay disgorgement of $28,503 plus prejudgment interest of
$2,515 and a $75,000 penalty, and ordered Rogers and Hotovec to each pay a $35,000 penalty.
The Commission further censured Respondents and ordered them to cease and desist from future
violations of Section 15(a) of the Securities Exchange Act of 1934.
In re Ambit Capital Pvt. Ltd., Release No. 68295, 2012 SEC LEXIS 3657 (Nov. 27, 2012)
Q.1.i
The Commission accepted an offer of settlement from Ambit Capital Pvt. Ltd., a brokerdealer
registered with the Securities and Exchange Board of India and based in Mumbai, India.
The Commission alleged that from at least January 2011 through at least October 2011, the Firm
solicited and provided brokerage services to U.S. institutional investors without being registered
as a broker-dealer as required by Section 15(a) of the Securities Exchange Act of 1934 or
meeting the requirements for an exemption. Ambit systematically solicited U.S. institutional
investors for the purposes of providing brokerage services through multiple visits to the United
States to meet with investors, sending hundreds of research reports to investors and following up
on those reports, and repeated telephone calls to at least one investor. The Commission censured
the Firm and ordered it to pay disgorgement of $30,000 plus prejudgment interest of $910. The
Commission did not impose a penalty based on the Firm’s cooperation in a Commission
investigation and/or related enforcement action.
525

Q.1.i
In re Edelweiss Fin. Serv. Ltd., Release No. 68298, 2012 SEC LEXIS 3654 (Nov. 27, 2012)
The Commission accepted an offer of settlement from Edelweiss Financial Services
Limited, a financial services holding company registered with the Securities and Exchange
Board of India and based in Mumbai, India. The Commission alleged that from at least 2007
until July 2011, the Firm solicited and provided brokerage services to U.S. institutional investors
without being registered as a broker-dealer as required by Section 15(a) of the Securities
Exchange Act of 1934 or meeting the requirements for an exemption. Among other things,
Edelweiss bought and sold securities of Indian issuers on Indian stock exchanges on behalf of
U.S. investors, receiving transaction-based compensation of approximately $9.4 million. The
Commission censured the Firm and ordered it to pay disgorgement of $540,000 plus
prejudgment interest of $28,347. The Commission did not impose a penalty based on the Firm’s
cooperation in a Commission investigation and/or related enforcement action.
Q.1.i
In re JM Fin. Institutional Sec. Private Ltd., Release No. 68297, 2012 SEC LEXIS 3655 (Nov.
27, 2012)
The Commission accepted an offer of settlement from JM Financial Institutional Securities
Private Limited, a broker registered with the Securities and Exchange Board of India and based
in Mumbai, India. The Commission alleged that from at least October 2007 until February 2012,
the Firm solicited and provided brokerage services to U.S. institutional investors without being
registered as a broker-dealer as required by Section 15(a) of the Securities Exchange Act of 1934
or meeting the requirements for an exemption. Among other things, JM Financial bought and
sold securities of Indian issuers on Indian stock exchanges on behalf of at least 91 U.S. investors,
receiving transaction-based compensation of approximately $2.3 million. The Commission
censured the Firm and ordered it to pay disgorgement of $425,000 plus prejudgment interest of
$18,545. The Commission did not impose a penalty based on the Firm’s cooperation in a
Commission investigation and/or related enforcement action.
In re Motilal Oswal Sec. Ltd., Release No. 68296, 2012 SEC LEXIS 3656 (Nov. 27, 2012).
Q.1.i
The Commission accepted an offer of settlement from Motilal Oswal Securities Limited, a
broker-dealer registered with the Securities and Exchange Board of India and based in Mumbai,
India. The Commission alleged that from at least 2007 until April 2011, the Firm solicited and
provided brokerage services to U.S. institutional investors without being registered as a brokerdealer
as required by Section 15(a) of the Securities Exchange Act of 1934 or meeting the
requirements for an exemption. Among other things, Motilal sponsored an annual conference in
the U.S. to which it invited U.S. investors and representatives of Indian issuers, and also bought
and sold securities of Indian issuers on Indian stock exchanges for U.S. investors in exchange for
commissions and soft-dollar payments. The Commission censured the Firm and ordered it to
pay disgorgement of $780,000 plus prejudgment interest of $41,594. The Commission did not
526

impose a penalty based on the Firm’s cooperation in a Commission investigation and/or related
enforcement action.
In re Zhou, Release No. 67531, 2012 SEC LEXIS 2384 (July 30, 2012).
Q.1.i
The Commission accepted an offer of settlement from Zhou, a registered representative
and president of a former registered broker-dealer. The Commission alleged that Zhou’s
registered broker-dealer acted as a placement agent for a Chinese reverse merger company (the
“Company”), and that Zhou facilitated the illicit payment of transaction-based compensation to
unregistered brokers in connection with two private placement transactions for the Company.
The Commission further alleged that Zhou facilitated the unregistered distribution and sale of
restricted securities as payment to the unregistered brokers, and that Zhou traded in the securities
of the Company on the basis of material non-public information. The Commission ordered Zhou
to pay disgorgement of $20,900 plus prejudgment interest of $2,463 and a $50,000 penalty. The
Commission further ordered Zhou to cease and desist from future violations of Sections 5(a),
5(c), and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, barred him from association and from
participating in an offering of penny stock, and prohibited him from employment with an
investment adviser or investment company, with the right to reapply after three years.
j. Miscellaneous
Q.1.j
In re eBX, LLC, Release 67969, 2012 SEC LEXIS 3150 (Oct. 3, 2012).
The Commission accepted an offer of settlement from eBX, LLC, a registered broker
dealer. The Commission alleged that the Firm violated Rules 301(b)(2) and 301(b)(10) of
Regulation ATS. According to the Commission, the Firm ran an alternative trading system that
outsourced its operation to a service provider. From at least 2008 through early 2011, the
alternative trading system failed to protect the confidential trading information of its subscribers
and failed to disclose to all its subscribers the uses that it allowed the service provider to make of
their confidential trading information, including use of that information to benefit a separate
order routing business that the service provider had. The ATS also failed to disclose these
matters in its Form ATS. The Commission censured the Firm and ordered it to cease and desist
from committing or causing current or future violations of Rules 301(b)(2) and 301(b)(10) of
Regulation ATS and to pay a $800,000 civil penalty.
In re Goldman, Sachs & Co., Release No. 67934, 2012 SEC LEXIS 3086 (Sept. 27, 2012).
527
Q.1.j
The Commission accepted an offer of settlement from Goldman, Sachs & Co., a registered
broker-dealer and municipal securities dealer. During the relevant time, the Firm employed
Morrison as a municipal finance professional and vice president of investment banking in one of
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
Commission alleged that Morrison assisted Cahill in various campaign functions, such as
fundraising, reviewing the campaign budget, and providing legal advice, at times from his office
using the Firm’s email address and telephone. Morrison also gave a friend $400 in cash and
asked the friend to write a check to Cahill’s campaign in the friend’s name. The Commission
alleged that Morrison’s actions constituted in-kind and indirect cash contributions to a political
campaign attributable to the Firm, triggering a two-year ban on municipal securities business
with issuers. Despite the ban, within two years after the contributions, the Firm participated as a
senior manager, co-senior manager, or co-manager for a total of thirty negotiated underwriters by
Massachusetts issuers. The Firm did not report these contributions, nor did it detect Morrison’s
activities for a two-year period. The Commission censured the Firm and directed it to cease and
desist from future violations of Section 15B(c)(1) of the Securities Exchange Act of 1934,
MSRB Rules G-8, G-9, G-17, G-27, G-37(b) and G-37(e). The Commission further ordered the
Firm to disgorge $7,558,942 in profits and pay a $3,750,000 penalty.
In re MidSouth Capital, Inc., Release No. 66828, 2012 SEC LEXIS 1254 (Apr. 18, 2012).
Q.1.j
The Commission accepted an offer of settlement from MidSouth Capital, Inc., a registered
broker-dealer, and Hill, the Firm’s largest shareholder, CEO, and Financial and Operations
Principal. The Commission alleged that on seven occasions between December 2008 and
October 2011, the Firm effected transactions in securities while failing to maintain sufficient net
capital. During certain of these times, FINRA and/or the Commission warned the Firm that
continuing to effect transactions in securities would violate Section 15(c)(3) of the Securities
Exchange Act of 1934 and Rule 15c3-1 thereunder. Despite these warnings, the Firm did not
suspend operations. FINRA sent three of the deficiency notifications directly to Hill, who had
primary responsibility for addressing the Firm’s net capital obligations and was aware of the
Firm’s past violations. The Firm also failed to file on a timely basis the required Rule 17a-11
notifications with FINRA and the Commission regarding its net capital deficiencies. One
deficiency arose because the Firm had improperly included “an aged unsecured receivable” from
an affiliated entity in its net capital. In so doing, the Firm also failed to maintain accurate books
and records. The Commission censured the Firm and ordered it to cease and desist from
violating Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-11, and 17a-
3 thereunder. The Commission ordered Hill to cease and desist from willfully aiding and
abetting violations of the same provisions, suspended him from association for six months,
prohibited him from acting as an employee, officer, or member of an advisory board, investment
adviser or depositor of, or principal underwriter for, a registered investment company for six
months, and ordered him to pay a $15,000 civil penalty.
2. SEC Review of SRO Proceedings
a. Sales Practice Violations
No cases decided in 2012.
528

. Unfair/Fraudulent Markups or Commissions
No cases decided in 2012.
c. Other Fraudulent Practices
(i)
Misrepresentation
Q.2.c(i)
In re Braff, Release No. 66467, 2012 SEC LEXIS 620 (Feb. 24, 2012).
The Commission reviewed an appeal from a FINRA disciplinary decision by Braff, a
former general securities representative, general securities principal, and options principal of
various FINRA member firms. A FINRA hearing panel had found that Braff violated NASD
Rule 3050(c) and NASD Rule 2110 by failing to provide written notice of his outside brokerage
accounts to his associated firms and failing to provide written notice of his associated person
status to the firms holding the outside brokerage accounts. The panel further found that he
violated Rule 2110 by falsely stating on certain employment documents that he had no outside
brokerage accounts. The hearing panel imposed a $15,000 fine and suspended Braff in all
capacities for one year. Braff appealed to the National Adjudicatory Council (“NAC”), which
affirmed the hearing panel’s findings of violation but increased the sanctions to a $25,000 fine
and two-year suspension. Braff appealed, claiming that the sanctions imposed by the NAC were
excessively harsh. The Commission sustained the NAC’s findings and sanctions, finding that
Braff’s misconduct was egregious and that the sanctions were neither excessive nor oppressive.
In re Mullins, Release No. 66373, 2011 SEC LEXIS 464 (Feb. 10, 2012).
Q. 2.c(i)
The Commission reviewed an appeal by J. Mullins and K. Mullins, former general
securities representatives associated with a FINRA member firm, from a FINRA disciplinary
action. FINRA had found that J. Mullins violated NASD Rule 2110 by converting customer
property and breaching fiduciary obligations and NASD Rules 2330(a) and 2110 by misusing
customer funds, and that both J. Mullins and K. Mullins violated NASD Rules 3110 and 2110 by
making material misstatements to their firm on annual compliance questionnaires and NASD
Rules 2370 and 2110 by borrowing funds from a customer without firm approval. The findings
stemmed from Respondents’ handling of funds held by a charitable foundation. The Mullins also
failed to disclose to their firm that they held positions with the Foundation as Foundation vice
president, in the case of J. Mullins, and as foundation Secretary and Treasurer, in the case of K.
Mullins. J. Mullins misused Foundation funds for his own benefit. Respondents also had a
personal relationship with the founder of the foundation that included assisting her with her
personal needs such as grocery shopping and running errands. FINRA barred J. Mullins in all
capacities. It suspended K. Mullins in all capacities for six months, fined her $15,000, and
ordered her to requalify as a sanction for the material misstatements. It further suspended her for
an additional three months, fined her $5,000 and ordered her to requalify as a sanction for
529

orrowing customer funds. The National Adjudicatory Council affirmed the hearing panel’s
findings of violation and the sanctions.
The Commission sustained the findings of violation in part, and vacated FINRA’s
findings that (a) J. Mullins violated NASD Rule 2330 by misusing customer funds, (b) J. Mullins
and K. Mullins violated NASD Rule 3110 by failing to disclose information to their firm, and (c)
J. Mullins and K. Mullins violated NASD Rules 3110 and 2110 by failing to disclose their status
as trustees of the foundation or its account. The Commission sustained the bar against J. Mullins
but modified the sanctions against K. Mullins. In particular, the Commission vacated K.
Mullins’ six month suspension, $15,000 fine and order to requalify sanction and ordered instead
a four month suspension, $10,000 fine and requalify order for failing to disclose information to
her firm. The Commission identified as mitigating factors that K. Mullins took responsibility for
her misstatements, appeared sincerely remorseful, and cooperated fully with FINRA’s
investigation. It further noted that the record indicated that branch personnel were generally
aware that K. Mullins was close to the founder of the foundation and helped her with the
foundation, lending some support to her argument that she was not engaged in a course of
conduct designed to deceive her firm.
(ii)
Falsification of Documents
. No cases decided in 2012.
(iii)
Failure to Maintain Accurate Books and Records
No cases decided in 2012.
(iv)
Selling Away
No cases decided in 2012.
d. Financial Responsibility Violations
(i)
Segregation of Customer Funds
No cases decided in 2012.
(ii)
Regulation T Violations
No cases decided in 2012.
e. Trading Practice Violations/Market Manipulation
No cases decided in 2012.
530

f. Failure to Supervise
Q.2.f
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012).
The Commission sustained FINRA’s imposition of sanctions against a former FINRA
member firm and its president and CEO. FINRA had found that the Firm violated Section 5 of
the Securities Act of 1933 and NASD Conduct Rule 2110 by engaging in the sale of unregistered
securities, and NASD Conduct Rules 3010 and 2110 by failing to maintain adequate written
supervisory procedures and to supervise reasonably registered representatives engaging in
unregistered sales. FINRA found that the Firm’s system of supervision consisted solely of
relying on transfer agents and clearing firms to ensure that its unregistered sales complied with
securities laws, and that the minimal written procedures the Firm had lacked meaningful
guidance setting forth “reasonable inquiry” procedures for registered representatives to follow
when customers sought to sell unregistered stock. FINRA fined the Firm $80,000, fined its
president and CEO $50,000 and suspended him in all principal capacities for two years, and
assessed costs. The Commission sustained FINRA’s ruling, noting that the Applicants’ prior
AWC involving similar violations of Section 5 was an aggravating factor.
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).
Q.2.f
The Commission sustained the decision and penalties imposed by FINRA’s National
Adjudicatory Council against World Trade Financial Corp., a registered broker-dealer, Michel,
its president, Adams, its trade desk supervisor, and Brickell, its registered representative. The
NAC had upheld a FINRA hearing panel’s findings that the Firm had sold, on behalf of three
customers, shares of an unregistered offering in the over-the-counter market in the absence of a
valid registration exemption. The hearing panel found that the Firm did not conduct adequate
due diligence regarding the registration status of the securities, and instead improperly relied on
the transfer agent’s erroneous conclusion that the securities qualified for an exemption from
registration under Rule 144 of the Securities Act of 1933. The firm did not have written
procedures addressing the circumstances under which its registered representatives should
initiate an inquiry into the registration status of shares its customers propose to sell, and Adams,
who supervised Brickell, did not require Brickell to make any inquiry as to the stocks at issue
here even though he know that two firm customers were selling large blocks of recently issued
stock and that both customers worked for a stock promoter. The hearing panel suspended Michel
forty-five days, and suspended both Adams and Brickell for thirty days. It further imposed fines
of $45,000 against the Firm (for the registration and related supervisory violations), $30,000
against Michel (for supervisory violations), $20,000 against Adams (for supervisory violations),
and $15,000 against Brickell (for the registration violations). The NAC upheld the sanctions, as
did the Commission, which noted that Respondents’ actions caused 2.3 million shares of an
unknown stock to be sold to investors without registration or exemption, and that the sanctions
imposed serve both general and specific deterrence.
531

g. Registration Violations
Q.2.g
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).
The Commission sustained the decision and penalties imposed by FINRA’s National
Adjudicatory Council against World Trade Financial Corp., a registered broker-dealer, Michel,
its president, Adams, its trade desk supervisor, and Brickell, its registered representative. The
NAC had upheld a FINRA hearing panel’s findings that the Firm had sold, on behalf of three
customers, shares of an unregistered offering in the over-the-counter market in the absence of a
valid registration exemption. The hearing panel found that the Firm did not conduct adequate
due diligence regarding the registration status of the securities, and instead improperly relied on
the transfer agent’s erroneous conclusion that the securities qualified for an exemption from
registration under Rule 144 of the Securities Act of 1933. The hearing panel suspended Michel
forty-five days, and suspended both Adams and Brickell for thirty days. It further imposed fines
of $45,000 against the Firm (for the registration and related supervisory violations), $30,000
against Michel (for supervisory violations), $20,000 against Adams (for supervisory violations),
and $15,000 against Brickell (for the registration violations). The NAC upheld the sanctions, as
did the Commission, which noted that Respondents’ actions caused 2.3 million shares of an
unknown stock to be sold to investors without registration or exemption, and that the sanctions
imposed serve both general and specific deterrence.
h. Failure to Cooperate with FINRA Investigation/Failure to Comply
with FINRA Requests for Financial Information
No cases decided in 2012.
i. Failure to Honor Arbitration Award/Failure to Pay Fines and
Costs/Failure to Comply with Sanctions Imposed
No cases decided in 2012.
j. Procedural Issues
(i)
Evidence
No cases decided in 2012.
(ii)
Due Process
No cases decided in 2012.
(iii)
Jurisdiction and Time Bars
No cases decided in 2012.
532

(iv)
Discovery
No cases decided in 2012.
(v)
Sanctions
No cases decided in 2012.
(vi)
Right to Counsel
No cases decided in 2012.
k. Statutory Disqualification
Q.2.k
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012).
The Commission considered an appeal by Asensio & Company, Inc., a Delaware
corporation, of FINRA’s denial of the Firm’s application for FINRA membership. The Firm’s
only representative, who was also the Firm’s chairman, chief executive officer, president, chief
financial officer, chief compliance officer, executive representative, general securities principal,
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
denied the new membership application because it found that the Firm failed to demonstrate it
was capable of complying with federal securities laws and FINRA rules, that it had an adequate
supervisory system, or that it and its associated persons had all required licenses and
registrations. The Commission dismissed the review proceeding, finding that the specific
grounds upon which FINRA based its decision existed in fact, and that FINRA’s determination
to deny the Firm’s application was in accordance with FINRA Rules.
In re Bowen, Release No. 68266, 2012 SEC LEXIS 3604 (Nov. 19, 2012).
Q.2.k
The Commission considered an application for relief from a statutory disqualification
brought by FINRA and a member firm on behalf of Bowen, a former registered representative of
a registered broker-dealer. The SEC had barred Bowen from association, with the right to
reapply after two years, for misrepresenting and omitting material information in his
communications with clients to induce them to purchase CMOs. It had also ordered him to pay
disgorgement of $33,664 plus prejudgment interest of $31,258 and a $5,000 civil penalty. The
Commission approved the application in reliance on the representations made by FINRA and the
firm concerning the proposed supervision of Bowen and the scope of his proposed employment,
which was to be limited to transacting business with institutional accounts and other FINRA
member firms.
533

Q.2.k.
In re McCaffrey, Release No. 66844, 2012 SEC LEXIS 1279 (Apr. 23, 2012).
The Commission approved FINRA’s application on behalf of a member firm for relief from
a statutory disqualification against McCaffrey. McCaffrey had been barred from association in
2005 with the right to reapply for association in a supervisory capacity after fifteen months. The
bar stemmed from the failure to supervise an employee who published fraudulent research
reports and established unrealistic price targets on several companies. The Firm sought approval
to hire McCaffrey as head of an equities division and supervisor of five direct reports. In support
of the application, FINRA and the Firm made various representations concerning a plan for the
heightened supervision of McCaffrey, if reinstated. The Commission approved the application
based on FINRA’s and the Firm’s representations.
l. Reporting Violations
In re Tucker, Release No. 68210, 2012 SEC LEXIS 3496 (Nov. 9, 2012).
534
Q.2.l
The Commission sustained FINRA’s sanctions against Tucker, a former registered
representative of a FINRA member firm. FINRA had found that over a period of seven years,
Tucker failed to disclose on his Forms U4 that he completed for eleven member firms three
judgments, two bankruptcies, and federal and state tax liens. FINRA determined that Tucker
willfully violated NASD IM-1000-1 and Conduct Rule 2110, suspended him from associating
with any member firm for two years and required that, at the conclusion of his suspension he requalify
as a corporate securities limited representative. In addition, FINRA found that because
Tucker’s violations were willful and material, it concluded that Tucker was statutorily
disqualified. The Commission found in relevant part that Tucker’s failures to disclose the
judgments, bankruptcies and liens were egregious, and that the sanctions were consistent with
FINRA’s Sanction Guidelines.
m. Net Capital Violations
No cases decided in 2012.
n. Miscellaneous
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012).
Q.2.n
The Commission considered an appeal by Asensio & Company, Inc., a Delaware
corporation, of FINRA’s denial of the Firm’s application for FINRA membership. The Firm’s
only representative, who was also the Firm’s chairman, chief executive officer, president, chief
financial officer, chief compliance officer, executive representative, general securities principal,
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
denied the new membership application because it found that the Firm failed to demonstrate it
was capable of complying with federal securities laws and FINRA rules, that it had an adequate
supervisory system, or that it and its associated persons had all required licenses and
registrations. The Commission dismissed the review proceeding, finding that the specific
grounds upon which FINRA based its decision existed in fact, and that FINRA’s determination
to deny the Firm’s application was in accordance with FINRA Rules.
In re Murphy, Release No. 66433, 2012 SEC LEXIS 564 (Feb. 21, 2012).
Q.2.n
The Commission granted FINRA’s motion to dismiss an appeal by Murphy, a former
registered general securities representative and principal with a FINRA member firm, of
FINRA’s disciplinary sanctions. Murphy failed to timely file a brief in support of his application
for review, and failed to respond to FINRA’s motion. The Commission determined that Murphy
had abandoned his appeal and dismissed him from the proceedings.
R. Broker-Dealer Employment Litigation and Arbitration
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Schwarzwaeler, 2012 WL 3264361 (3d Cir. Dec.
26, 2012).
A financial advisor challenged an arbitration award requiring her to repay her former
employer, a broker-dealer, pursuant to the terms of a promissory note executed at the outset of
her employment. The arbitration panel had determined the advisor was not entitled to offset the
amounts owed on the promissory note with additional compensation she claimed she was owed,
because the advisor released any such claim to additional compensation by virtue of her
settlement of a prior action against the broker-dealer pursuant to the Employee Retirement
Income Security Act, 29 U.S.C. §§ 1001, et. seq. (“ERISA”). The advisor argued in the district
court that the ERISA settlement preserved her right to assert defenses in any action for the
unpaid balance of the promissory note, including a claim for potential setoff. The district court
agreed with the advisor, denied the employer’s application to confirm the arbitration award, and
vacated the award. On appeal, the U.S. Court of Appeals for the Third Circuit reversed the
district court’s decision. The Third Circuit Court concluded that the arbitration panel’s decision
could be rationally derived from the parties’ agreements and submissions to the panel, and
therefore should not be disturbed.
R.
535

R.
Wachovia Securities, LLC .v Brand, 671 F.3d 472 (4th Cir. 2012).
A broker-dealer commenced a FINRA arbitration against former employees for allegedly
conspiring with a competitor and misappropriating confidential and proprietary information. On
the final day of the hearing, the employees moved to recover their attorneys’ fees pursuant to the
South Carolina statute, the Frivolous Civil Proceeding Act (“FCPA”). Notwithstanding the
broker-dealer’s objection that this statute required thirty days’ notice and a separate hearing, the
panel in its award against the broker-dealer awarded $1,111,553.85 for attorneys’ fees under the
FCPA. The broker-dealer moved in the district court to vacate the award, arguing that the panel
manifestly disregarded the law and was guilty of misconduct by failing to comply with the notice
and hearing provisions of the FCPA. The district court disagreed and found that the panel had a
sufficient record to decide the issue of attorneys’ fees and that nothing in the record suggested
misconduct by the panel. On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed,
explaining that arbitrators do not need to follow state procedural requirements, even when
relying upon state substantive law, because arbitrators are given broad discretion on procedure.
Further, the court found no support for the argument that the panel manifestly disregarded the
law, because the panel was not required to apply state procedural law.
Waterford Inv. Servs., Inc. v. Bosco, 682 F.3d 348 (4th Cir. 2012).
A broker-dealer sought to enjoin a customer arbitration commenced against a brokerdealer
and a financial advisor concerning an alleged Ponzi scheme that occurred when the
financial advisor was associated with a different broker-dealer. The broker-dealer alleged that it
should not be forced to arbitrate claims arising from the financial advisor’s conduct while he was
employed with another firm. On cross-motions for summary judgment, the district court denied
the requested injunction, holding that the broker-dealer’s extensive connections with the
financial advisor’s prior firm established that the financial advisor was an “associated person” of
the broker-dealer at the time the alleged Ponzi scheme occurred. Both broker-dealers had
common directors, officers and employees, shared the same office, used the same trading desk,
shared overhead costs, and had the same majority owner. The U.S. Court of Appeals for the
Fourth Circuit affirmed the district court’s decision. Because the financial advisor’s superiors at
his former firm were also officers of the broker-dealer, the Court held that the broker-dealer
could have exercised control, whether direct or indirect, over the financial advisor at the relevant
time. As such, the financial advisor was an associated person of the broker-dealer, and the
broker-dealer could be compelled to arbitrate the investors’ claims under FINRA rules.
Hudson v. Merrill Lynch Int’l Fin. Inc., 2012 WL 5877960 (E.D. La. Nov. 20, 2012).
In an arbitration involving a broker-dealer and its employee, a financial advisor, the panel
granted the financial advisor compensation he claimed was he owed. Both parties sought to
R.
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536

enforce the award in the district court, but disagreed as to whether the required payment to the
financial advisor constituted wages for tax purposes. The district court held that, because the
arbitration award labeled the payment as “damages,” the payment should not be considered
wages. The court ordered the broker-dealer to pay the award in a lump sum and the employee
was responsible for paying any applicable taxes on the awarded amount.
Merrill Lynch, Pierce, Fenner & Smith v. Smolcheck, 2012 WL 4056092 (S.D. Fla. Sept. 17,
2012).
Two financial advisors sought to confirm an arbitration award for $10,250,000 against
their former employer, a broker-dealer. The broker-dealer, in turn, moved to vacate. First, the
broker-dealer argued that the chairperson was impartial and failed to disclose that her husband
had a law practice specializing in suits against financial services companies, had obtained a large
award against the broker-dealer, and had made disparaging comments about the broker-dealer to
the press. The district court concluded, however, that the broker-dealer knew these facts at the
time of the arbitration, notwithstanding their non-disclosure by the chairperson, because printouts
from the website of the law practice pre-dating the arbitration, and a copy of the prior award
against the broker-dealer were found in the files of the broker-dealer’s attorney. Despite this
knowledge, the broker-dealer did not challenge the chairperson for bias prior to the arbitration.
Although the court did not find that these facts constituted a waiver, the court held that the
alleged bias was too remote and speculative to warrant vacatur. The district court also rejected
the broker-dealer’s arguments that the panel engaged in misconduct or exceeded its authority by
limiting the broker-dealer’s presentation of the case and imposing sanctions without notice or a
hearing. The court stated that the panel had a reasonable basis for its actions and, therefore,
refused to vacate the award on these grounds.
Marina v. Edward D. Jones & Co., 2012 WL 3885305 (D. Nev. Sept. 6, 2012).
A financial advisor sued his former employer, a broker-dealer, under the American with
Disabilities Act. The broker-dealer moved to compel arbitration pursuant to an arbitration
provision in the advisor’s employment agreement. The district court compelled arbitration,
because the arbitration provision clearly and unambiguously provided that any dispute would be
submitted to arbitration, including claims for discrimination.
Oliviera v. Citigroup North America, Inc., 2012 WL 1831230 (M.D. Fla. May 18, 2012).
A group of former financial analysts commenced a putative class action against a
financial services company for allegedly violating the Fair Labor Standards Act (“FLSA”) by
misclassifying financial analysts as exempt employees. The company sought to compel
arbitration based upon an arbitration policy acknowledged by the former analysts. The former
R.
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537

analysts did not challenge the applicability of the arbitration policy, but instead challenged the
collective action waiver contained in the policy and argued that such a waiver of class action
rights is unenforceable. The district court recognized binding Eleventh Circuit precedent that
class action waivers may be enforced and compelled arbitration.
Osborne v. Wells Fargo Advisors, LLC, 2012 WL 2952533 (M.D. Fla. July 19, 2012)
A broker-dealer filed an arbitration claim with FINRA to recover payment on two
promissory notes executed by its former employee. The employee responded by commencing an
action in state court seeking a declaration regarding the notes. The broker-dealer removed that
state court action and subsequently moved to compel arbitration of that action. The district court
compelled arbitration, holding that the Form U-4 executed by the employee contained a valid
and enforceable arbitration clause. The court further held that actions relating to promissory
notes were arbitrable under applicable FINRA rules.
Blackwell v. Bank of America Corp., 2012 WL 1229673 (D.S.C. March 22, 2012).
A former employee of a broker-dealer filed a pro se complaint against the broker-dealer’s
parent company for wrongful discharge by the broker-dealer. The parent company moved to
dismiss on the ground that the former employee executed a Form U-4 with an arbitration
provision and that any claim for wrongful discharge may only be submitted to arbitration. The
former employee argued that he should be permitted to proceed in court in light of (1) a FINRA
rule that he argued exempted from arbitration disputes arising out of “insurance business
activities” and (2) Dodd-Frank Financial Reform Act amendments to the Sarbanes-Oxley Act
that exempted from arbitration disputes involving whistleblowers. The magistrate judge rejected
these arguments. The employee failed to allege any nexus between his employment dispute and
any insurance business activities. In addition, the Dodd-Frank Act could not retroactively affect
the relevant arbitration agreement, which was executed prior to that legislation. The magistrate
judge, therefore, recommended granting the parent company’s motion to dismiss, which was
adopted by the district court.
White Pacific Securities, Inc. v. Mattinen, 2012 WL 952232 (N.D. Cal. March 19, 2012).
A broker-dealer sought to enjoin a customer arbitration where the investors were not
customers of the broker-dealer. The investors contended that they were customers of a registered
representative of the broker-dealer and, therefore, could bring an arbitration against the brokerdealer
under FINRA Rule 12200, which relates to disputes between the customer and an
“associated person of a member.” The court agreed with the investors and denied the brokerdealer’s
request for a preliminary injunction. The broker-dealer had failed to establish any
likelihood of success on the merits of its claims because the weight of evidence -- including that
R.
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538

(i) the representative was registered with FINRA through the broker-dealer, (ii) the investors
dealt with other employees of the broker-dealer in connection with their investments, and (iii) the
representative used the broker-dealer’s e-mail server, address, and phone number -- all supported
a conclusion that the representative met the definition of an “associated person” under FINRA
Rule 12100(r).
Alakozai v. Chase Inv. Servs. Corp., 2012 WL 748684 (C.D. Cal. March 1, 2012).
A group of financial advisors and trainees commenced a putative class action against a
securities brokerage firm alleging violations of the Fair Labor Standard Act (“FLSA”) and
seeking restitution of unpaid wages and improper wage reductions. The firm moved to compel
arbitration pursuant to arbitration agreements with each named plaintiff. Plaintiffs did not
dispute the existence of the arbitration agreements, but challenged the applicability of the
agreement to the class action claims asserted. The district court held that, pursuant to FINRA
Rule 13024, the firm could not enforce its arbitration agreement against a member of a certified
or putative class until class certification is denied, the class is decertified, the member is
excluded from the class by the court, or the member elects to not participate or withdraw from
the class. Because none of these prerequisites applied, the court denied the motion to compel
arbitration.
Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012).
An arbitration panel denied the claim of an employee that his former employer, a brokerdealer,
violated the Uniformed Services Employment and Reemployment Rights Act
(“USERRA”) and discriminated against him based upon his deployment to active duty in the
United States Armed Forces. The employee subsequently sought to vacate the award, asserting
that the panel was unfair or impartial, that the award violated the policy behind USERRA, and
that the panel manifestly disregarded the law. The district court, however, affirmed the award.
The court found that the alleged instances of unfairness or impartiality, such as friendly
exchanges between the panel and defense counsel and a six-month gap in the proceeding due to
scheduling issues, were innocuous and minor. The court also determined that there was no
requirement for the panel to provide a reasoned award when neither party had requested one, and
the panel did not improperly consult a treatise on USERRA where the employee’s counsel had
submitted the treatise to the panel in the first place. Further, the district court found no policy
under USERRA to which the award was contrary, nor could the district court find any support
for the argument that the panel manifestly disregarded the law.
R.
R.
539

R.
LaVoice v. UBS Fin. Servs., Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012).
A broker-dealer moved to compel arbitration of a putative class action filed by a former
employee based on alleged violations of the Fair Labor Standards Act (“FLSA”) and equivalent
state labor statutes. The financial advisor opposed the motion on the ground that his class-wide
claims were not subject to arbitration. While the court noted that a recent Supreme Court
decision has called into question Second Circuit precedent governing arbitrability of class
claims, the court concluded that the financial advisors’ claims were subject to arbitration under
either precedent because the employee failed to establish that the practical effect of compelling
arbitration would provide him with no remedy. The court concluded that it made practical sense
to pursue the putative class representative’s claim individually in arbitration because the
financial advisor sought a six figure recovery individually and had the opportunity recover
attorneys’ fees in arbitration. The court further disregarded the financial advisor and his
counsel’s “self-serving and irrelevant” position that they would not pursue the action in
arbitration and refused to devalue the financial advisor’s claims based upon an unsupported
estimate of the percentage likelihood of recovery. As such, the court compelled arbitration.
Pemberton v. Citgroup Global Markets, 268 P.3d 11 (Kan. App. 2012).
A broker-dealer obtained an arbitration award against a former employee for failure to
pay the balance on a promissory note at the termination of the employee’s employment. The
award also found in favor of the broker-dealer on the former employee’s counter-claims for
unpaid commissions. The employee, pro se, sought to vacate the award. The trial court denied
the motion to vacate and confirmed the award. On appeal, the Court of Appeals of Kansas
affirmed the trial court’s holding that the record below did not support the employee’s arguments
that the arbitration agreement was procured by undue means, that the arbitration proceeding was
unfair, or that the award violated public policy. The appellate court further determined that there
was no basis to vacate the award where the arbitrators and counsel for the broker-dealer were not
licensed attorneys in the state of Kansas. Finally, the court held that the employee’s remaining
arguments sought review of the merits of his counter-claim, and that a claim that a party should
have prevailed on the merits of a claim in arbitration is not a basis for vacating an arbitration
award under Kansas law.
Gomez v. Brill Sec., Inc., 943 N.Y.S.2d 400 (N.Y. App. Div. 2012) (3-2 Decision) (Sweeney, J.,
dissenting).
In a putative class action brought in state court by employees of a broker-dealer alleging
violations of New York employment statutes relating to wages and commissions, the brokerdealer
moved to dismiss on res judicata grounds and to compel arbitration. The employees
previously had asserted the same class-wide claims, along with a class claim for a violation the
R.
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Federal Fair Labor Standards Act (“FLSA”), in federal court. After the federal district court
compelled arbitration on the FLSA claim and stayed the state law claims in that action, the
employees voluntarily withdrew the state law claims and essentially re-filed them in state court.
Reviewing the motion court’s denial of the broker-dealer’s motions, the appellate court held that
res judicata was inapplicable because the prior federal action did not result in a decision on the
merits. The court further held that the state law claims were not subject to arbitration on a classwide
basis pursuant to FINRA Rule 13204(d). Distinguishing the federal district court’s decision
in the prior federal action compelling arbitration on the FLSA class-wide claim, the court posited
that the district court stayed the state law claims because the state law claims, unlike the FLSA
claim, could be brought on a class-wide basis and, therefore, could not be arbitrated. The
dissent, in contrast, argued that the employees should not have brought the state law claims on a
class-wide basis, concluding that pleading the claims on a class-wide basis was an improper
attempt to avoid arbitration.
541

TABLE OF AUTHORITIES
Page
21st Century Sys. v. Perot Sys. Gov’t & Servs., 284 Va. 32 (2012). ............................................. 355
Aaes v. 4G Cos., 2012 U.S. Dist. LEXIS 37356 (S.D. Tex. Mar. 20, 2012) ................................ 352
Abdelnour v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 29 Mass. L. Rep. 540 (Mass.
Super. Ct. 2012). ............................................................................................................................... 454
Abeyrama v. J.P. Morgan Chase Bank, 2012 U.S. Dist. LEXIS 87847 (C.D. Cal. July 22,
2012) .................................................................................................................................................. 430
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 2012 WL 3584278
(S.D.N.Y. Aug. 17, 2012). ............................................................................................................... 378
Acosta-Castillo v. Guzman-Lora, 2012 WL 3963019 (D. Puerto Rico Sept. 11, 2012) .............. 151
Acticon AG v. China North East Petroleum Holdings Ltd., 692 F.3d 34 (2d Cir. 2012). ............ 381
Adams v. Rothstein, No. 11-61688-CIV, 2012 WL 1605098 (S.D. Fla. May 8, 2012). .............. 376
Alakozai v. Chase Inv. Servs. Corp., 2012 U.S. Dist. LEXIS 30759 (C.D. Cal. Mar. 1,
2012) .................................................................................................................................................. 421
Alakozai v. Chase Inv. Servs. Corp., 2012 WL 748684 (C.D. Cal. March 1, 2012). ................... 539
Alberts v. Razor Audio, Inc., 2012 U.S. Dist. LEXIS 20386 (E.D. Cal. Feb. 16, 2012) .............. 300
Allstate Ins. Co. v. CitiMortgage Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012). ........ 391, 471
Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011) ........ 113, 407
Alpha Mgmt. Inc. v. Last Atlantis Capital Mgmt., LLC, No. 12 C 4642, 2012 WL
5389734 (N.D. Ill. Nov. 2, 2012) ............................................................................................. 45, 465
Am. Int’l Grp., Inc. v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.-
Backed Sec. Litig.) .............................................................................................................................. 47
Amarosa v. AOL Time Warner, Inc., 409 Fed. App’x 412 (2d Cir. 2011) (unpublished) ........... 110
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684 F.3d 36 (2d Cir. 2012) ...................... 64, 140
Anderson v. AON Corp., 674 F.3d 895 (7th Cir. 2012). ................................................................ 409
Anderson v. McGrath, 2012 U.S. Dist. LEXIS 156625 (D. Ariz. Nov. 1, 2012) ................ 128, 295
i

Andrade v. Ewanouski, 2012 Mass. App. Unpub. LEXIS 236 (Mass. App. Ct. Mar. 1,
2012) .................................................................................................................................................. 431
Andrade v. Ewanouski, 81 Mass. App. Ct. 1117 (Mass. App. Ct. 2012). ............................ 435, 455
Andrade v. Ewanouski, 962 N.E.2d 245 (Mass. App. Ct. 2012). .................................................. 412
Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98 (C.A.2 N.Y., 2012).. 168, 214, 238, 458
Anthony v. Princeton Trading Group, Inc., 2012 Ohio 1834 (Ohio Ct. App., Cuyahoga
County Apr. 26, 2012) ...................................................................................................................... 426
Antilla v. L.J. Altfest & Co., Inc., 2012 WL 3580477 (D. Conn. Aug 17, 2012) ................ 214, 223
Anwar v. Fairfield Greenwich, Ltd., 2012 WL 4086117 (S.D.N.Y. Sept. 12,
2012) ................................................................................................................................. 216, 221, 225
Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012) ....................... 205, 362
Applestein v. Medivation, Inc., 861 F. Supp. 2d 1030 (N.D. Cal. 2012) ........................................ 86
Arfa v. Mecox Lane Ltd., 2012 Fed. Sec. L. Rep. (CCH) 96,753 (S.D.N.Y. Mar. 1,
2012) .................................................................................................................................................. 251
Armstrong v. Am. Pallet Leasing Inc., No. C07-4107-MWB, 2012 WL 3906205 (N.D.
Iowa Sept. 7, 2012) ............................................................................................................................. 45
Armstrong v. SEC, 476 F. App’x 864 (D.C. Cir. 2012) ................................................................. 347
Aronson v. Advanced Cell Tech., Inc., 2012 U.S. Dist. LEXIS 140750 (D. Mass. July 16,
2012) .................................................................................................................................................. 245
Askenazy v. Tremont Grp. Holdings, Inc., 29 Mass. L. Rep. 340 (Mass. Super. Jan. 26,
2012) ......................................................................................................................................... 310, 344
Automotive Indus. Pension Trust Fund v. Textron, Inc., 682 F.3d 34 (1 st Cir. 2012) ......... 101, 167
Ayco Co., L.P. v. Frisch, 2012 U.S. Dist. LEXIS 2112 (N.D.N.Y Jan. 9, 2012) ......................... 418
Azure Ltd. v. I-Flow Corp., 143 Cal.Rptr.3d 136 (Cal. App. June 21, 2012). .............................. 397
Bajaj v. Fisher Asset Mgmt, LLC, 2012 WL 1293169 (D. Del. Apr. 10, 2012). .......................... 392
Bajaj v. Fisher Asset Mgmt., LLC, 2012 U.S. Dist. LEXIS 50524 (D. Del. Apr. 10, 2012). ...... 443
Baker Hughes Inc. v. BNY Mellon Capital Markets LLC, 2012 WL 5634397 (S.D. Tex.
Nov. 4, 2012) ..................................................................................................................... 60, 430, 433
ii

Baker v Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 N.Y. Misc. LEXIS 1123
(N.Y. Sup. Ct. Mar. 9, 2012). .......................................................................................................... 455
Bamert v. Pulte Home Corp., No. 6:08-CV-2120-ORL-22, 2012 WL 3292875 (M.D.
Fla. Aug. 10, 2012). ........................................................................................................... 52, 134, 466
Banco Indus. de Venez. v. CDW Direct, L.L.C., 2012 U.S. Dist. LEXIS 125277
(S.D.N.Y. Sept. 4, 2012) .................................................................................................................. 322
Bank Hapoalim B.M. v. Bank of Am. Corp., 2012 WL 6814194 (C.D. Cal. Dec. 21,
2012). ................................................................................................................................................. 410
Barbara v. Marinemax, Inc., 2012 U.S. Dist. LEXIS 171975 (E.D.N.Y. Dec. 4,
2012) .................................................................................................................................................. 317
Barbara v. MarineMax, Inc., No. 12-CV-0368, 2012 WL 6025604 (E.D.N.Y. Dec.
4, 2012) ................................................................................................................................................ 69
Baroi v. Platinum Condo. Dev., LLC, No. 09-CV-00671, --- F.Supp.2d ----, 2012
WL 2847819 (D. Nev. July 11, 2012) .........................................................................................3, 304
Barrett v. J.P. Morgan Sec. Inc., 2012 WL 4754171 (FINRA Sept. 24, 2012) ............................. 61
Barros v. UBS Trust Co. of P.R., 2012 U.S. Dist. LEXIS 133233 (D.P.R. Sept. 17, 2012) ........ 417
Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., No. 652996/2011,
2012 WL 5187653 (N.Y. Sup. Ct., N.Y. County Oct. 18, 2012). ................................................. 474
BCJJ, LLC v. Lefevre, 2012 WL 2590473 (M.D. Fla. July 3, 2012). ........................................... 396
Bear, Stearns & Co. v. Int’l Capital & Mgmt. Co., 952 N.Y.S.2d 106 (N.Y. App.
Div. 2012). ........................................................................................................................................ 396
Beckman v. Ener1, Inc., 2012 WL 512651 (S.D.N.Y. Feb. 15, 2012) .......................................... 178
Belmont Holdings Corp. v. Suntrust Banks, Inc., No. 1:09-cv-1185, 2012 WL
4096146 (N.D. Ga. Aug. 28, 2012) ................................................................................................... 24
Belmont Holdings, Corp. v. Suntrust Banks, Inc., 2012 WL 4096146 (N.D. Ga. Aug.
28, 2012)................................................................................................................................... 466, 467
Belmont v. MB Inv. Partners, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,707 (E.D. Pa.
Jan. 5, 2012) ............................................................................................................................. 233, 283
Benezra v. Zacks Inv. Research, Inc., 2012 U.S. Dist. LEXIS 47769 (M.D.N.C. Mar.
30, 2012)............................................................................................................................................ 419
iii

Bennett v. Sprint Nextel Corp., No. 099-2122-EFM, 2011 WL 4553055 (D. Kan.
Sept. 29, 2011) .................................................................................................................................. 114
Bensinger v. Denbury Res. Inc., 2012 U.S. Dist. LEXIS 140801 (E.D.N.Y Sept. 28,
2012) .................................................................................................................................................. 117
Berman v. Morgan Keegan & Co., Inc., 455 F. App'x. 92 (2nd Cir. 2012) ......................... 220, 311
Berthel Fisher & Co. Fin. Servs. v. Larmon, 695 F.3d 749 (8th Cir. 2012) ........................ 415, 440
Biremis Corp. and Peter Beck, FINRA Case No. 2010021162202 (June 20, 2012) ................... 145
Biremis, Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 U.S. Dist.
LEXIS 30988 (E.D.N.Y. Mar. 8, 2012) ................................................................................. 418, 442
Bixler v. Next Fin. Group, Inc., 858 F. Supp. 2d 1136 (D. Mont. 2012) ...................................... 423
Blackwell v. Bank of America Corp., 2012 WL 1229673 (D.S.C. March 22, 2012). .................. 538
Blakeslee v. PHC, Inc. (In re PHC, Inc. S'holder Litig.), 2012 U.S. Dist. LEXIS
44616 (D. Mass. Mar. 30, 2012) ...................................................................................................... 115
Blitz v. AgFeed Indus., Inc., 2012 WL 1192814 (M.D. Tenn. Apr. 10, 2012) ............................. 181
BNP Paribas Mortg. Corp. v. Bank of America, N.A., 866 F. Supp. 2d 257
(S.D.N.Y. 2012) ................................................................................................................................ 224
Bo Young Cha v. Kinross Gold Corp., 2012 WL 2025850 (S.D.N.Y. May 31, 2012) ................ 176
Boca Raton Firefighters and Police Pension Fund v. Bahash, 2012 WL 6621391
(9th Cir. December 20, 2012) .......................................................................................................... 149
Bonnant v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 467 Fed. Appx. 4 (2d Cir. 2012). ...... 438
Bonomo v. NOVA Fin. Holdings, Inc., 2012 WL 2196305 (E.D. Pa. June 15, 2012) .................. 194
Boudinot v. Shrader, No. 09 CIV. 10163 LAK, 2012 WL 489215 (S.D.N.Y. Feb. 15,
2012). ................................................................................................................................................. 368
Boulware v. Baldwin, No. 11–CV–762, 2012 WL 1412698 (D. Utah Apr. 23,
2012) ............................................................................................................................. 3, 155, 203, 375
Bradley v. Miller, No. 10-CV-760, 2012 WL 4447454 (S.D. Ohio Sept. 25, 2012). .................. 371
Brady v. Kosmos Energy Ltd., 2012 WL 6204247 (N.D. Tex. July 10, 2012) .................... 212, 473
Brashear v Pelto, 94 A.D.3d 1189 (N.Y. App. Div. 3d Dep't 2012) ............................................ 425
Brasher v. Broadwind Energy, Inc., 2012 WL 1357699 (N.D. Ill. Apr. 19, 2012) ..... 165, 196, 290
iv

Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean
Ltd., 2012 U.S. Dist. LEXIS 46202 (S.D.N.Y. Mar. 30, 2012) ............................................ 120, 159
Bricklayers of W. Pa. Pension Plan v. Hecla Mining Co., 2012 WL 2872787 (D.
Id. Jul. 12, 2012) ...................................................................................................................... 187, 386
Bristol County Ret. Sys. v. Allscripts Healthcare Solutions, Inc., 2012 WL
5471110 (N.D. Ill. Nov. 9, 2012) .................................................................................................... 181
Brockway v. Evergreen Int’l Trust, 2012 WL 5458464 (4th Cir. Nov. 9, 2012).......................... 203
Brodzinsky v. Frontpoint Partner LLC, No. 11CV10 WWE, 2012 WL 1468507
(D. Conn. Apr. 26, 2012) .................................................................................................. 68, 107, 248
Brown v. China Integrated Energy, Inc., 875 F.Supp. 2d 1096 (C.D. Cal. 2012)......... 22, 213, 475
Bruce v. Gore, et al., 2012 WL 987556, N.D. Tex. Mar. 22, 2012). ............................................ 463
Bruce v. Suntech Power Holdings Co., 2012 WL 5927985 (N.D. Cal. Nov. 13, 2012) .............. 185
Burger v. Hartley, 2012 U.S. Dist. LEXIS 129783 (S.D. Fla. Sept. 12, 2012). ........................... 354
Butterworth v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 140209 (N.D. Ala.
Sept. 28, 2012). ................................................................................................................................. 452
Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 6644397 (C.D.Cal.,2012) ............. 156
Cabacoff v. Wells Fargo Bank, N.A., No. 12-CV-56-PB, 2012 WL 5392545
(D.N.H. Nov. 5, 2012). ..................................................................................................................... 366
Calderon Serra v. Banco Santander Puerto Rico, No. 10-1906 GAG, 2012 WL
3067609 (D. Puerto Rico Jul. 30, 2012). ......................................................................................... 366
Cambridge Place Inv. Mgmt. Inc. v. Morgan Stanley & Co., Inc., 2012 WL
5351233 (Mass. Sup. Ct. Sept. 28, 2012) ........................................................................................ 218
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 Fed. Sec. L. Rep. (CCH)
97,234 (S.D.N.Y. Dec. 17, 2012) ................................................................................................. 277
Camofi Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767 (S.D.N.Y.
Dec. 17, 2012). ......................................................................................................................... 159, 385
Capital Ventures Int’l v. UBS Sec. LLC, 2012 U.S. Dist. LEXIS 140663 (D. Mass.
Sept. 28, 2012) .................................................................................................................................. 246
Carlucci v. Han, No. 12-CV-451, --- F. Supp. 2d ---, 2012 WL 3242618 (E.D. Va.
Aug. 7, 2012) ................................................................................................ 4, 44, 158, 379, 406, 409
Carter v. Holdman, 95 So. 3d 560 (La. Ct. App. 2012) ........................................................ 230, 457
v

Carter v. TD Ameritrade Holding Corp., 721 S.E.2d 256 (N.C. Ct. App. 2012) ......................... 426
Caruthers v. Underhill, 287 P.3d 807 (Ariz. Ct. App. 2012). ....................................................... 397
Casper v. Jinan, 2012 WL 3865267 (S.D.N.Y. Sept. 6, 2012) ..................................................... 175
Cather v. Isom, 2012 U.S. Dist. LEXIS 1687 (D. Utah Jan. 5, 2012)........................................... 308
Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., 2012 WL
6044787 (N.D. Cal. Dec. 5, 2012) .......................................................................... 198, 202, 301, 303
Cerone v. Bank of Am., 2012 U.S. Dist. LEXIS 76952 (D.N.J. June 4, 2012). ............................ 444
CFTC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 109747 (N.D. Ill.
Aug. 6, 2012) .................................................................................................................................... 331
Chechele v. Elstain, 2012 WL 607448 (S.D.N.Y. Feb. 24, 2012).......................................... 70, 141
Chechele v. Morgan Stanley, --- F.Supp.2d ---, 2012 WL 4490730 (S.D.N.Y.
Sept. 26, 2012). ................................................................................................................................... 76
Chechele v. Morgan Stanley, 2012 WL 4490730 (S.D.N.Y. Sept. 26, 2012) .............................. 142
Chechele v. Scheetz, 466 Fed. Appx 39 (2nd Cir. 2012)......................................................... 64, 139
Chechele v. Sperling, 2012 WL 1038653 (S.D.N.Y. Mar. 29, 2012) ........................................... 141
Cheng v David Learner Assoc., Inc., 35 Misc. 3d 1238A (N.Y. Sup. Ct. 2012) .......................... 429
Chester County Emps.’ Ret. Fund v. White, 2012 WL 1245724 (N.D. Ill. Apr. 13, 2012) ......... 182
Chipman v. Aspenbio Pharma, Inc., 2012 WL 4069353 (D. Colo. Sept. 17, 2012) .................... 155
Cho v. UCBH Holdings, Inc., 2012 U.S. Dist. LEXIS 123234 (N.D. Cal. Aug. 29,
2012) ................................................................................................................................. 236, 302, 465
Citigroup Global Markets, Inc., FINRA Case No. 2008012808101 (May 15, 2012).................. 146
Citigroup Global Mkts., Inc. v. Berghorst, 2012 U.S. Dist. LEXIS 76459 (S.D.
Fla. Jan. 20, 2012)............................................................................................................................. 453
City of Bristol Pension Fund v. Vertex Pharm., 2012 WL 6681907 (D. Mass. Dec.
21, 2012)................................................................................................................................... 172, 468
City of Pontiac Gen. Emp.’ Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811 (W.D.
Mich. 2012) ................................................................................................................ 82, 165, 195, 288
City of Pontiac Gen. Emps. Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d
359 (S.D.N.Y. 2012)......................................................................................................................... 190
vi

City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 844 F. Supp. 2d
498 (S.D.N.Y. 2012)......................................................................................................................... 173
City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., No. 11-2340-RDR, 2012
WL 3010992 (N.D. Cal. July 23, 2012) ................................................................... 88, 187, 201, 301
City of Royal Oak Retirement System v. Itron, Inc., 2012 WL 3966310 (E.D.
Wash. Sept. 11, 2012)....................................................................................................................... 157
City of St. Clair Shores Gen. Employees' Ret. Sys. v. Lender Processing Servs.,
Inc., 2012 Fed. Sec. L. Rep (CCH) 96,790 (M.D. Fla. Mar. 30, 2012)...................................... 309
City of St. Clair Shores General Employees’ Retirement System v. Lender
Processing Services, Inc., 2012 WL 1080953 (M.D. Fla. March 30, 2012)................................. 167
City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Hospira, Inc., 2012 WL 1339678
(N.D. Ill. Apr. 18, 2012) ................................................................................................................... 183
Cobalt Multifamily Investors I, LLC v. Arden, No. 06 CV 6172 (KMW)(MHD),
2012 WL 3838834 (S.D.N.Y. Aug. 14, 2012) .................................................................................. 30
Cody v. Sec. Exchange Comm., 693 F.3d 251 (1st Cir. 2012) ......................................................... 60
Cole v. Patricia A. Meyer & Assoc., APC, 206 Cal. App. 4th 1095 (Cal. App. 2012) ................ 101
Collins v. Chi. Inv. Group, LLC, 2012 U.S. Dist. LEXIS 37217 (D. Nev. Mar. 19, 2012). ........ 450
Commodities Futures Trading Comm’n v. Sentinel Mgmt. Grp., 2012 U.S. Dist.
LEXIS 46198 (N.D. Ill. Mar. 30, 2012) .......................................................................................... 290
Compsource Okla., Bd. of Tr. of the Elec. Workers Local No. 26 Pension Trust
Fund v. BNY Mellon, N.A., 2012 WL 6864701 (E.D. Okla. Oct. 25, 2012). ................................ 471
Compucredit Corp., et al., v. Greenwood, 132 S. Ct. 665 (2012). ................................................ 413
Corre Opportunities Fund, LP v. Emmis Commc’n Corp., 2012 U.S. Dist. LEXIS
124298 (S.D. Ind. Aug. 31, 2012) ................................................................................................... 121
Costello ex rel. Comdisco Litig. Trust v. Grundon, 651 F.3d 614 (3d Cir. 2011) ........................ 110
Credit Suisse Sec. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012) ............................ 63, 138, 400
Curry v. Hansen Med., Inc., 2012 WL 3242447 (N.D. Cal. Aug. 10, 2012) ............... 200, 236, 302
Daniels v. Morgan Asset Mgmt., Inc., 2012 WL 3799150 (6th Cir. Aug. 31, 2012) ................... 204
Darwin v. Taylor, 2012 WL 5250400 (D. Colo. Oct. 23, 2012) ................................................... 188
Datto Inc. v. Broadband, 856 F. Supp. 2d 359 (D. Conn. 2012) ................................................... 247
vii

Davey v. First Command Fin. Servs., 2012 U.S. Dist. LEXIS 11481 (N.D. Tex.
Jan. 31, 2012). ................................................................................................................................... 436
Deborah G. Mallow IRA Sep Inv. Plan v. Aubrey K. McClendon, 2012 U.S. Dist.
LEXIS 78479 (W.D. Okla. June 6, 2012) .............................................................................. 122, 188
Delgado v. Center on Children, Inc., No. 10–2753, 2012 WL 2878622 (E.D. La.
July 13, 2012)................................................................................................................................2, 115
Demoulas v. Goldman, Sachs & Co., 2012 U.S. Dist. LEXIS 30508 (D. Mass.
Mar. 8, 2012) ............................................................................................................................ 417, 442
Denenberg v. Rosen, 941 N.Y.S.2d 38 (N.Y. App. Div. 2012). .................................................... 399
Department of Enforcement v. Daniel James Gallagher, Complaint No.
2008011701203, 2012 FINRA Discip. LEXIS 61 (Nat’l Adj. Council, Dec. 12,
2012). ................................................................................................................................................. 485
Department of Enforcement v. Hedge Fund Capital Partners, LLC, and Howard
G. Jahre, Complaint No. 2006004122402, 2012 FINRA Discip. LEXIS 42 (Nat’l
Adj. Council, May 1, 2012). ............................................................................................................ 486
Department of Enforcement v. Hugh Vincent Murray III, Discip. Proc. No.
2008016437801, 2012 FINRA Discip. LEXIS 64 (Office of Hearing Officers,
Oct. 25, 2012). .................................................................................................................................. 486
Department of Enforcement v. Wedbush Securities, Inc. and Edward William
Wedbush, Discip. Proc. No. 20070094044, 2012 FINRA Discip. LEXIS 59
(Office of Hearing Officers, Aug, 2, 2012)..................................................................................... 488
Department of Market Regulation v. Robert N. Drake, Discip. Proc. No.
20060053785-02, 2012 FINRA Discip. LEXIS 48 (Office of Hearing Officers,
May 3, 2012). .................................................................................................................................... 488
Desteph v. Commissioner, Connecticut Dept. of Banking, No. CV105015042S,
2012 WL 953741 (Conn. Super. Ct. Feb. 29, 2012)........................................................................... 6
DesyaFosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D.Nev.,2012. July 11, 2012) ...... 154
Desyatnikov v. Credit Suisse Grp., Inc., No. 10-CV-1870(DLI)(VVP), 2012 WL
1019990 (E.D.N.Y. Mar. 26, 2012) .................................................................................. 29, 157, 472
Dexia Holdings, Inc. v. Countrywide Fin. Corp., No. 11-CV-07165 MRP
(MANx), 2012 WL 2161498 (C.D. Cal. June 1, 2012) ................................................... 48, 296, 334
Digges v. State of Texas, No. 05–10–00239–CR, 2012 WL 2444543 (Tex. Ct.
App. June 28, 2012) .............................................................................................................................. 5
viii

D-J Eng'g Inc. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 6678 (D. Kan. Jan. 20, 2012) ......... 424
Dobina v. Weatherford Int’l Ltd., 2012 Fed. Sec. L. Rep. (CCH) 97,081
(S.D.N.Y. Nov. 7, 2012) .................................................................................................................. 275
Dobina v. Weatherford Int’l Ltd., 2012 WL 5458148 (S.D.N.Y. Nov. 7, 2012). ........................ 461
Dodona I LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012) .............. 252, 319
Donoghue v. Bulldog Investors Gen. P’ship, 696 F.3d 170 (2d Cir. 2012) ........................... 65, 140
Donoghue v. Morgan Stanley High Yield Fund, 2012 WL 6097654 (S.D.N.Y.
Dec. 7, 2012). .................................................................................................................................... 390
Dorn v. Berson, No. 09-CV-2717 ADS AKT, 2012 WL 1004907 (E.D.N.Y. Mar.
1, 2012). ............................................................................................................................ 367, 384, 389
Dottore v. Huntington Nat’l Bank, 2012 U.S. App. LEXIS 9185 (6th Cir. May 4, 2012) .......... 415
Dunleavy v. Gannon, 2012 WL 259382 (D. N.J. Jan. 26, 2012). .................................................. 467
Dunn v. Dunn, 281 P.3d 540 (Kan. Ct. App. 2012). ...................................................................... 411
Eagletech Commc’ns, Inc. v. Bryn Mawr Inv. Group, Inc., 79 So. 3d 855 (Fla.
App. 2012)................................................................................................................................ 356, 377
Easton Cap. Partners, LP v. Rush, No. 09 Civ. 1307(LLS), 2011 WL 3809927
(S.D.N.Y. Aug. 26, 2011) ................................................................................................................ 111
Elliot v. China Green Agricultures, Inc., No. 3:10-CV-0648-LRH-WGC, 2012
WL 5398863 (D. Nev. Nov. 2, 2012) ....................................................................................... 49, 305
Embraceable You Designs, Inc. v. First Fid. Grp. Ltd., 2012 Fed. Sec. L. Rep.
(CCH) 97,217 (C.D. Cal. Dec. 3, 2012) ....................................................................................... 299
Embraceable You Designs, Inc. v. First Fidelity Group, Ltd., No. 09–cv–03271,
2012 WL 6012852 (C.D. Cal. Dec. 3, 2012) .................................................................................. 103
Mercer v. Gupta, -- F. Supp. 2d --, 2012 WL 3095300 (S.D.N.Y. July 27, 2012)......................... 75
Erichsen v. RBC Capital Mkts., LLC, 2012 U.S. Dist. LEXIS 93641 (E.D.N.C.
July 5, 2012) ...................................................................................................................................... 419
Estate of Campana v. Comerica Bank & Trust, N.A., 2012 U.S. Dist. LEXIS 1490
(N.D. W. Va. Jan. 4, 2012)............................................................................................................... 419
F.D.I.C. v. Countrywide Fin. Corp., 2012 WL 5900973 (C.D. Cal. Nov. 21, 2012). .................. 470
Facciola v. Greenberg Traurig LLP, 2012 WL 1021071 (D. Ariz. Mar. 20, 2012) ........... 212, 333
ix

Farber v. Goldman Sachs Group, Inc., No. 10 Civ. 873(BSJ)(GWG), 2011 WL
666396 (S.D.N.Y. Feb. 16, 2011) .................................................................................................... 111
Fazzari v. Hilbrant (In re Hilbrant), 2012 Bankr. LEXIS 5001 (Bankr. W.D.N.C.
Oct. 24, 2012) ................................................................................................................................... 351
FDIC v. Banc of America Securities LLC, 2012 WL 2904310 (D. Nev. July 16,
2012). ................................................................................................................................................. 473
FDIC v. Morgan Stanley & Co., No. H-11-4187, 2012 WL 401203 (S.D. Tex.
Feb. 7, 2012) .................................................................................................................................44, 45
Fed. Hous. Fin. Agency v. Ally Fin. Inc., No. 11 Civ. 7010 (DLC), 2012 WL
6616061 (S.D.N.Y. Dec. 19, 2012) ................................................................................................... 33
Fed. Hous. Fin. Agency v. Bank of Am. Corp., No. 11 Civ. 6195 (DLC), 2012 WL
6592251 (S.D.N.Y. Dec. 18, 2012) ................................................................................................... 33
Fed. Hous. Fin. Agency v. Barclays Bank PLC, 2012 U.S. Dist. LEXIS 165138
(S.D.N.Y. Nov. 19, 2012) ................................................................................................................ 276
Fed. Hous. Fin. Agency v. JP Morgan Chase & Co., 2012 WL 5395646
(S.D.N.Y. Nov. 5, 2012) ........................................................................................................... 19, 190
Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 2012 Fed. Sec. L. Rep.
(CCH) 97,075 (S.D.N.Y. Nov. 5, 2012) ....................................................................................... 275
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC), 2012
WL 5451188 (S.D.N.Y. Nov. 8, 2012). ................................................................................... 31, 387
Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 2012 Fed. Sec. L. Rep. (CCH)
97,079 (S.D.N.Y. Nov. 8, 2012) ................................................................................................... 276
Fed. Hous. Fin. Agency v. SG Americas., Inc., No. 11 Civ. 6203 (DLC), 2012 WL
5931878 (S.D.N.Y. Nov. 27, 2012) ................................................................................................... 32
Fed. Hous. Fin. Agency v. SG Americas., Inc., 2012 Fed. Sec. L. Rep. (CCH)
97,210 (S.D.N.Y. Nov. 27, 2012) ................................................................................................. 277
Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306 (S.D.N.Y.
2012) .................................................................................................... 11, 31, 256, 267, 275, 278, 403
Fed. Hous. Fin. Agency v. Morgan Stanley, No. 11 Civ. 6739 (DLC), 2012 WL
5868300 (S.D.N.Y. Nov. 19, 2012) ................................................................................................... 32
Fencorp, Co. v. Ohio Ky. Oil Corp., 675 F.3d 933 (6th Cir. 2012) ............................... 27, 382, 408
Ferguson v. Purvis, No. 11–cv–573, 2012 WL 1029388 (S.D. Ind. Mar. 26, 2012) ....................... 2
x

Feyko v. Yuhe Int’l Inc., 2012 WL 682882 (C.D. Cal. Mar. 2, 2012) ........................................... 186
Fid. Brokerage Servs. LLC v. Brown, 2012 U.S. Dist. LEXIS 141960 (S.D. Cal.
Sept. 28, 2012). ................................................................................................................................. 437
Fid. First Home Mortg. Co. v. Williams, 2012 Md. App. LEXIS 135 (Md. Ct.
Spec. App. Nov. 27, 2012) ............................................................................................................... 237
Filho v. Safra Nat’l Bank, 2012 U.S App. LEXIS 15309 (2d Cir. July 25, 2012) ....................... 413
Filing v. Phipps, No. 11–4157, 2012 WL 5200375 (6 th Cir. Oct. 23, 2012) ................................ 102
Finkel v. Am. Oil & Gas, Inc., 2012 WL 171038 (D. Colo. Jan. 20, 2012). ................................. 395
Finn v. Barney, 471 F. App’x 30 (2d Cir. 2012) ............................................................................ 238
FINRA Dep’t of Enforcement v. Brookstone Secs., Inc., Antony Lee Turbeville,
Christopher Dean Kline, and David William Locy, FINRA Disciplinary
Proceeding No. 2007011413501 (May 31, 2012) .......................................................................... 146
FINRA Dep’t of Enforcement v. Genesis Securities, LLC and William C. Yeh,
FINRA Disciplinary Proceeding No. 2009021082501 (May 15, 2012) ....................................... 147
FINRA Dep’t of Enforcement v. Richard J. Buswell and Herbert S. Fouke, FINRA
Disciplinary Proceeding No. 2009017275301 (Jan. 4, 2012) ........................................................ 148
Fischer Lime and Cement Co. v. Morgan Keegan & Co., Inc., No. 08-04856,
2012 WL 6759349 (FINRA Dec. 28, 2012) ..................................................................................... 25
Fisher Asset Mgmt., LLC v. Rider, 2012 U.S. Dist. LEXIS 20703 (S.D. Ohio Feb.
17, 2012)............................................................................................................................................ 446
Fisher v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 179691 (D. Kan.
Dec. 17, 2012). .................................................................................................................................. 452
Fornell v. Morgan Keegan & Co., 2012 U.S. Dist. LEXIS 108677 (M.D. Fla.
Aug. 3, 2012). ................................................................................................................................... 452
Fornell v. Morgan Keegan & Co., 2012 WL 3155727 (M.D. Fla. Aug. 3, 2012). ...................... 395
Fort Worth Emps.’ Ret. Fund v. J.P. Morgan Chase & Co., 862 F. Supp. 2d 322
(S.D.N.Y. 2012) ......................................................................................................................... 12, 172
Fosbre v. Las Vegas Sands Corp., 2012 WL 2848057 (D. Nev. Jul. 11, 2012) ........................... 202
Fragin v. Mezei, 2012 U.S. Dist. LEXIS 119064 (S.D.N.Y. Aug. 22, 2012)............................... 321
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011) ...................................................................... 110
xi

Frank v. Elgamal, 2012 Del. Ch. LEXIS 62 (Del. Ch. Mar. 30, 2012) ........................................ 345
Frederick v. Mechel OAO, 475 F. App’x 353 (2d Cir. 2012) ............................................... 168, 238
Freecharm Ltd. v. Atlas Wealth Holdings Corp., 2012 U.S. App. LEXIS 24847
(11th Cir. Dec. 4, 2012).................................................................................................................... 432
Freedom Envtl. Servs., Inc. v. Borish, 2012 WL 2505723 (M.D. Fla. June 20, 2012) ................ 109
Freedom Investors Corp. v. Kahal Shomrei Hadath, 2012 U.S. Dist. LEXIS
15129 (S.D.N.Y. Feb. 7, 2012). ....................................................................................................... 443
Freidus v. ING Grp. N.V., No. 09-1049-LAK, 2012 WL 4857543 (S.D.N.Y. Oct.
11, 2012)..................................................................................................................................... 34, 378
French v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 18233 (D. Vt. Feb.
14, 2012)............................................................................................................................................ 418
Fried v. Stiefel Labs., Inc., 2012 U.S. Dist. LEXIS 122507 (S.D. Fla. June 8, 2012) ................. 354
Fulton County Employees Retirement System v. MGIC Inv. Corp., 675 F.3d 1047
(C.A.7 (Wis., 2012) .......................................................................................................................... 170
Fulton County Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047 (7th Cir. 2012) ................... 241
Gallman v. Sovereign Equity Grp., Inc., No. AW-11-2750, 2012 WL 1820556 (D.
Md. May 15, 2012) ............................................................................................................................. 44
Gammel v. Hewlett-Packard Co., 2012 WL 5945089 (C.D. Cal. Aug. 29, 2012) .............. 172, 200
Garcia v. Wachovia Corp., 699 F.3d 1273 (11th Cir. 2012) ......................................................... 416
Garden City Emples. Ret. Sys. v. Anixter Int’l Inc., 2012 Fed. Sec. L. Rep. (CCH)
96,780 (N.D. Ill. Mar. 29, 2012) ................................................................................................... 289
Gardner v. Major Automotive Companies, 2012 WL 1230135 (E.D.N.Y. April 12, 2012). ...... 476
Gardner v. The Major Auto. Co., 2012 U.S. Dist. LEXIS 118191 (E.D.N.Y Aug.
21, 2012)............................................................................................................................................ 118
Gardner v. The Major Auto. Cos., 2012 U.S. Dist. LEXIS 51821 (E.D.N.Y Apr.
12, 2012)............................................................................................................................................ 119
Gault v. SRI Surgical Express, Inc., 2012 U.S. Dist. LEXIS 151409 (N.D. Fla.
Oct. 22, 2012) ................................................................................................................................... 338
Gen. Ret. System of City of Detroit v. Onyx Capital Advisors, LLC, No. 10-CV-
11941, 2012 WL 1018949 (E.D. Mich. Mar. 26, 2012)................................................................. 371
xii

George v. China Auto. Sys., Inc., 2012 WL 3205062 (S.D.N.Y. Aug. 8, 2012) ................... 76, 175
George v. China Auto. Sys., Inc., No. 11 CIV. 7533 KBF, 2012 WL 4493107
(S.D.N.Y. Sept. 25, 2012). ................................................................................................................. 76
Gerardo Gerson & Rivadavia, S.A. v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS
128128 (S.D. Fla. Sept. 10, 2012). .................................................................................................. 453
Gilmore v. Gilmore, No. 11-4091-CV, 2012 WL 5935341 (2d Cir. Nov. 28, 2012). .................. 365
GMO Trust v. ICAP Plc, 2012 U.S. Dist. LEXIS 150074 (D. Mass. Oct. 18, 2012) ................... 228
Goldberg v. 401 North Wabash Venture, LLC, No. 09 C 6455, --- F.Supp.2d ----,
2012 WL 4932653 (N.D. Ill. Oct. 16, 2012) ....................................................................................... 1
Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Bayou Grp.,
LLC, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012) .................................................. 228, 438
Goldman v. City of Reno, 2012 U.S. Dist. LEXIS 167902 (D. Nev. Nov. 26, 2012) .................. 424
Goldman v. Nationwide Life Ins. Co., 2012 Ohio 3574 (Ohio Ct. App., Cuyahoga
County Aug. 9, 2012) .............................................................................................................. 237, 361
Gomez v Brill Sec., Inc., 95 A.D.3d 32 (N.Y. App. Div. 1st Dep't 2012) ..................................... 425
Gomez v. Brill Sec., Inc., 943 N.Y.S.2d 400 (N.Y. App. Div. 2012) (3-2 Decision)
(Sweeney, J., dissenting). ................................................................................................................. 540
Gondeck v. A Clear Title & Escrow Exch., LLC, 2012 U.S. Dist. LEXIS 151210
(N.D. Ill. Oct. 22, 2012) ................................................................................................................... 331
Gordon v. Sonar Capital Mgmt. LLC, 2012 WL 1193844 (S.D.N.Y. Apr. 9, 2012) ................... 176
Gottlieb v. Willis, 2012 U.S. Dist. LEXIS 159343 (D. Minn. Nov. 7, 2012) ............................... 123
Gould v. Winstar Communs., Inc., 692 F.3d 148, 2012 U.S. App. LEXIS 18426
(2d Cir. July 19, 2012)...................................................................................................................... 144
Grace Village Health Care Facilities, Inc. v. Lancaster Pollard & Co., 2012 WL
3916652 (N.D. Ind. Sept. 7, 2012) ......................................................................................... 222, 226
Grail Semiconductor, Inc. v. Stern, 2012 WL 5903817 (S.D.Fla. Nov.26, 2012). ...................... 474
Grant v. Houser, 2012 WL 519120 (E.D.La.,2012. February 15, 2012) ..................... 158, 234, 414
Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., 962 N.E.2d 221
(Mass. App. Ct. 2012). ..................................................................................................................... 396
xiii

Griffin v. Morgan Stanley Smith Barney, LLC, 2012 Ill. App. Unpub. LEXIS 2297
(Ill. App. Ct. 1st Dist. Sept. 19, 2012) ............................................................................................. 427
Grodko v. Central European Dist. Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012) ............... 179
Groom v. Bank of Am., 2012 U.S. Dist. LEXIS 2374 (M.D. Fla. Jan. 9, 2012) ........................... 337
Hansalik v. Wells Fargo Advisors, 2012 Cal. App. Unpub. LEXIS 3145 (Cal.
App. 2d Dist. Apr. 25, 2012). .......................................................................................................... 457
Hantz Fin. Servs. v. Monroe, 2012 Mich. App. LEXIS 147 (Mich. Ct. App. Jan. 24, 2012)...... 431
Harding v. Midsouth Bank N A, 2012 U.S. Dist. LEXIS 143984 (W.D. La. Oct. 3, 2012) ........ 419
Hardisty v. Moore, No. 11 CV 1591 AJB BLM, 2012 WL 1564533 (S.D. Cal.
May 2, 2012). .................................................................................................................................... 374
Hemenway v. Bartoletta, 2012 WL 1252691 (M.D. Fla. April 13, 2012) .................................... 167
Hickory Sec. Ltd. v. Republic of Argentina, 2012 WL 3291796 (2d Cir. Aug. 14, 2012). .......... 381
Hicks v. State of Georgia, 315 Ga. App. 779, 728 S.E.2d 294 (Ga. Ct. App. 2012)........................ 6
Hidalgo-Velez v. San Juan Asset Mgmt., Inc., 2012 WL 4427077 (D.P.R. Sept. 24, 2012) ....... 205
Highland Capital Mgmt. v. Ryder Scott Co., 2012 Tex. App. LEXIS 2674 (Tex.
App. 2012)......................................................................................................................................... 356
Highland Capital Mgmt., L.P. v. Ryder Scott Co., 2012 WL 6082713 (Tex. App. Dec. 6,
2012). ................................................................................................................................................. 380
Hildene Capital Mgmt., LLC v. Friedman, Billings, Ramsey Group, Inc., No. 11 Civ.
5832 AJN, 2012 WL 3542196 (S.D.N.Y. Aug. 15, 2012). ............................................................ 369
Ho v. Duoyuan Global Water Inc., No. 10 Civ. 7233, 2012 WL 3647043 (S.D.N.Y. Aug.
24, 2012).................................................................................................... 16, 162, 192, 231, 262, 269
Hohenstein v. Behringer Harvard REIT I, Inc., 2012 WL 6625382 (N.D. Tex. Dec. 20,
2012) ......................................................................................................................................... 181, 469
Holladay v. CME Group, No. 11-CV-8226, 2012 WL 5845621 (N.D. Ill. 2012). ...................... 363
Holland v. TD Ameritrade, Inc., 2012 U.S. Dist. LEXIS 22470 (E.D. Cal. Feb. 22, 2012) ........ 421
Hospitalists of Del., LLC v. Lutz, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012) .... 346, 355
Howard v. Nano, No. 11 CV 366 MCR CJK, 2012 WL 3668045 (N.D. Fla. Aug. 25,
2012) .................................................................................................................................................... 92
xiv

Hubbard v. BankAtlantic Bancorp, Inc., No. 11-14703, 2012 WL 6013216 (11th Cir.
Dec. 3, 2012) ...................................................................................................................... 67, 242, 383
Hudson v. Merrill Lynch Int’l Fin. Inc., 2012 WL 5877960 (E.D. La. Nov. 20, 2012)............... 536
Huppe v. WPCS Int’l Inc., 670 F.3d 214 (2d Cir. 2012) ......................................................... 63, 139
Hutchins v. NBTY, Inc., No. CV 10-2159 LDW, 2012 WL 1078823 (E.D.N.Y. Mar. 30,
2012) ........................................................................................................................... 68, 157, 193, 249
I.B.E.W. Local 697 Pension Fund v. Int’l Game Tech., Inc., 2012 WL 5199742 (D. Nev.
Oct. 19, 2012). .................................................................................................................................. 394
IBEW Local 98 Pension Fund v. Best Buy Co., 2012 Fed. Sec. L. Rep. (CCH) 96,779
(D. Minn. Mar. 20, 2012) ................................................................................................................. 292
IBEW Local 98 Pension Fund v. Cent. Vt. Pub. Serv. Corp., 2012 U.S. Dist. LEXIS
36784 (D. Vt. Mar. 19, 2012) ................................................................................................. 116, 279
Iconix Brand Group Inc. v. Merrill Lynch, Pierce Fenner & Smith Inc., 2012 WL
6097440 (2d Cir. Dec. 10, 2012) ....................................................................................................... 60
In re 1st Discount Brokerage, Inc., Release No. 33-66212A, 2012 SEC LEXIS
220 (Jan. 23, 2012). ......................................................................................................... 359, 481, 522
In re Adams, Securities Exchange Act of 1934 Release No. 67019, 2012 SEC
LEXIS 1564 (May 18, 2012) .................................................................................................. 134, 342
In re Advanced Battery Technologies, Inc. Securities Litigation, 2012 WL
3758085 (S.D.N.Y. Aug. 29, 2012) ................................................................................................. 162
In re Advanced Battery Techs., Inc. Sec. Litig., 2012 U.S. Dist. LEXIS 123757
(S.D.N.Y. Aug. 29, 2012) ....................................................................................................... 262, 270
In re Advanced Equities, Inc., Release No. 34-67878, 2012 SEC LEXIS 2958
(Sept. 18, 2012). ....................................................................................................................... 483, 504
In re Alchemy Ventures, Inc., Release No. 67206, 2012 SEC LEXIS 1866 (June
15, 2012)............................................................................................................................................ 525
In re Allen, Release No. 67744, 2012 SEC LEXIS 2775 (Aug. 12, 2012). .................................. 501
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012
U.S. Dist. LEXIS 22065 (C.D. Cal. Feb. 22, 2012) ......................................................................... 85
In re Allergan, Inc. S’holder Derivative Litig., No. SACV 10-1352 DOC, 2012
WL 137457 (C.D. Cal. Jan. 17, 2012) ............................................................................................... 85
xv

In re Allstate Life Ins. Co. Litig., 2012 U.S. Dist. LEXIS 72900 (D. Ariz. May 24, 2012) ........ 293
In re Almost Family Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,737 (W.D. Ky.
Feb. 9, 2012) ..................................................................................................................................... 288
In re Am. Apparel, Inc. S’holders Litig., 855 F. Supp. 2d 1043 (C.D. Cal. 2012) ....................... 295
In re Am. Int’l Grp., Inc. Sec. Litig., 2012 WL 345509 (S.D.N.Y. Feb. 2, 2012). ....................... 391
In re Ambit Capital Pvt. Ltd., Release No. 68295, 2012 SEC LEXIS 3657 (Nov. 27,
2012) .................................................................................................................................................. 525
In re American Apparel, Inc. Shareholder Litigation, 855 F.Supp.2d 1043
(C.D.Cal.,2012. January 13, 2012 ) ................................................................................................. 156
In re American Funds Securities Litigation, 479 Fed.Appx. 782 (C.A.9 Cal., 2012) ................. 171
In re Anadigics, Inc., 484 F. App’x 742 (3d Cir. 2012) ................................................................. 240
In re Apollo Group Inc. Securities Litig., 2012 WL 1378677 (D. Ariz. Apr. 20, 2012).............. 470
In re Apollo Group, Inc. Sec. Litig., Nos. CV-10-1735-PHX-JAT, CV-10-2044-PHX-
JAT, CV-10-2121-PHX, JAT, 2012 WL 2376378 (D. Ariz. June 22, 2012) ................................. 84
In re Apollo Grp. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,924 (D. Ariz.
June 22, 2012) ................................................................................................................................... 294
In re Apollo Grp., Inc., Sec. Litig., 2012 WL 4513608 (D. Ariz. Oct. 2, 2012). .......................... 393
In re A-Power Energy Generation Sys. Sec. Litig., 2012 U.S. Dist. LEXIS 79417 (C.D.
Cal. May 31, 2012) ........................................................................................................................... 298
In re Application of Midas Sec., LLC, Release No. 34-66200, 2012 SEC LEXIS 199 (Jan.
20, 2012)............................................................................................................................................ 480
In re Application of World Trade Financial Corp., Release No. 66114, 2012 SEC LEXIS
56 (Jan. 6, 2012). .............................................................................................................................. 479
In re Asensio & Co., Inc., Release No. 68505, 2012 SEC LEXIS 3954 (Dec. 20, 2012). .. 533, 534
In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Sec.
Act , 2012 WL 6644623 (S.D.N.Y. 2012) ....................................................................................... 159
In re Austin Capital Mgmt. Ltd., Sec. & Employee Ret. Income Sec. Act (ERISA) Litig.,
No. 09 M.D. 2075, 2012 WL 6644623 (S.D.N.Y. Dec. 21, 2012) .................................................. 34
In re Austin Capital Mgmt., Ltd., Sec. & ERISA Litig., 2012 WL 6644623 (S.D.N.Y. Dec.
21, 2012)............................................................................................................................................ 208
xvi

In re Axa Advisors, LLC, Release No. 34-66206, 2012 SEC LEXIS 206 (Jan. 20,
2012). ................................................................................................................................ 358, 479, 521
In re Bank of Am. Corp. Sec., Derivative, and Emp. Ret. Income Sec. Act (ERISA) Litig.,
281 F.R.D. 134 (S.D.N.Y. 2012) ....................................................................................................... 14
In re Bank of America Corp. Sec., Deriv. and Employee Ret. Income Sec. Act Litig. No.
09 MD 2058, 2012 WL 1353523 (S.D.N.Y. 2012) ........................................................................ 106
In re Bank of America Corp. Securities, Derivative, and Employment Retirement Income
Security Act (ERISA) Litigation, 2012 WL 1353523 (S.D.N.Y. April 12, 2012)......................... 161
In re Barriger, Release No. 66142, 2012 SEC LEXIS 105 (Jan. 26, 2012). ................................ 501
In re Bauer, Release No. 67205, 2012 SEC LEXIS 1865 (June 14, 2011). ................................. 514
In re Beacon Assocs. Litig., 282 F.R.D. 315 (S.D.N.Y. 2012) ............................................. 108, 402
In re Bear Stearns Cos. Sec., Derivative, and ERISA Litig., 2012 WL 5465381 (S.D.N.Y.
Nov. 9, 2012). ................................................................................................................................... 390
In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746
(S.D.N.Y. 2012) ............................................................................................................. 9, 35, 253, 402
In re Berger, Release No. 66365, 2012 SEC LEXIS 1006 (Feb. 9, 2012). .................................. 517
In re Biremis Corp., Release No. 68456, 2012 SEC LEXIS 3930 (Dec. 18, 2012). ... 361, 485, 522
In re Blankenship, Release No. 68038, 2012 SEC LEXIS 3238 (Oct. 11, 2012). .............. 502, 510
In re Blimline, Release No. 68347, 2012 SEC LEXIS 3733 (Dec. 4, 2012). ............................... 505
In re Bogar, Securities Exchange Act of 1934 Release No. 67769, 2012 SEC LEXIS
2786 (Aug. 31, 2012)........................................................................................................................ 134
In re Boston Scientific Corp. Securities Litigation, 686 F.3d 21 (C.A.1 Mass., 2012) ................ 167
In re Bowen, Release No. 68266, 2012 SEC LEXIS 3604 (Nov. 19, 2012)................................. 533
In re BP P.L.C. Sec. Litig., 852 F. Supp. 2d 767 (S.D. Tex. 2012) .............................. 195, 212, 287
In re BP P.L.C. Securities Litig., 853 F. Supp.2d 767 (S.D. Tex. 2012). ..................................... 464
In re BP p.l.c. Securities Litigation, 843 F.Supp.2d 712 (S.D.Tex.,2012. February
13, 2012)........................................................................................................................... 164, 235, 286
In re Braff, Release No. 66467, 2012 SEC LEXIS 620 (Feb. 24, 2012). ..................................... 529
In re Bravo, Release No. 67805, 2012 SEC LEXIS 2854 (Sept. 7, 2012).................................... 518
xvii

In re Brogger, Release No. 66594, 2012 SEC LEXIS 821 (Mar. 14, 2012). ............................... 514
In re Brown, Release Nos. 66469 & 3376, 2012 SEC LEXIS 636 (Feb. 27, 2012).... 340, 360, 482
In re Buggy, Release No. 66205, 2012 SEC LEXIS 211 (Jan. 20, 2012). .................................... 505
In re Campbell, Release No. 67770, 2012 SEC LEXIS 2790 (Aug. 31, 2012). ........................... 502
In Re Carter’s Inc. Securities Litigation, 2012 WL 3715241 (N.D. Ga. Aug. 28, 2012) ............ 166
In re Celera Corp. S’holder Litig., 2012 Del. Ch. LEXIS 66 (Del. Ch. Mar. 23, 2012). ............ 345
In re Central European Dist. Corp. Sec. Litig., 2012 WL 5511711 (D.N.J. Nov. 14, 2012) ...... 179
In Re Checking Account Overdraft Litig., 2012 U.S. App. LEXIS 15781 (11th Cir. Mar.
11, 2012)............................................................................................................................................ 416
In Re Checking Account Overdraft Litig., 674 F.3d 1252 (11th Circ. 2012) ................................ 416
In Re Checking Account Overdraft Litig., 685 F.3d 1269 (11th Cir. 2012). ................................ 416
In re China Educ. Alliance, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,804 (C.D. Cal.
Apr. 6, 2012) ..................................................................................................................................... 297
In re China Intelligent Lighting & Elecs. Inc., 2012 Fed. Sec. L. Rep. (CCH) 97,008
(C.D. Cal. Sept. 5, 2012) .................................................................................................................. 298
In re China Intelligent Lighting & Electronics, Inc. Sec. Litig., CV 11-2768 PSG SSX,
2012 WL 3834815 (C.D. Cal. Sept. 5, 2012).................................................................................... 48
In re China Valves Tech. Sec. Litig., No. 11 CIV. 0796 LAK, 2012 WL 4039852
(S.D.N.Y. Sept. 12, 2012) ......................................................................................... 35, 264, 272, 460
In Re China Valves Technology Securities Litigation, 2012 WL 4039852 (S.D.N.Y. Sept.
12, 2012)............................................................................................................................................ 163
In re Chiu, Release Nos. 6647 & 3367, 2012 SEC LEXIS 639 (Feb. 27, 2012).......................... 341
In re Cioffi, Release No. 67250, 2012 SEC LEXIS 1967 (June 25, 2012); In re Tannin,
Release No. 67249, 2012 SEC LEXIS 1968 (June 25, 2012)........................................................ 505
In re CMED Sec. Litig., 2012 WL 1118302 (S.D.N.Y. Apr. 2, 2012) .......................................... 177
In re Comeaux, Release No. 67768, 2012 SEC LEXIS 2787 (Aug. 31, 2012). .................. 499, 506
In re Commodity Exch. Inc., 2012 U.S. Dist. LEXIS 181487 (S.D.N.Y. Dec. 21, 2012)............ 325
In re Computer Sciences Corp. Sec. Litig., 2012 WL 3779349 (E.D. Va. Aug. 29, 2012) ......... 194
xviii

In re Computer Sciences Corporation Securities Litigation, 2012 WL 3779349 (E.D.Va.
Aug. 29, 2012) .................................................................................................................................. 158
In re Constellation Energy Group, Inc., 2012 U.S. Dist. LEXIS 44036 (D. Md. Mar. 28,
2012) .................................................................................................................................................. 284
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 834 F. Supp. 2d 949 (C.D. Cal
2012) .................................................................................................................................................... 21
In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 860 F. Supp. 2d 1062
(C.D. Cal. 2012) .......................................................................................... 21, 47, 407, 408, 410, 411
In re CRM Holdings, Ltd. Sec. Litig., No. 10-Civ. 975 RPP, 2012 WL 1646888 (S.D.N.Y.
May 10, 2012) ..................................................................................................................................... 73
In re CRM Holdings, Ltd., 2012 U.S. Dist. LEXIS 66034 (S.D.N.Y. May 10, 2012) ................. 256
In re DBSI, Inc., 476 B.R. 413 (Bankr. D. Del. 2012) .................................................................4, 42
In re Dent, Release No. 68223, 2012 SEC LEXIS 3511 (Nov. 14, 2012). ................................... 506
In re Detling, Release No. 66161, 2012 SEC LEXIS 142 (Jan. 17, 2012) ................................... 340
In re Diamond Foods Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,216 (N.D. Cal.
Nov. 30, 2012) .................................................................................................................................. 303
In Re Diamond Foods, Inc., 2012 U.S. Dist. LEXIS 74129 (N.D. Cal. May 29, 2012) .............. 126
In re Diamond Foods, Inc., Sec. Litig., 281 F.R.D. 405 (N.D Cal. 2012) ........................... 184, 186
In re Direxion Shares ETF Trust, 279 F.R.D. 221 (S.D.N.Y. 2012) ..................................... 13, 403
In re Dot Hill Sys. Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. Sept. 2, 2008). .......... 477
In re Drimal, Release No. 66314, 2012 SEC LEXIS 1001 (Feb. 2, 2012). .................................. 515
In re eBX, LLC, Release 67969, 2012 SEC LEXIS 3150 (Oct. 3, 2012). ..................................... 527
In re Echeverri, Release No. 66088, 2012 SEC LEXIS 1000 (Jan. 3, 2012). .............................. 515
In re Edelweiss Fin. Serv. Ltd., Release No. 68298, 2012 SEC LEXIS 3654 (Nov. 27,
2012) .................................................................................................................................................. 526
In re Electronic Brokerage Systems, LLC, FINRA Proc. Nos. 20110270289 (ARCA), and
20110302093 and 20110270122 (NYSE), NYSE Disc. Action 2012-4, 2012 NYSE Disc.
Action LEXIS 4 (May 1, 2012). ...................................................................................................... 497
In re Eschbach, Release No. 66634, 2012 SEC LEXIS 894 (Mar. 21, 2012). .................... 502, 511
xix

In re Evergreen Ultra Short Opportunities Fund Sec. Litig., 2012 WL 6184269 (D. Mass.
Dec. 10, 2012). .................................................................................................................................. 389
In re Facebook, Inc. IPO Securities and Derivative Litigation, 2012 WL 6061862
(S.D.N.Y. Dec. 6, 2012). ......................................................................................................... 174, 468
In re Fannie Mae 2008 ERISA Litig., No. 09 Civ. 1350 PAC, 09 MDL 2013 PAC, 2012
WL 5198463 (S.D.N.Y. Oct. 22, 2012) ............................................................................................ 77
In re Fannie Mae 2008 Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,995 (S.D.N.Y.
Aug. 30, 2012) ......................................................................................................................... 263, 271
In re Fannie Mae 2008 Sec. Litig., 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012). ........... 162, 209
In re Ferrer, Securities Exchange Act of 1934 Release No. 66892, 2012 SEC LEXIS
1403 (May 1, 2012) .......................................................................................................................... 135
In re Finger, Release No. 67041, 2012 SEC LEXIS 1602 (May 22, 2012). ....................... 500, 511
In re Finisar Corp. Derivative Litig., No. C-06-07660 RMW, 2012 WL 2873844 (N.D.
Cal. July 12, 2012) ..................................................................................................................... 87, 127
In re First Solar Derivative Litig., No. CV-12-00769-PHX-DGC, 2012 WL 6570914 (D.
Ariz. Dec. 17, 2012) ........................................................................................................................... 84
In re Fleishman, Release No. 67190, 2012 SEC LEXIS 1849 (June 12, 2012). .......................... 515
In re Folan, Release No. 66127, 2012 SEC LEXIS 1003 (Jan. 10, 2012).................................... 506
In re Gables Mgmt., LLC, 473 B.R. 352 (Bankr. D. Idaho 2012) ..................................................... 4
In re Gen. Elec. Co. Sec. Litig., 856 F. Supp. 2d 645 (S.D.N.Y. 2012) ........................... 10, 36, 161
In re Gen. Elec. Sec. Litig., 857 F. Supp. 2d 367 (S.D.N.Y. 2012) ...................................... 105, 250
In re Gengler, Release No. 67918, 2012 SEC LEXIS 3027 (Sept. 24, 2012). ............................. 507
In re Gentiva Sec. Litig., 281 F.R.D. 108 (E.D.N.Y. 2012) ........................................................... 173
In re Genzyme Corp., 2012 WL 1076124 (D. Mass. March 30, 2012) ................................ 150, 244
In re GMR Securities Litigation, 2012 WL 5457534 (S.D.N.Y. Nov. 8, 2012). .......................... 478
In re Goldfarb, 96 A.D.3d 12 (N.Y. App. Div. 2d Dep’t 2012) .................................................... 100
In re Goldman Sachs Execution & Clearing, L.P., FINRA Proc. No. 20110270059, 2012
NYSE Disc. Action LEXIS 5 (July 23, 2012). ............................................................................... 496
xx

In re Goldman, Sachs & Co., FINRA Proceeding No. 20110270394, NYSE Disc. Action
2012-12; 2012 NYSE Disc. Action LEXIS 3 (April 4, 2012). ...................................................... 497
In re Goldman, Sachs & Co., FINRA Proceeding Nos. 20110270256, 20110270345,
20110270250, NYSE Disc. Action 2012-1, 2012 NYSE Disc. Action LEXIS 1 (Jan. 9,
2012). ................................................................................................................................................. 498
In re Goldman, Sachs & Co., Release No. 67934, 2012 SEC LEXIS 3086 (Sept. 27,
2012). ................................................................................................................................................. 527
In re Groupon Derivative Litig., No. 12-CV-5300, 2012 WL 3133684 (N.D. Ill. July 31,
2012) ........................................................................................................................................... 20, 182
In re H. Clayton Peterson, Release No. 3391, Release No. 67282, Release No. 34-67282,
Release No. AE-3391, 2012 WL 2411469 (June 27, 2012) ............................................................ 92
In re Heckmann Corp. Sec. Litig., 869 F. Supp.2d 519 (D. Del. 2012). ....................................... 463
In re Hold Brother Execution Services, LLC, FINRA Proc. Nos. 20110270318,
20110270169, and 20110297129, NYSE Disc. Action 2012-8, 2012 NYSE Disc. Action
LEXIS 8 (Oct. 5, 2012). ................................................................................................................... 495
In re Hold Brothers On-Line Inv. Servs., LLC, Release No. 34-67924, 2012 SEC
LEXIS 3029 (Sept. 25, 2012). ................................................................................................ 484, 518
In re HP Derivative Litig., 2012 U.S. Dist. LEXIS 137640 (N.D. Cal. Sept. 25, 2012) ............. 129
In re Hunter Adams, Release No. 67019, 2012 SEC LEXIS 1564 (May 18, 2012). ................... 519
In re IMAX Sec. Litig., 2012 WL 3133476 (S.D.N.Y. Aug. 1, 2012). .......................................... 390
In re Indymac Mortg.-Backed Sec. Litg., 286 F.R.D. 226 (S.D.N.Y. 2012). ............................... 469
In re IndyMac Mortgage-Backed Sec. Litig., No. 09 Civ. 4583, 2012 WL 3553083
(S.D.N.Y. Aug. 17, 2012) ........................................................................................... 16, 37, 261, 269
In re Int’l Mgmt. Assocs., LLC, 2012 WL 2105908 (Bankr. N.D. Ga. Apr. 3, 2012). ................. 386
In re ITT Educational Services, Inc. and Securities and Shareholder Derivatives Litig.,
859 F. Supp. 2d 572 (S.D.N.Y. 2012) .................................................................................... 160, 256
In re Jiangbo Pharm., Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,958 (S.D. Fla.
Aug. 1, 2012) .................................................................................................................................... 309
In re Jiangbo Pharmaceuticals, Inc., Securities Litigation, 2012 WL 3150085 (S.D.Fla.
2012) .................................................................................................................................................. 164
In re Jilaine H. Bauer, Esq., Release No. 68214, 2012 WL 5493356 (Nov. 13, 2012) ................. 93
xxi

In re JM Fin. Institutional Sec. Private Ltd., Release No. 68297, 2012 SEC LEXIS 3655
(Nov. 27, 2012) ................................................................................................................................. 526
In re John Jantzen, Release No. 472, 2012 WL 5422022 (Nov. 6, 2012) ...................................... 93
In re JP Morgan Auction Rate Sec. Mktg. Litig., 867 F. Supp. 2d 407 (S.D.N.Y. 2012) ............ 254
In re JP Morgan Auction Rate Securities (ARS) Marketing Litigation, 867 F. Supp. 407
(S.D.N.Y. 2012) ................................................................................................................................ 160
In re JP Turner & Co., LLC, Release No. 34-67808, 2012 SEC LEXIS 2852 (Sept. 10,
2012). ................................................................................................................................................. 483
In re JP Turner & Co., LLC, Release No. 67808, 2012 SEC LEXIS 2852 (Sep. 10, 2012). ...... 523
In re Kimelman, 94 A.D.3d 148 (N.Y. App. Div. 2d Dep’t 2012) .................................................. 99
In re Kimelman, Release No. 66626, 2012 SEC LEXIS 889 (Mar. 20, 2012). ............................ 516
In re Kueng, Release No. 66585, 2012 SEC LEXIS 815 (Mar. 13, 2012). .................................. 516
In re K-V Pharm. Co. Sec. Litig., 2012 WL 1570118 (E.D.Mo. May 3, 2012)............................ 183
In re L & L Energy, Inc. Securities Litigation, 2012 WL 6012787 (W.D.Wash.,2012
December 03, 2012) ......................................................................................................................... 148
In re Labineri, Release No. 66318, 2012 SEC LEXIS 404 (Feb. 3, 2012)................................... 503
In re Leaddog Capital Mkts., LLC, 2012 SEC LEXIS 2918 (Sept. 14, 2012).............................. 343
In re Lehman Bros. Sec. & ERISA Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,052
(S.D.N.Y. Oct. 15, 2012)......................................................................................................... 266, 274
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 4866504 (S.D.N.Y. Oct. 15, 2012). ........... 405
In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 6584524 (S.D.N.Y. Dec. 18, 2012). ........... 404
In re Lehman Bros. Sec. and ERISA Litig., 2012 WL 6603321 (S.D.N.Y. Dec. 17,
2012) ......................................................................................................................................... 161, 208
In re Lehman Bros. Sec. and ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011) ..................... 112
In re Lehman Bros. Sec. Litig., 2012 U.S. Dist. LEXIS 148177 (S.D.N.Y. Oct. 15, 2012). ....... 323
In re Lehman Bros. Secs. & Erisa Litig., 2012 U.S. Dist. LEXIS 90796 (S.D.N.Y. June
29, 2012)............................................................................................................................................ 443
In re Lehman Brothers and ERISA Litig., No. 09 Civ. 6040, 2012 WL 4866504 (S.D.N.Y.
Oct. 15, 2012) ..................................................................................................................................... 18
xxii

In re Level 3 Commc’ns Sec. Litig., 667 F.3d 1331 (10th Cir. 2012) ........................................... 242
In re Level 3 Communications, Inc. Securities Litigation, 667 F.3d 1331 (C.A.10 Colo.
2012) .................................................................................................................................................. 172
In re Longtop Fin. Techs. Ltd. Sec. Litig., 2012 U.S. Dist. LEXIS 91004 (S.D.N.Y.
June 28, 2012) ................................................................................................................................... 258
In re Lopez, Release No. 66638, 2012 SEC LEXIS 907 (Mar. 21, 2012). ................................... 519
In re Luna, Securities Exchange Act of 1934 Release No. 67864, 2012 SEC LEXIS 2948
(Sept. 14, 2012) ................................................................................................................................. 136
In re Madoff, Release No. 67512, 2012 SEC LEXIS 2367 (July 26, 2012). ................................ 511
In re Marks, Release No. 68275, 2012 SEC LEXIS 3616 (Nov. 20, 2012). ................................ 507
In re Martinez, Release No. 66712, 2012 SEC LEXIS 1107 (Apr. 2, 2012)....................... 499, 507
In re Massey Energy Co. Sec. Litig., 2012 U.S. Dist. LEXIS 42563 (S.D. W. Va. Mar. 28,
2012) .................................................................................................................................................. 285
In re Mazuchowski, Release No. 67532, 2012 SEC LEXIS 2387 (July 30, 2012). ..................... 513
In re McCaffrey, Release No. 66844, 2012 SEC LEXIS 1279 (Apr. 23, 2012). .......................... 534
In re Med. Capital Sec. Litig., 842 F. Supp. 2d 1208 (C.D. Cal. 2012). ....................................... 398
In re MELA Sciences, Inc. Sec. Litig., 2012 WL 4466604 (S.D.N.Y. Sept. 19, 2012) ....... 163, 192
In re Merck & Co. Inc., Vytorin / Zetia Sec. Litig., 2012 WL 4482041 (D.N.J. Sept. 25,
2012) .................................................................................................................................................. 109
In re Merck & Co. Sec., Derivative, & ERISA Litig., 2012 WL 6840532 (D. N.J. Dec. 20,
2012). ................................................................................................................................................. 405
In re Merck & Co., 2012 Fed. Sec. L. Rep. (CCH) 97,239 (D.N.J. Dec. 20, 2012).................. 283
In re Merck & Co., 2012 U.S. Dist. LEXIS 123800 (D.N.J. Aug. 29, 2012) ............................... 282
In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litigation, 2012 WL 3779309
(D.N.J. Aug. 29, 2012) ..................................................................................................................... 152
In re Merrill Lynch Auction Rate Sec. Litig., Nos. 09 MD 2030 (LAP), 10 Civ. 0124
(LAP), 2012 WL 1994707 (S.D.N.Y. June 4, 2012) ........................ 37, 61, 215, 221, 224, 251, 387
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Proc. No. 20110270034,
NYSE Disc. Action 2012-7, 2012 NYSE Disc. Action LEXIS 7 (Sept. 13, 2012). .................... 495
xxiii

In re MGM Mirage Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,787 (D. Nev. Mar. 26,
2012) .................................................................................................................................................. 304
In re MGM Mirage Sec. Litig., 594 F. Supp. 2d 1150, 1165-66 (S.D. Cal. June 21, 2008). ....... 476
In re Midas Sec., LLC, Release No. 66200, 2012 SEC LEXIS 199 (Jan. 20, 2012). .......... 358, 531
In re MidSouth Capital, Inc., Securities Exchange Act of 1934 Release No. 66828, 2012
SEC LEXIS 1254 (Apr. 18, 2012) .......................................................................... 138, 341, 512, 528
In re Mindlin, Release No. 66246, 2012 SEC LEXIS 335 (Jan. 26, 2012) .................................. 516
In re Mona Lisa at Celebration, LLC, 472 B.R. 582 (Bankr. M.D. Fla. 2012) ................................ 5
In re Montford & Co., 2012 SEC LEXIS 1264, SEC Initial Decision Release No. 457
(Apr. 20, 2012) .................................................................................................................................. 342
In re Morgan Stanley & Co., LLC, FINRA Proceeding No. 20110270171, 2012 NYSE
Disc. Action LEXIS 6 (Aug. 10, 2012). .......................................................................................... 496
In re Morgan, Release No. 67974, 2012 SEC LEXIS 3138 (Oct. 3, 2012). ................................. 524
In re Mullins, Release No. 66373, 2011 SEC LEXIS 464 (Feb. 10, 2012). ................................. 529
In re Mun. Mortg. & Equity, LLC, Sec. and Derivative Litig., --- F. Supp. 2d ---, 2012
WL 2450161 (D. Md. June 26, 2012) ........................................................... 20, 43, 44, 81, 284, 405
In re Murphy & Durieu, FINRA Proc. No. 20110270062, NYSE Disc. Action 2012-9,
2012 NYSE Disc. Action LEXIS 9 (Oct. 15, 2012). ...................................................................... 495
In re Murphy, Release No. 66433, 2012 SEC LEXIS 564 (Feb. 21, 2012). ................................. 535
In re Nat’l Century Fin. Enterprises, Inc., Invest. Litig., 846 F. Supp. 2d 828 (S.D. Ohio
2012) ................................................................................................ 217, 221, 229, 327, 328, 350, 388
In re Netflix, Inc., Sec. Litig., 2012 WL 1496171 (N.D. Cal. Apr. 27, 2012)............................... 186
In re Northfield Labs., Inc. Sec. Litig., 2012 WL 2458445 (N.D. Ill. June 26, 2012). ................ 393
In re Novatel Wireless Sec. Litig., No. 08CV1689 AJB RBB, 2012 WL 5463214 (S.D.
Cal. Nov. 8, 2012)...................................................................................................................... 89, 114
In re Novell, Inc. S'holder Litig., 2012 U.S. Dist. LEXIS 16765 (D. Mass. Feb. 10, 2012).116, 243, 315
In re Oppenheimer Champion Fund Sec. Fraud Class Actions, 2012 U.S. Dist. LEXIS
35243 (D. Colo. Mar. 15, 2012). ..................................................................................................... 435
In re Oppenheimer Rochester Funds Grp. Sec. Litig., 838 F. Supp. 2d 1148 (D. Colo.
2012) .......................................................................................................................23, 49, 50, 306, 408
xxiv

In re OppenheimerFunds, Inc., Release No. 67142, 2012 LEXIS 1765 (June 6, 2012). ............. 513
In re Passaro, Release No. 68477, 2012 SEC LEXIS 4023 (Dec. 19, 2012). .............................. 503
In re Pfizer Inc. Sec. Litig., 282 F.R.D. 38 (S.D.N.Y. 2012) ........................................................... 72
In re Plate, Release No. 66313, 2012 SEC LEXIS 1005 (Feb. 2, 2012). ..................................... 517
In re Premo, 2012 SEC LEXIS 4036 (Dec. 26, 2012). .................................................................. 344
In re Proshares Trust Sec. Litig., No. 09 Civ. 6935, 2012 WL 3878141 (S.D.N.Y. Sept. 7,
2012) ................................................................................................................................... 17, 263, 272
In re Puttick, Release No. 66879, 2012 SEC LEXIS 2089 (Apr. 30, 2012). ................................ 520
In re QA3 Fin. Corp., 466 B.R. 142 (Bankr. D. Neb. Jan. 18, 2012) ............................................ 293
In re Quantek Asset Mgmt., Release Nos. 9326, 3408, & 30085, 2012 SEC LEXIS 1654
(May 29, 2012).................................................................................................................................. 343
In re Ramsey, Release No. 66744, 2012 SEC LEXIS 1117 (Apr. 5, 2012). ................................. 503
In re Refco Inc. Sec. Litig., 859 F. Supp. 2d 644 (S.D.N.Y. 2012) ...................................... 206, 317
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (2d Cir. 2012) ............................ 7, 149, 241, 460
In re Ritchie, Release No. 66684, 2012 SEC LEXIS 1016 (Mar. 29, 2012). ............................... 520
In re Rizzo, Release Nos. 67479 & 3436, 2012 Fed. Sec. L. Rep. (CCH) 80,127
(July 20, 2012). ................................................................................................................ 360, 482, 523
In re Rough Rice Commodity Litig., 2012 U.S. Dist. LEXIS 17773 (N.D. Ill. Feb. 9,
2012) .................................................................................................................................................. 329
In re Royal Bank of Scotland Grp. plc Sec. Litig., No. 09 Civ. 300 (DAB), 2012 WL
3826261 (S.D.N.Y. Sept. 4, 2012) ..................................................................................................... 37
In re Ruiz, Release No. 66573, 2012 SEC LEXIS 792 (Mar. 12, 2012). ...................................... 508
In re Satyam Computer Servs. Ltd. Sec. Litig., 2013 WL 28053 (S.D.N.Y. Jan. 2, 2013) .......... 108
In re Schering-Plough Corp./ENHANCE Sec. Litig., No. CIV. 8-397 DMC/JAD, 2012
WL 4482032 (D.N.J. Sept. 25, 2012) ....................................................................................... 42, 109
In re Sekaran, Release No. 68331, 2012 SEC LEXIS 3720 (Nov. 30, 2012). .................... 504, 512
In re Slowey, Release No. 68259, 2012 SEC LEXIS 3672 (Nov. 19, 2012). ...................... 504, 508
In re Smith & Wesson Holding Corp. Sec. Litig. 669 F.3d 68 (1 st Cir. 2012) .............................. 101
xxv

In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (1st Cir. 2012) ................... 189, 238
In re Smith Barney Transfer Agent Litig., 2012 Fed. Sec. L. Rep. (CCH) 96,977
(S.D.N.Y. Aug. 15, 2012) ....................................................................................................... 260, 268
In re Still Water Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. Apr. 3,
2012) .................................................................................................................................................. 119
In re Stillwater Capital Partners Inc. Litig., 851 F. Supp. 2d 556 (S.D.N.Y. 2012) ................... 207
In re Stillwater Capital Partners Inc. Litig., 853 F. Supp. 2d 441 (S.D.N.Y. 2012) .. 206, 254, 319
In re Stillwater Capital Partners Inc. Litig., 858 F. Supp. 2d 277 (S.D.N.Y. 2012) ................... 255
In re Sturm, Ruger & Co. Sec. Litig., 2012 WL 3589610 (D. Conn. Aug. 20, 2012). ................. 389
In re Tak, Release No. 66147, 2012 SEC LEXIS 121 (Jan. 12, 2012). ........................................ 509
In re Thornburg Mortg. Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,218 (D.N.M.
Nov. 26, 2012) .................................................................................................................................. 307
In re Thornburg Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2012 WL 6004176
(D. N.M. Nov. 26, 2012) ................................................................................................... 51, 395, 471
In re Thornburg Mortg., Inc., --- F.Supp.2d ---, 2012 WL 6004176 (D.N.M. Nov. 26,
2012) ................................................................................................................................... 91, 395, 471
In re Tucker, Release No. 68210, 2012 SEC LEXIS 3496 (Nov. 9, 2012). ................................. 534
In re UBS AG Sec. Litig., No. 07-11225-RJS, 2012 WL 4471265 (S.D.N.Y. Sept. 28,
2012) ................................................................................................................................... 38, 266, 273
In re UBS Fin. Serv. Inc. of Puerto Rico, Release No. 66893, 2012 SEC LEXIS 1394
(May 1, 2012).................................................................................................................................... 509
In re UBS Fin. Svcs. Inc. of P.R., Securities Exchange Act of 1934 Release No. 66893,
2012 SEC LEXIS 1394 (May 1, 2012) ........................................................................................... 137
In re Urban, Release No. 3366, 2012 SEC LEXIS 346 (Jan. 26, 2012). ...................................... 359
In re Urban, Release No. 34-66259, 2012 SEC LEXIS 346 (Jan. 26, 2012). .............................. 481
In re VeriFone Holdings, Inc. Sec. Litig., --- F.3d ---, 2012 WL 6634351 (9th Cir. Dec.
21, 2012)............................................................................................................................. 66, 103, 150
In re Veriphone Holdings, Inc. Sec. Litig., 2012 Fed. Sec. L. Rep. (CCH) 97,238 (9th
Cir. Dec. 21, 2012). .......................................................................................................................... 241
In re Vivendi Univ., S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012) ................................. 52
xxvi

In re Vivendi Universal, S.A. Sec. Litig., 284 F.R.D. 144 (S.D.N.Y. 2012). ................................ 404
In re Vivendi Universal, S.A., Sec. Litig., 842 F. Supp. 2d 522 (S.D.N.Y. 2012)9, 38, 250, 385, 404
In re Wachovia Equity Sec. Litig., 2012 WL 2774969 (S.D.N.Y. June 12, 2012). ...................... 391
In re Wachovia Preferred Sec. & Bond/Notes Litig., 2012 WL 2589230 (S.D.N.Y. Jan. 3,
2012). ................................................................................................................................................. 392
In re Wal-Mart Stores, Inc. S'holder Derivative Litig., 2012 U.S. Dist. LEXIS 167923
(W.D. Ark. Nov. 27, 2012) .............................................................................................................. 125
In re Wells Fargo Sec., LLC, Release No. 67649, 2012 SEC LEXIS 2626 (Aug. 14,
2012). ................................................................................................................................................. 500
In re Wells Real Estate Inv. Trust Sec. Litig., 2012 U.S. Dist. LEXIS 156173 (N.D. Ga.
Sept. 26, 2012) .................................................................................................................................. 130
In re Western Pacific Capital Management, LLC, Release No. 67890, 2012 SEC LEXIS
2962 (Sep. 19, 2012); In re Western Pacific Capital Management, LLC, Release No.
67891, 2012 SEC LEXIS 2963 (Sep. 19, 2012). ............................................................................ 510
In re Wilmington Trust Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012) ............................... 19, 280
In re Wilmington Trust Securities Litigation, 852 F.Supp.2d 477 (D.Del.,2012 March 29,
2012) .................................................................................................................................................. 151
In re Wilmington Trust. Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012) ....................................... 41
In re Wolfson, Release No. 67450, 2012 SEC LEXIS 2266 (July 17, 2012); In re Wolfson,
Release No. 67451, 2012 SEC LEXIS 2265 (July 17, 2012). ....................................................... 521
In re World Trade Fin. Corp., Release No. 66114, 2012 SEC LEXIS 56 (Jan. 6, 2012).357, 531, 532
In re Yamashiro, Release No. 67789, 2012 SEC LEXIS 2839 (Sept. 5, 2012). ........................... 510
In re Zhou, Release No. 67531, 2012 SEC LEXIS 2384 (July 30, 2012)..................................... 527
In the Matter of Aladdin Capital, Adm. Proc. File No. 3-15134, 33 Act Release No. 9374,
2012 SEC LEXIS 3911 (Dec. 17, 2012) ........................................................................................... 57
In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-15098, 33
Act Release No. 9368, 2012 SEC LEXIS 3569 (Nov. 16, 2012) .................................................... 57
In the Matter of JP Turner & Company, LLC and William L. Mello, 2012 WL 3903395
(S.E.C. Release No. 3-15014, Sept. 10, 2012) .................................................................................. 59
In the Matter of Michael Bresner; Ralph Calabro; Jason Konner; and Dimitrios
Koustoubos, 2012 WL 3903387 (S.E.C. Release No. 3-15015, Sept. 10, 2012) ........................... 61
xxvii

In the Matter of Wells Fargo Brokerage Services, LLC, Adm. Proc. File No. 3-14982, 33
Act Release No. 9349, 2012 SEC LEXIS 2626 (Aug. 14, 2012) .................................................... 58
Indus. Tech. Ventures LP v. Pleasant T. Rowland Revocable Trust, 2012 WL 777313
(W.D.N.Y. Mar. 8, 2012). ................................................................................................................ 392
Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC, No. Civ. 12-254
(RHK/JSM), 2012 U.S. Dist. LEXIS 96263 (D. Minn. July 12, 2012) .......................................... 46
Ipcon Collections LLC v. Costco Wholesale Corp., 698 F.3d 58 (C.A.2 N.Y., 2012) ................. 168
Ireland v. Lear Capital, Inc., 2012 U.S. Dist. LEXIS 171544 (D. Minn. Dec. 4, 2012) ............. 420
Israni v. Bittman, 473 Fed. Appx. 548 (9th Cir. 2012) .................................................................... 66
Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. March 30, 2012) .............. 161, 254
Jayhawk Capital Mgmt., LLC v. LSB Indus., Inc., 2012 WL 4210462 (D. Kan. Sept. 19,
2012). ................................................................................................................................................. 380
Jirak v. Eichten, No. A11-1388, 2012 WL 2505748 (Minn. Ct. App. July 2, 2012). .................. 363
Johannsen v. Morgan Stanley Credit Corp., 2012 U.S. Dist. LEXIS 5367 (E.D. Cal. Jan.
11, 2012)............................................................................................................................................ 421
Jones v. U.S. Bank Nat’l Ass’n, No. 10 CV 0008, 2012 WL 899247 (N.D. Ill. Mar. 15,
2012). ................................................................................................................................................. 371
Joseph v. Mieka Corp., 282 P.3d 509 (Colo. App. 2012) .............................................................. 218
Kaltenbacher v. Morgan Keegan & Co., 84 So. 3d 1127 (Fla. Dist. Ct. App. 2012). ................. 398
Karam v. Corinthian Colleges, Inc., 2012 U.S. Dist. LEXIS 44153 (C.D. Cal. Jan. 30,
2012) .................................................................................................................................................. 296
Karpov v. Insight Enterprises, Inc., 471 Fed.Appx. 607 (C.A.9 Ariz., 2012) .............................. 171
Katz v. China Century Dragon Media, Inc., No. LA CV11-02769 JAK (SSx), 2012 WL
6644353 (C.D. Cal. Dec. 18, 2012) .......................................................................... 47, 297, 398, 470
Katz v. Pershing, LLC, 672 F.3d 64 (1st Cir. 2012) ....................................................................... 227
Kerr v. Exobox Techs. Corp., 2012 WL 201872 (S.D. Tex. Jan. 23, 2012) ................................. 352
Kim v. Kearney, 838 F. Supp. 2d 1077 (D. Nev. 2012). ................................................................ 353
King Cnty. v. IKB Deutsche Industriebank AG, 863 F. Supp. 2d 288 (S.D.N.Y. 2012) .............. 320
xxviii

King Cnty. Wash. v. Merrill Lynch & Co., 2012 U.S. Dist. LEXIS 87734 (W.D. Wash.
June 25, 2012) ................................................................................................................................... 305
Kinnett v. Strayer Educ., Inc., No. 10-CV-2317-T-23MAP, 2012 WL 933285 (M.D. Fla.
Jan. 3, 2012) ....................................................................................................................... 91, 243, 308
Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir. 2012). .......................................................... 364
Kool Radiators, Inc. v. Evans, 278 P.3d 310 (Ariz. Ct. App. 2012). ............................................ 397
Kovtun v. Vivus, Inc., 2012 WL 4477647 (N.D. Cal. Sept. 27, 2012) .......................................... 199
Krasner v. Rahfco Funds LP, 2012 U.S. Dist. LEXIS 134351 (S.D.N.Y. Aug. 9, 2012) ........... 260
Krieger v. Atheros Communs., Inc., 2012 U.S. Dist. LEXIS 74214 (N.D. Cal. May 29,
2012) .................................................................................................................................................. 127
Kuriakose v. Fed. Home Loan Mortg. Corp., 2012 WL 4364344 (S.D.N.Y. Sept. 24,
2012) .................................................................................................................................................. 191
Kyung Cho v. UCBH Holdings, Inc., 2012 WL 3763629 (N.D.Cal. Aug. 29, 2012) .................. 165
L.A. Mun. Police Emp. Ret. Sys. v. Cooper Indus., 2012 Fed. Sec. L. Rep. (CCH)
97,054 (N.D. Ohio Oct. 16, 2012) ................................................................................................ 289
La. Mun. Police Emps.’ Ret. Sys. v. KPMG, LLP, 2012 WL 3780344 (N.D. Ohio Aug. 31,
2012). ................................................................................................................................................. 407
Lakeview Inv., LP v. Schulman, 2012 WL 4461762 (S.D.N.Y. Sept. 27, 2012). ......................... 209
Lamm v. State St. Bank & Trust Co., 2012 U.S. Dist. LEXIS 135008 (S.D. Fla. Aug. 21,
2012) .................................................................................................................................................. 339
Lane v. Page, 272 F.R.D. 581 (D.N.M. 2011) ................................................................................ 114
Langley v. Jones, No. 11-CV-774-PK, 2012 WL 2019522 (D.Or. May 18, 2012)...................... 375
Lapin v. Facebook, Inc., 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012) ............................. 213, 473
Latour v. Citigroup Global Mkts., Inc., 2012 U.S. Dist. LEXIS 35976 (S.D. Cal. Mar. 15,
2012). ................................................................................................................................................. 448
Lau v. Mezei, No. 10 CV 4838(KMW), 2012 WL 3553092 (S.D.N.Y. Aug. 16, 2012)39, 261, 268
LaVoice v. UBS Fin. Servs., Inc., 2012 WL 124590 (S.D.N.Y. Jan. 13, 2012)............................ 540
LaWarre v. Fifth Third Sec., Inc., 2012 Ohio 4016 (Ohio Ct. App., Sept. 5, 2012). ................... 362
Lawarre v. Fifth Third Sec., Inc., 2012 WL 3834052 (Ohio App. Sept. 5, 2012)............... 217, 227
xxix

Lenartz v. Am. Superconductor Corp., Civ. No. 11-10582, 2012 WL 3039735 (D. Mass.
July 26, 2012).................................................................................................. 8, 28, 67, 150, 245, 383
Lerner v. Immelt, No. 10 Civ. 1807 DLC, 2012 WL 2197456 (S.D.N.Y. June 15, 2012) ............ 75
Levin v. Barry Kaye & Assocs., Inc., 858 F.Supp.2d 914 (S.D. Ohio 2012) ............................3, 235
Levinson v. Westport Nat’l Bank, 2012 WL 4490432 (D. Conn. Sept. 28, 2012)........................ 384
Levitt v. Brooks, 669 F.3d 100 (2d Cir. 2012). ................................................................................. 63
Levy v. Huszagh, No. 11-CV-3321, 2012 WL 4512038 (E.D.N.Y. Sept. 28, 2012)...................... 68
Lewy v. Skypeople Fruit Juice, Inc., 2012 U.S. Dist. LEXIS 128416 (S.D.N.Y. Sept. 7,
2012) ................................................................................................................................. 232, 264, 271
Lewy v. SkyPeople Fruit Juice, Inc., No. 11 CIV. 2700 PKC, 2012 WL 3957916
(S.D.N.Y. Sept. 10, 2012). ........................................................................................................ 39, 163
Liberty Media Corp., LMC v. Vivendi Universal, S.A., 842 F. Supp. 2d 587 (S.D.N.Y.
2012) .................................................................................................................................................. 207
Lickiss v. Financial Industry Regulatory Authority, 208 Cal. App. 4th 1125 (2012) .................. 144
Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, No. 11 Civ. 398, 2012 WL
4616958 (S.D.N.Y. Sept. 28, 2012)............................................................................ 18, 39, 265, 273
Liverett v. Island Breeze Int’l, Inc., 2012 U.S. Dist. LEXIS 111621 (D.S.C. Aug. 9, 2012) ...... 351
Lobaito v. Chase Bank, 2012 U.S. Dist. LEXIS 107344 (S.D.N.Y. July 30, 2012). ................... 432
Longfield v Financial Tech. Partners, 2012 N.Y. Misc. LEXIS 5497 (N.Y. Sup. Ct. Nov.
28, 2012)............................................................................................................................................ 456
Lopes v. Viera, 2012 WL 691665 (E.D. Cal. Mar. 2, 2012). ......................................................... 379
Louisiana Mun. Police Emps. Ret. Sys. v. Cooper Indust. PLC, 2012 U.S. Dist. LEXIS
148542 (N.D. Ohio Oct. 16, 2012) .................................................................................................. 125
Louisiana Pacific Corp. v. Money Market 1 Institutional Investment Dealer, 285 F.R.D.
481 (N.D. Cal. Sept. 10, 2012). ....................................................................................................... 477
Luciani v. Luciani, No. 10-CV-2583 JM WVG, 2012 WL 4953110 (S.D. Cal. Oct. 17,
2012) ........................................................................................................................................... 89, 379
Lumen v. Anderson, 280 F.R.D. 451 (W.D. Mo. 2012) ................................................................. 229
Ly v. Solin, Inc., 2012 WL 6561557 (D.D.C. Dec. 17, 2012). ....................................................... 467
xxx

M&T Bank Corp v. LaSalle Bank Nat'l Ass'n, 852 F. Supp. 2d 324 (W.D.N.Y.
2012 .................................................................................................................................. 216, 219, 225
Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012) ....22, 49, 104, 197, 304
Marina v. Edward D. Jones & Co., 2012 WL 3885305 (D. Nev. Sept. 6, 2012)......................... 537
Martinek v. Diaz, No. 11 C 7190, 2012 WL 2953183 (N.D. Ill Jul. 18, 2012). ........................... 372
Mass. Mut. Life Ins. Co. v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 121702 (C.D.
Cal. Aug. 17, 2012) .......................................................................................................................... 298
Mass. Mut. Life Ins. Co. v. Residential Funding Co., 843 F. Supp. 2d 191 (D. Mass.
2012) ......................................................................................................................................... 245, 409
Mastick v. TD Ameritrade, Inc., 209 Cal. App. 4th 1258 (Cal. App. 2d Dist. 2012) ................... 428
Matter of Bear, Stearns & Co., Inc. v. Int’l Capital & Mgt. Co. LLC, 99 A.D.3d 402
(N.Y. App. Div. 1st Dep't 2012). ..................................................................................................... 437
Matter of Citi International Financial Services LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125821 (March 19, 2012). .................... 494
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125369 (Jan. 18, 2012).......................... 494
Matter of Citigroup Global Markets, Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P126482 (May 22, 2012)......................... 492
Matter of David Lerner Associates, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P191729 (Oct. 22, 2012). ........................ 489
Matter of Goldman, Sachs & Co., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P125974 (April 12, 2012). ...................... 493
Matter of Guggenheim Securities, LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P187302 (Oct. 11, 2012). ........................ 490
Matter of Hold Brothers On-Line Investment Services, LLC, FINRA Press Release,
available at: http://www.finra.org/Newsroom/NewsReleases/2012/P178687 (Sept. 25,
2012). ................................................................................................................................................. 490
Matter of Hudson Valley Capital Management, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P196921 (Nov. 8, 2012). ......................... 489
Matter of Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P177007 (Sept. 24, 2012). ....................... 491
xxxi

Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Press Release, available
at: http://www.finra.org/Newsroom/NewsReleases/2012/P127129 (June 21, 2012). .................. 492
Matter of Pruco Securities, LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P197541 (Dec. 26, 2012). ....................... 488
Matter of Rodman & Renshaw LLC, FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P154856 (Aug. 22, 2012). ....................... 491
Matters of Citigroup Global Markets, Inc., Goldman, Sachs & Co., J.P. Morgan
Securities LLC, Merrill Lynch, Pierce , Fenner & Smith, Inc., Morgan Stanley & Co.,
FINRA Press Release, available at:
http://www.finra.org/Newsroom/NewsReleases/2012/P197554 (Dec. 27, 2012). ....................... 487
McCrary v. Stifel, Nicolaus & Co., Inc., 687 F.3d 1052 (C.A.8 Mo., 2012) ....................... 170, 440
McDowell v. Lopez, No. 2 CA–CV 2011–0073, 2012 WL 376690 (Ariz. Ct. App. Feb. 7,
2012) ...................................................................................................................................................... 6
McGee v. S-Bay Dev. LLC, 2012 Fed. Sec. L. Rep (CCH) 96,751 (M.D. Fla. Mar. 8,
2012) .................................................................................................................................................. 309
McGee v. S-Bay Dev., LLC, No. 11-CV-1091-T-27TGW, 2012 WL 760797 (M.D. Fla.
Mar. 8 2012). ..................................................................................................................................... 376
McIntyre v. Chelsea Therapeutics Int’l, Ltd., 2012 WL 3962522 (W.D.N.C. Aug. 16,
2012) .................................................................................................................................................. 181
McKenna v. Smart Techs. Inc., No. 11 Civ. 7673 (KBF), 2012 WL 3589655 (S.D.N.Y.
Aug. 21, 2012) ........................................................................................................................... 40, 255
Mercer v. Gupta, 880 F. Supp. 2d 486 (S.D.N.Y. 2012) ............................................................... 142
Meridian Horizon Fund, L.P. v. Tremont Group Holdings, Inc., 2012 WL 4049953
(S.D.N.Y Sept. 14, 2012) ................................................................................................................. 163
Meridian Horizon Fund, LP v. KPMG, 487 Fed.Appx. 636 (C.A.2 N.Y., 2012) ............... 168, 312
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Schwarzwaeler, 2012 WL 3264361 (3d
Cir. Dec. 26, 2012). .......................................................................................................................... 535
Merrill Lynch, Pierce, Fenner & Smith Inc., FINRA Case No. 2008014187701 (June 28,
2012) .................................................................................................................................................. 145
Merrill Lynch, Pierce, Fenner & Smith v. Smolcheck, 2012 WL 4056092 (S.D. Fla. Sept.
17, 2012)............................................................................................................................................ 537
xxxii

Merrill Lynch, Pierce, Fenner & Smith v. Smolchek, 2012 U.S. Dist. LEXIS 134089
(S.D. Fla. Sept. 17, 2012). ................................................................................................................ 454
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Res., Inc., 47 A.3d 1 (App. Div.),
cert denied, 56 A.3d 395 (N.J. 2012). ............................................................................................. 400
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super.
45 (App.Div. 2012) .......................................................................................................... 425. 435, 456
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Schwarzwaelder, 2012 U.S. App. LEXIS
16845 (3d Cir. Aug. 13, 2012). ........................................................................................................ 439
Merrill, Lynch, Fenner, Pierce & Smith Inc., FINRA Case No. 2009018601702 (Aug. 29,
2012) .................................................................................................................................................. 145
Messier v. Merrill Lynch Int'l Fin., Inc., 2012 Conn. Super. LEXIS 3140 (Conn. Super.
Ct. Dec. 28, 2012). ............................................................................................................................ 455
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 Del. Ch. LEXIS 287 (Del. Ch.
Dec. 20, 2012) ................................................................................................................................... 346
Meyer v. St. Joe Co., 2012 U.S. Dist. LEXIS 3861 (N.D. Fla. Jan. 23, 2012) ............................. 309
MHC Mut. Conversion Fund, L.P. v. United Western Bancorp, Inc., No. 11-cv-00624-
WYD-MJW, 2012 WL 6645097 (D. Colo. Dec. 19, 2012) .................................................... 50, 154
Michael Douglas Venable, FINRA Case No. 2010021688101 ..................................................... 147
Mill Bridge V, Inc. v. Benton, No. 11-1184, 2012 WL 4017804 (3d Cir. Sept. 13, 2012) ... 65, 239
Miraglia v. Human Genome Science Inc., 2012 WL 987502 (D. Md. Mar. 22, 2012)................ 180
Mitchell v. Cantor Fitzgerald, L.P., 2012 N.Y. Misc. LEXIS 5418 (N.Y. Sup. Ct. Nov.
21, 2012)............................................................................................................................................ 429
MJK Partners, LLC v. Husman, 877 F.Supp.2d 596 (N.D. Ill. 2012)........................................... 372
Monk v. Johnson & Johnson, 2012 U.S. Dist. LEXIS 71425 (D.N.J. May 22, 2012) ................. 281
Mordecai v. Morgan Keenan & Co., Inc., No. 11-04320, 2012 WL 2504038 (FINRA
June 18, 2012) ..................................................................................................................................... 25
Morgan Keegan & Co. v. Garrett, 2012 U.S. App. LEXIS 22057 (5th Cir. Oct. 23, 2012). ...... 439
Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012). ......................... 389
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22492 (9th Cir. Oct. 25, 2012). ........ 441
Morgan Keegan & Co. v. Grant, 2012 U.S. App. LEXIS 22508 (9th Cir. Oct. 25, 2012) 415, 442
xxxiii

Morgan Keegan & Co. v. Louise Silverman Trust, 2012 U.S. Dist. LEXIS 3870 (D. Md.
Jan. 12, 2012). ................................................................................................................................... 444
Morgan Keegan & Co. v. Pessel, 2012 U.S. Dist. LEXIS 60465 (D. Colo. May 1, 2012). ........ 451
Morgan Keegan & Co. v. Sturdivant, 2012 U.S. Dist. LEXIS 120295 (S.D. Miss. Aug.
24, 2012)............................................................................................................................................ 445
Morgan Stanley & Co., LLC v. The Core Fund, 2012 U.S. Dist. LEXIS 115760 (M.D.
Fla. July 11, 2012). ........................................................................................................................... 437
MTA, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 Ala. LEXIS 167 (Ala.
Dec. 7, 2012) ..................................................................................................................................... 424
Musikantow v. Deutsche Bank AG, 2012 Ill. App. Unpub. LEXIS 1108 (Ill. App. Ct. 1st
Dist. May 11, 2012) .......................................................................................................................... 427
MV Ins. Consultants, LLC v. NAFH Nat'l Bank, 87 So. 3d 96 (Fla. Dist. Ct. App. 3d Dist.
2012) .................................................................................................................................................. 428
MVP Asset Mgmt. (USA) LLC v. Vestbirk, 2012 Fed. Sec. L. Rep. (CCH) 96,938 (E.D.
Cal. July 11, 2012) ............................................................................................................................ 300
N. Atl. Sec., LLC v. Me. Office of Sec., 2012 Me. Super. LEXIS 111 (Me. Super. July 10,
2012) .................................................................................................................................................. 310
N. Miami Beach Gen. Emp. Ret. Fund v. Parkinson, No. 10 C 6514, 2012 WL 4180566
(N.D. Ill. Sept. 19, 2012) .................................................................................................................... 82
N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ. 5310 (DAB), 2012
WL 1076143 (S.D.N.Y. Mar. 29, 2012) .................................................................................. 41, 253
NASDAQ OMX PHLX, Inc. v. PennMont Sec., 52 A.3d 296 (Pa. Super. Ct. 2012). ................... 363
NASDAQ OMX PHLX, Inc. v. Pennmont Securities, 52 A.3d 296 (Pa. 2012) ............................. 143
Nat’l Credit Union Admin. Bd. v. RBS Sec. Inc., Nos. 11-2340, 11-2649, 2012 WL
3028803 (D. Kan. July 25, 2012) ................................................................................................24, 51
NDX Advisors, Inc. v. Advisory Fin. Consultants, Inc., 2012 U.S. Dist. LEXIS 176977
(N.D. Cal. Dec. 12, 2012) ................................................................................................................ 422
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir.
2012) ............................................................................................................................... 6, 26, 169, 377
NECA–IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10 Civ. 440 (LAK)(HBP),
2012 WL 3191860 (S.D.N.Y. Feb. 9, 2012) ..................................................................................... 40
xxxiv

Nee v. Fin. Indus. Regulatory Auth., Inc., 2012 WL 832665 (Mass. Super. Feb. 17, 2012). ...... 413
Negrete v. Allianz Life Ins. Co. of N. Am., Nos. CV 05-6838 CAS (MANx), CV 05-8908
CAS (MANx), 2012 WL 6737390 (C.D. Cal. Dec. 28, 2012). ..................................................... 372
New Jersey Carpenters Health Fund v. RALI Series 2006—Q01 Trust, 477 Fed.Appx.
809 (2d Cir. 2012)................................................................................................................................. 8
Niitsoo v. Alpha Natural Res. Inc., 2012 WL 5395812 (S.D.W.V. Nov. 5, 2012)....................... 211
Nolfi v. Ohio Ky. Oil Corp., 675 F.3d 538 (6th Cir. 2012) ..................................... 27, 102, 382, 400
Nova Leasing, LLC v. Sun River Energy, Inc., 2012 WL 3778332 (D. Colo. Aug. 31,
2012) ................................................................................................................................. 155, 337, 375
Ohlfs v. Charles Schwab & Co., 2012 U.S. Dist. LEXIS 7737 (D. Colo. Jan. 24, 2012). ........... 451
Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012). ..................... 539
Oklahoma Firefighters Pension and Retirement System v. Capella Educ. Co., 873
F.Supp.2d 1070 (D. Minn. 2012) ............................................................................................ 153, 292
Oliviera v. Citigroup North America, Inc., 2012 WL 1831230 (M.D. Fla. May 18, 2012). ....... 537
Orlan v. Spongetech Delivery Sys., Inc., Sec. Litig., Nos. 10–CV–4093 (DLI)(JMA), 10–
CV–4104 (DLI)(JMA), 2012 WL 1067975 (E.D.N.Y. Mar. 29, 2012) ................................. 29, 249
Osborne v. Wells Fargo Advisors, LLC, 2012 U.S. Dist. LEXIS 100205 (M.D. Fla. July
19, 2012)............................................................................................................................................ 424
Osborne v. Wells Fargo Advisors, LLC, 2012 WL 2952533 (M.D. Fla. July 19, 2012) ............. 538
Oshidary v. Purpura-Andriola, 2012 U.S. Dist. LEXIS 81367 (N.D. Cal. June 12,
2012) ................................................................................................................................. 430, 434, 447
Ouwinga v. Benistar 419 Plan Services, Inc., 694 F.3d 783 (6th Cir., 2012) ..................... 149, 365
Oxbow Calcining USA Inc. v. Am. Indus. Partners, 96 A.D.3d 646 (N.Y. App. Div.
2012). ................................................................................................................................................. 411
Pa. Pub. Sch. Emps.’ Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y.
2012). .................................................................................................................................. 12, 259, 403
Pa. Public School Emps.’ Ret. Sys. v. Bank of Am. Corp., 2012 WL 2847732 (S.D.N.Y.
July 11, 2012).................................................................................................................................... 193
Padilla v. Winger, No. 2:11CV897DAK, 2012 WL 1379228 (D. Utah Apr. 20, 2012)................ 52
xxxv

Palazzo v. Fifth Third Bank, 2012 Ky. App. Unpub. LEXIS 585 (Ky. Ct. App. Aug. 17,
2012) .................................................................................................................................................. 426
Panther Partners Inc., v. Ikanos Commc’ns Inc., 681 F.3d 114 (2d Cir. 2012) ................ 8, 26, 458
Passatempo v. McMenimen, 461 Mass. 279, 960 N.E.2d 275 (2012)............................................... 5
Pastimes, LLC v. Clavin, 274 P.3d 714 (Mont. 2012). .................................................................. 399
Pemberton v. Citgroup Global Markets, 268 P.3d 11 (Kan. App. 2012). ........................... 457, 540
Pension Trust Fund for Operating Eng’rs v. Mortg. Asset Securitization Transactions,
Inc., No. CIV. 10-898 CCC, 2012 WL 3113981 (D.N.J. July 31, 2012) ............................... 43, 282
People v. Greenberg, 2012 WL 1582779 (N.Y. App. Div. May 8, 2012) .................................... 209
Peters v. JinkoSolar Holding Co., 2012 WL 946875 (S.D.N.Y. Mar. 19, 2012) ......................... 177
Peyser v. Kirshbaum, 2012 U.S. Dist. LEXIS 176873 (S.D.N.Y. Dec. 11, 2012 ........................ 418
Phelps v. Stomber, 883 F. Supp. 2d 188 (D.D.C. 2012). ............................................................... 105
Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012). ............. 368
Pipefitters Local 636 Defined Benefit Plan v. Tekelec, 2012 Fed. Sec. L. Rep. (CCH)
96,788 (D.N.J. May 22, 2012) ...................................................................................................... 281
Pipefitters Local No. 636 Defined Ben. Plan v. Zale Corp., 2012 WL 5985075 (C.A.5
Tex., 2012) ........................................................................................................................................ 169
Pitkin v. Ocwen Fin. Corp., 2012 WL 5986480 (D. Md. Nov. 27, 2012). ................................... 412
Plaintiffs’ S’holders Corp., v. Southern Farm Bureau Life Ins. Co., 2012 U.S. App.
LEXIS 16713 (11th Cir. Aug. 10, 2012) ......................................................................................... 417
Plumber’s Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-
10446-RGS, 2012 WL 4480735 (D. Mass. Oct. 1, 2012) ................................................................ 27
Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 679
F.3d 952 (C.A.7 Ind., 2012) ............................................................................................................. 170
Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v. Fairfax Fin.
Holdings Ltd., No. 11 Civ. 5097, 2012 WL 3283481 (S.D.N.Y. Aug. 13, 2012) .......................... 15
Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan
Acceptance Corp., 2012 Fed. Sec. L. Rep. (CCH) 96,744 (E.D.N.Y. Feb. 23, 2012) .............. 248
xxxvi

Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan
Acceptance Corp. I, No. 08 VC 1713(ERK)(WDW), 2012 WL 4053716 (E.D.N.Y. Sept.
14, 2012).............................................................................................................................................. 29
Plumbers’ & Pipefitters’ Local 562 Supplemental Plan & Trust v. J.P. Morgan
Acceptance Corp., No. 08 CV 1713 (ERK)(WDW), 2012 WL 601448 (E.D.N.Y. Feb. 23,
2012) .................................................................................................................................................... 30
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,
2012 U.S. Dist. LEXIS 141626 (D. Mass. Oct. 1, 2012) ...................................................... 247, 401
Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 11 Civ. 4904 JPO, 2012 WL
1868874 (N.D. Cal. May 22, 2012) .......................................................................................... 87, 201
Police Ret. Sys. v. Intuitive Surgical, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,832 (N.D.
Cal. May 22, 2012) ........................................................................................................................... 301
Poptech L.P. v. Stewardship Inv. Advisors, LLC, 849 F. Supp. 2d 249 (D. Conn.
2012) ................................................................................................................................. 104, 107, 315
Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,766
(D. Conn. Mar. 19, 2012) ................................................................................................................. 247
Prefontaine v. Research In Motion Ltd., 2012 WL 104770 (S.D.N.Y. Jan. 5, 2012) .................. 178
Premium of America v. Save POA, 2012 U.S. Dist. LEXIS 139745 (D. Md. Sept. 27,
2012) .................................................................................................................................................. 124
Prime Mover Capital Partners L.P. v. Elixir Gaming Tech., Inc., --- F.Supp.2d ---, 2012
WL 4714799 (S.D.N.Y. Sept. 27, 2012) ........................................................................................... 77
Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 2012 WL 4714799
(S.D.N.Y. Sept. 27, 2012) .............................................................................. 191, 265, 273, 461, 462
Prissert v. Emcore Corp., --- F.Supp.2d ---, 2012 WL 4504512 (D.N.M. Sept. 28, 2012) .. 91, 307
Prudential Ins. Co. of Am. v. J.P. Morgan Secs., LLC, No. 12-CV-3489 (WHW), 2012
U.S. Dist. LEXIS 181464 (D.N.J. Dec. 12, 2012). ......................................................................... 370
Prudential Ins. Co. v. J.P. Morgan Securities, LLC, 2012 WL 6771977 (D.N.J. Dec. 20,
2012). ................................................................................................................................................. 475
Pub. Emples. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 280 F.R.D. 130 (S.D.N.Y.
2012) ........................................................................................................................................... 13, 251
Pub. Emps. Ret. Ass’n of N.M. v. Clearlend Secs., 2012 WL 2574819 (D.N.M. June 29,
2012). ................................................................................................................................................. 395
xxxvii

Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972 (8th Cir. 2012). .............................. 459
Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972 (C.A.8 Mo., 2012) ....... 171
Puente v. ChinaCast Educ. Corp., 2012 WL 3731822 (C.D. Cal. Aug. 22, 2012) ...................... 185
Purser v. Coralli, 2012 WL 5875600 (N.D.Tex.,2012. November 21, 2012).............................. 166
Puskala v. Koss Corp., 799 F. Supp. 2d 941 (E.D. Wis. 2011) ..................................................... 113
Questar Capital Corp. v. Gorter, 2012 U.S. Dist. LEXIS 163380 (W.D. Ky. Nov. 14,
2012). ................................................................................................................................................. 446
R.Q. Constr., Inc. v. Ecolite Concrete U.S.A., Inc., 2012 WL 6091408 (S.D. Cal. Dec. 7,
2012). ................................................................................................................................................. 394
Rabbani v. DryShips, Inc., No. 4:12CV130 RWS, 2012 WL 5395787 (E.D. Mo. Nov. 6,
2012) ................................................................................................................................... 46, 196, 286
Rabin v. McClain, 2012 U.S. Dist. LEXIS 58441 (W.D. Tex. Apr. 26, 2012) ................... 352, 370
Rahman v. Kid Brands Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012) ..................... 280
Rahman v. Kid Brands, Inc., 2012 U.S. Dist. LEXIS 31406 (D.N.J. Mar. 8, 2012) .................... 232
Rathje v. Horlbeck Capital Mgmt., LLC, 2012 Ill. App. Unpub. LEXIS 1794 (Ill. App.
Ct. 2d Dist. July 26, 2012) ............................................................................................................... 427
Red River Res. v. Marine Sys., 2012 U.S. Dist. LEXIS 90959 (D. Ariz. June 29, 2012) ............ 294
Redding v. Montana First Judicial Dist. Court, 365 Mont. 316, 281 P.3d 189 (2012) ................... 5
Redwen v. Sino Clean Energy, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,933 (S.D.N.Y.
June 4, 2012) ..................................................................................................................................... 257
Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239 (C.A.6 Ky., 2012)170, 214, 220, 222, 408,
Reuter v. Cutcliff (In re Reuter), 686 F.3d 511 (8th Cir. 2012). .................................................... 389
Reyes v. WMC Mortgage Corp., No. C 11-01988 CW, 2012 WL 1067560 (N.D. Cal.
Mar. 28, 2012)................................................................................................................................... 373
Richman v. Goldman Sachs Grp., Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,926
(S.D.N.Y. June 21, 2012) ........................................................................................................ 258, 362
Robert L. Franklin Trustee of Global Liquidating Trust v. Consus Ethanol, LLC, No. 11-
CV-4062-TWT, 2012 WL 3779093 (N.D. Ga. Aug. 29, 2012). ................................................... 376
Robert L. McCrary v. Steifel, Nicolaus & Co. Inc.,687 F.3d 1052 (8th Cir. 2012) ....................... 59
xxxviii

Rochester Laborers Pension Fund v. Monsanto Co., 2012 WL 3143914 (E.D. Mo. Aug.
1, 2012) ..................................................................................................................................... 197, 292
Roland v. Green, 675 F.3d 503 (5th Cir. 2012) .............................................................................. 204
Rosenthal v. New York University, 482 Fed.Appx. 609 (2d Cir. 2012) .......................................... 64
Ross Sinclaire & Assoc., v. Premier Senior Living, LLC, et al., 2012 WL 2501115 (N.D.
Cal. June 27, 2012) ........................................................................................................................... 422
Ross v. Career Educ. Corp., 2012 Fed. Sec. L. Rep. (CCH) 97,068 (N.D. Ill. Oct. 30,
2012) .................................................................................................................................................. 291
Ross v. Lloyds Banking Group, PLC, No. 11 Civ. 8530, 2012 WL 4891759 (S.D.N.Y.
Oct. 16, 2012) .................................................................................................................. 106, 267, 275
Roth ex rel. Leap Wireless Int’l, Inc. v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524
(S.D.N.Y. 2012) .................................................................................................................................. 74
Roth v. Goldman Sachs Group, Inc., 873 F. Supp. 2d 524 (S.D.N.Y. 2012)................................ 141
RS-ANB Fund, LP v. KMS SPE LLC, 2012 WL 1288762 (D. Idaho April 16, 2012).................. 153
S&S NY Holdings, Inc. v. Able Energy, Inc., 2012 U.S. Dist. LEXIS 105892 (S.D.N.Y.
July 27, 2012).................................................................................................................................... 259
S.E.C. v. Cuban, 798 F. Supp. 2d 783 (N.D. Tex. 2011) ............................................................... 112
S.E.C. v. Delphi Corp., No. 11–2624, 2012 WL 6600324 (6 th Cir. Dec. 18, 2012) ..................... 102
S.E.C. v. Ehrenkrantz King Nussbaum, Inc., No. 05 CV 4643 (E.D.N.Y. Mar. 15, 2012) .......... 105
S.E.C. v. Gabelli, 653 F.3d 49 (2d Cir. 2011) ................................................................................. 110
S.E.C. v. Gagnon, No. 10–CV–11891, 2012 WL 994892 (E.D. Mich. Mar. 22, 2012) ..........2, 107
S.E.C. v. Greenstone Holdings, Inc., No. 10 Civ. 1302, 2012 WL 1038570 (S.D.N.Y.
Mar. 28, 2012)................................................................................................................................... 106
S.E.C. v. Merkin, No. 11–23585, 2012 WL 5245561 (S.D. Fla. Oct. 3, 2012) ............................ 105
S.E.C. v. Merklinger, 489 Fed. Appx. 937, 2012 WL 3064777 (6 th Cir. July 30, 2012). ................ 1
S.E.C. v. Microtune, Inc., 783 F. Supp. 2d 867 (N.D. Tex. 2011)................................................. 112
S.E.C. v. Morgan Keegan & Co., Inc., 678 F.3d 1233 (11 th Cir. 2012) ........................................ 103
S.E.C. v. Morriss, No. 12-CV-80, 2012 WL 6822346 (E.D. Mo. Sept. 21, 2012 ............................ 3
xxxix

S.E.C. v. Mowen, No. 09–CV–00786, 2012 WL 2120249 (D. Utah June 11, 2012) ....................... 4
S.E.C. v. Pentagon Capital Mgmt. PLC, 844 F.Supp.2d 377 (S.D.N.Y. 2012)............................ 106
S.E.C. v. Schooler, No. 12–CV–2164, --- F. Supp. 2d ---, 2012 WL 4761917 (S.D. Cal.
Oct. 5, 2012).......................................................................................................................................... 1
S.E.C. v. Sentinel Mgmt. Group, Inc., No. 07 C 4684, 2012 WL 1079961 (N. D. Ill. Mar.
30, 2012)................................................................................................................................................ 2
S.E.C. v. Shields, No. 11–CV–02121, 2012 WL 3886883 (D. Colo. Sept. 6, 2012)........................ 1
S.E.C. v. Smart, 678 F.3d 850 (10 th Cir. 2012) ............................................................................... 103
S.E.C. v. Wilde, No. SACV 11–0315, 2012 WL 6621747 (C.D. Cal. Dec. 17, 2012) ................. 104
Safadi v. Citibank, N.A., 2012 U.S. Dist. LEXIS 142773 (N.D. Cal. Oct. 2, 2012) .................... 422
Saltz v. First Frontier, L.P. 485 Fed.Appx. 46 (C.A.2 N.Y., 2012) .............................................. 169
Saunders v. Principal Residential Mortgage, Inc., No. 11-cv-1817 (VLB), 2012 WL
4321974 (D. Conn. Sept. 20, 2012). ................................................................................................ 367
Sawant v. Ramsey, 2012 WL 3265020 (D. Conn. Aug. 9, 2012) .................................................. 189
Sawyer v. Horwitz & Assocs., 2012 U.S. Dist. LEXIS 11850 (S.D. Cal. Jan. 30, 2012)............. 448
Schneider v. Kingdom of Thailand, 688 F.3d 68 (2d Cir. 2012) ................................................... 414
Schwarz v. Wells Fargo Advisors, LLC, 2012 PA Super 265 (Pa. Super. Ct. 2012).................... 456
Scott v. ZST Digital Networks, Inc., No. CV 11-03531, 2012 WL 4459572 (C.D. Cal.
Aug. 7, 2012) ............................................................................................................................. 22, 296
Scottrade, Inc., FINRA Case No. 2010021776501 (May 11, 2012) ............................................. 147
Scottsdale Capital Advisors Corp. v. Jones, 2012 U.S. Dist. LEXIS 67535 (D.
Ariz. May 14, 2012). ....................................................................................................... 421, 433, 447
Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 2012 WL 3597179 (M.D. Pa. Aug.
20, 2012)............................................................................................................................................ 180
SEC Police & Fire Prof’ls of Am. Ret. Fund v. Pfizer, Inc., 2012 U.S. Dist. LEXIS 16782
(D.N.J. Feb. 10, 2012) ...................................................................................................................... 280
SEC v. Acord, Litigation Release No. 22282A, 2012 WL 1894129 (Mar. 12, 2012) .................... 95
SEC v. Adondakis, Litigation Release No. 22325, 2012 WL 1894169 (Apr. 10, 2012) ................ 96
xl

SEC v. Alternative Green Technologies, Inc., 2012 U.S. Dist. LEXIS 142154 (S.D.N.Y.
Sept. 24, 2012) .................................................................................................................................. 322
SEC v. Apuzzo, 2012 U.S. App. LEXIS 16510 (2d Cir. Aug. 8, 2012)....... 312, 314, 324, 327, 335
SEC v. Bankatlantic Bancorp, 285 F.R.D. 661 (S.D. Florida June 26, 2012). ............................. 477
SEC v. BankAtlantic Bancorp, Inc., 2012 Fed. Sec. L. Rep. (CCH) 96,901 (S.D. Fla.
May 29, 2012) ................................................................................................................................... 338
SEC v. Bankatlantic Bancorp, Inc., 2012 WL 1936112 (S.D. Fla. May 29, 2012)............. 203, 477
SEC v. Bankosky, No. 12 Civ. 1012 HB, 2012 WL 1849000 (S.D.N.Y. May 21, 2012) .............. 73
SEC v. Bauer, No. 03-C-1427, 2012 WL 2217045 (E.D. Wis. June 15, 2012).............................. 83
SEC v. Berlacher, No. Civ. A. 07-03800, 2012 WL 512201 (E.D. Pa. Feb. 15, 2012) ........ 79, 393
SEC v. Berrettini, No. 10-CV-01614, 2012 WL 5557993 (N.D. Ill. Nov. 15, 2012) .................... 83
SEC v. Black, 2012 U.S. Dist. LEXIS 145587 (N.D. Ill. Oct. 9, 2012) ........................................ 291
SEC v. Brown, 878 F. Supp. 2d 109 (D.D.C. 2012). ...................................................................... 401
SEC v. Clay Cap. Mgmt., Litigation Release No. 22464, 2012 WL 3801333 (Aug. 31,
2012) .................................................................................................................................................... 98
SEC v. Compania Int’l Financiera S.A., et al., Litigation Release No. 22378, 2012 WL
1943783 (May 29, 2012) .................................................................................................................... 97
SEC v. Compania Internacional Financiera, No. 11 Civ. 4904, 2012 WL 1856491
(S.D.N.Y. May 22, 2012) ................................................................................................................... 73
SEC v. Cutillo, Litigation Release No. 2299, 2012 WL 189144 (Mar. 20, 2012) .......................... 95
SEC v. CytoCore, Inc., Litigation Release No. 22260, 2012 SEC LEXIS 537 (Feb. 16,
2012) .................................................................................................................................................... 94
SEC v. Dafoitis, 874 F. Supp. 2d 870 (N.D. Cal. 2012) ................................................................. 335
SEC v. Delphi Corp., No. 11-2624, 2012 WL 6600324 (6th Cir. Dec. 18, 2012).......................... 66
SEC v. Dunn, Litigation Release No. 22439, 2012 WL 3224452 (Aug. 8, 2012) .......................... 98
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 3096646 (D. Nev. July 30, 2012) ............. 90
SEC v. Dunn, No. 09-CV-2213 JCM VCF, 2012 WL 475653 (D. Nev. Feb. 14, 2012) ............... 89
xli

SEC v. Ehrenkrantz King Nussbaum, Inc., 05 CV 4643 (DRH) (GRB), 2012 U.S. Dist.
LEXIS 35228 (E.D.N.Y. Mar. 15, 2012) ............................................................................... 133, 316
SEC v. Espuelas, 2012 U.S. Dist. LEXIS 154465 (S.D.N.Y. Oct. 26, 2012) ............................... 324
SEC v. Familant, 2012 U.S. Dist. LEXIS 179007 (D.D.C. Dec. 19, 2012) ................................. 314
SEC v. Flanagan, Litigation Release No. 22524, 2012 WL 5360953 (Oct. 31, 2012) .................. 99
SEC v. Goble, 682 F.3d 934 (11th Cir. May 29, 2012) ................................................. 131, 143, 313
SEC v. Greenstone Holdings, Inc., 2012 SEC LEXIS 3639 (S.D.N.Y. 2012) ............................. 325
SEC v. Grendys, 840 F. Supp. 2d 36 (D.D.C. 2012) ...................................................................... 313
SEC v. Gruss, 859 F. Supp. 2d 653 (S.D.N.Y. 2012) ..................................................................... 320
SEC v. Gupta, 281 F.R.D. 169 (S.D.N.Y. 2012) ........................................................................71, 99
SEC v. Hardin, Litigation Release No. 22297, 2012 WL 1894142 (Mar. 19, 2012) ..................... 95
SEC v. Huff, 455 F. App’x 882 (11th Cir. 2012) ............................................................................ 242
SEC v. ICP Asset Mgmt., LLC, Litigation Release No. 22477, 2012 SEC LEXIS 2848
(S.D.N.Y. Sept. 10, 2012) ................................................................................................................ 135
SEC v. Jackson, 2012 U.S. Dist. LEXIS 174946 (S.D. Tex. Dec. 11, 2012) .............. 287, 326, 406
SEC v. Jantzen, Litigation Release No. 22273, 12012 SEC LEXIS 693 (Mar. 1, 2012) ............... 94
SEC v. Juno Mother Earth Asset Mgmt., 2012 Fed. Sec. L. Rep. (CCH) 96,748
(S.D.N.Y. Mar. 2, 2012) ................................................................................................................... 318
SEC v. Keung, Litigation Release No. 22284, 2012 WL 1894130 (Mar. 12, 2012) ...................... 94
SEC v. Khan, Litigation Release No. 22364, 2012 WL 1894207 (May 10, 2012) ........................ 97
SEC v. King Chuen Tang, No. C-09-05146 JCS, 2012 WL 10522 (N.D. Cal. Jan. 3, 2012) ........ 86
SEC v. Kiselak Capital Grp., LLC, 2012 WL 369450 (N.D. Tex. Feb. 3, 2012). ........................ 393
SEC v. Kovzan, 2012 WL 4819011 (D. Kan. Oct. 10, 2012). ....................................................... 478
SEC v. Li, Release No. 3379, Litigation Release No. 22324, 2012 WL 1894168 (Apr. 9,
2012) .................................................................................................................................................... 92
SEC v. LoBue, Litigation Release No. 22519, 2012 WL 5267548 (Oct. 25, 2012) ....................... 98
SEC v. Longoria, Litigation Release No. 22308, 2012 WL 189153 (Mar. 27, 2012) .................... 96
xlii

SEC v. Madoff, Litigation Release No. 22407, 2012 SEC LEXIS 2040 (S.D.N.Y.
June 29, 2012) ................................................................................................................................... 132
SEC v. McGee, --- F.Supp.2d ---, 2012 WL 4025409 (E.D. Pa. Sept. 13, 2012) ........................... 80
SEC v. Morgan Keegan & Co., 678 F.3d 1233, 2012 U.S. App. LEXIS 8966 (11th Cir.
2012) ......................................................................................................................................... 132, 230
SEC v. Mudd, No. 11 Civ. 09202, 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10,
2012) ........................................................................................................................................... 53, 321
SEC v. Neves, Litigation Release No. 22462, 2012 SEC LEXIS 2759 (S.D. Fla. Aug. 29,
2012) .................................................................................................................................................. 137
SEC v. O’Meally, No. 06 Civ, 6483, 2012 U.S. Dist. LEXIS 76072 (S.D.N.Y. May 30,
2012) .................................................................................................................................................... 54
SEC v. Obus, 693 F.3d 276 (2d Cir. 2012) ....................................................................................... 65
SEC v. One or More Unknown Purchasers of Sec. of Global Indus., Ltd., No. 11 Civ.
6500 RA, 2012 WL 5505738 (S.D.N.Y. Nov. 9, 2012) ................................................................... 78
SEC v. Pentagon Capital Management, 844 F. Supp. 2d 377 (S.D.N.Y. Feb. 14, 2012) .............. 54
SEC v. Perry, No. CV111309R, 2012 U.S. Dist. LEXIS 136596 (C.D. Cal., Sept. 24,
2012) .................................................................................................................................................... 56
SEC v. Peterson, Litigation Release No. 22404, 2012 WL 2457467 (June 28, 2012) ................... 97
SEC v. Radius Capital Corp., No. 2:11-cv-116-FtM-29DNF, 2012 U.S. Dist. LEXIS
26648 (M.D. Fla. Mar. 1, 2012)......................................................................................................... 57
SEC v. Sells, No. C11-4941CW, 2012 U.S. Dist. LEXIS 112450 (N.D. Cal., Aug. 10,
2012) ........................................................................................................................................... 56, 336
SEC v. Sentinel Management Group, No. 07 C 4684, 2012 U.S. Dist. LEXIS 57579 (N.D.
Ill. Mar. 30, 2012) ............................................................................................................................... 55
SEC v. Sentinel Mgmt. Grp., Inc., 2012 U.S. Dist. LEXIS 57579 (N.D. Ill. Mar. 30, 2012) ...... 330
SEC v. Stoker, 865 F. Supp. 2d 457 (S.D.N.Y. 2012) ...................................................................... 53
SEC v. Treadway, Litigation Release No. 22251, 2012 SEC LEXIS 433 (Feb. 3, 2012)..... 93, 327
SEC v. True N. Fin. Corp., No. 10-3995, 2012 U.S. Dist. LEXIS 161044 (D. Minn., Nov.
9, 2012) ....................................................................................................................................... 55, 332
SEC v. Wealth Mgmt., LLC, 2012 Fed. Sec. L. Rep. (CCH) 96,814 (E.D. Wis. Apr. 24,
2012) .................................................................................................................................................. 332
xliii

SEC v. Wilde, 2012 U.S. Dist. LEXIS 183252 (C.D. Cal. Dec. 17, 2012) ................................... 335
SEC v. Woodruff, Litigation Release No. 22271, 2012 SEC LEXIS 664 (Feb. 28, 2012) ............ 94
SEC v. Wyly, 860 F. Supp. 2d 275 (S.D.N.Y. 2012). ..................................................................... 367
Sec. Exch. Comm’n v. Kovzan, 807 F. Supp. 2d 1024 (D. Kan. 2011) ......................................... 115
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 477 B.R. 351 (Bankr.
S.D.N.Y. June 20, 2012) .................................................................................................................. 257
Sec. Police and Fire Prof’l of Am. Ret. v. Pfizer, Inc., No. 10-CV-3105 MCA, 2012 WL
458431 (D.N.J. Feb. 10, 2012)........................................................................................................... 79
Securities and Exchange Commission, In the Matter of Michael Bresner, Ralph Calabro,
Jason Konner, and Dimtrios Koustoubos, Administrative Proceeding File No. 3-15015,
December 18, 2012 ............................................................................................................................. 59
Securities and Exchange Commission, v. Wealth Mgmt., 2012 WL 1424683 (E.D. Wis.
Apr. 24, 2012) ..................................................................................................................................... 61
Security Police and Fire Professionals of America Retirement Fund v. Pfizer, Inc. ................... 152
Seymour Topple v. Steven Andrew Jennings, 2012 WL 1898052 (FINRA May 16, 2012) .......... 62
Sgaliordich v. Lloyd's Asset Mgmt., 2012 WL 4327283 (E.D.N.Y. Sept. 20, 2012) .. 215, 224, 231
Shah v. GenVec, Inc., 2012 WL 1478792 (D. Md. Apr. 26, 2012) ............................................... 180
Shenk v. Karmazin, 868 F. Supp. 2d 299 (S.D.N.Y. 2012) ............................................................ 106
Sher v. Goldman Sachs, 2012 U.S. Dist. LEXIS 56596 (D. Md. Apr. 19, 2012)......................... 433
Shields v. Murdoch, 2012 U.S. LEXIS 133453 (S.D.N.Y. Sept. 18, 2012).................................. 117
Short v. Conn. Cmty. Bank, N.A., 2012 U.S. Dist. LEXIS 42617 (D. Conn. Mar. 28, 2012) ...... 316
Simmons v. Morgan Stanley Smith Barney, LLC, 872 F. Supp. 2d 1002 (S.D. Cal. 2012) 423, 449
SMA Irrevocable Trust v. R. Capital Advisors, LLC, No. 4:11CV00697 ERW, 2012 WL
5194332 (E.D. Mo. Oct 19, 2012) ..................................................................................................... 46
Smilovits v. First Solar, Inc., 2012 WL 6574410 (D.Ariz.,2012) ................................ 153, 184, 295
Smith ex rel. Apollo Group, Inc. v. Sperling, No. CV 11-722 PHX JAT, 2012 WL
3064261 (D. Ariz. July 26, 2012) ...................................................................................................... 84
Smith v. Robbins & Myers, Inc., 2012 U.S. Dist. LEXIS 164868 (S.D. Ohio Nov. 19,
2012) .................................................................................................................................................. 123
xliv

Solow v. Citigroup, Inc., 2012 U.S. Dist. LEXIS 70022 (S.D.N.Y. May 18, 2012) .................... 257
Soloway v Morgan Stanley Smith Barney, LLC, 34 Misc. 3d 1217A (N.Y. Sup. Ct. 2012)........ 429
Solymar Inv., Ltd., v. Banco Santander S.A., 672 F.3d 981 (11th Cir. 2012) ............................... 417
Son Ly v. Sonlin, Inc., No. 12-CV-1004 (EGS), 2012 WL 6561557 (D.D.C. Dec. 17,
2012). ................................................................................................................................................. 365
Space Coast Credit Union v. Barclays Capital, Inc., 2012 U.S. Dist. LEXIS 38488
(S.D.N.Y. Mar. 19, 2012) ................................................................................................................. 252
Spungin v. GenSpring Family Offices, LLC, 2012 U.S. Dist. LEXIS 113962 (S.D. Fla.
May 25, 2012). .................................................................................................................................. 454
St. Louis Police Retirement System v. Clinton H. Severson, 2012 U.S. Dist. LEXIS
152392 (N.D. Cal., Oct. 23, 2012)................................................................................................... 128
Stanchart Secs. Int'l v. Gavaldon, 2012 U.S. Dist. LEXIS 163631 (S.D. Cal. Nov. 9,
2012). ................................................................................................................................................. 449
Stanchart Secs. Int'l, Inc. v. Galvadon, 2012 U.S. Dist. LEXIS 153046 (S.D. Cal. Oct. 24,
2012). ................................................................................................................................................. 449
Star Int’l Co. v. Fed. Reserve Bank of N.Y., 2012 U.S. Dist. LEXIS 165289 (S.D.N.Y.
Nov. 19, 2012) .................................................................................................................................. 324
State v. Marsh & McLennan Companies, Inc., 2012 WL 6212518 (Or. Dec. 13, 2012) ............. 217
Steamfitters Local 449 Pension Fund v. Cent. European Dist. Corp., 2012 WL 3638629
(D.N.J. Aug. 22, 2012) ..................................................................................................................... 179
Steinhardt v. Howard-Anderson, No. C. A. 5878-VCL, 2012 WL 29340 (Del. Ch. Jan. 6,
2012) .................................................................................................................................................. 100
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012) .................................................. 210, 392
Stephens v. Gentilello, 853 F. Supp. 2d 462 (D.N.J. 2012). .......................................................... 392
Stichting Pensioenfonds ABP v. Countrywide Financial Corp., 802 F. Supp. 2d 1125
(S.D.N.Y. 2011) .............................................................................................. 112, 194, 211, 282, 412
Stone v. Agnico-Eagle Mines Ltd., 280 F.R.D. 142 (S.D.N.Y. 2012) ........................................... 174
Stone v. Bear, Stearns & Co., 872 F. Supp. 2d 435 (E.D. Pa. 2012). ........................................... 444
Stoody-Broser v. Bank of Am., 2012 WL 1657187 (N.D. Cal. May 10, 2012) ............................ 213
Stout St. Funding LLC v. Johnson, 873 F. Supp. 2d 632 (E.D. Pa. 2012) ........................... 233, 357
xlv

Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197 (9 th Cir. 2012)......... 102, 378, 383, 401
Stratton v. XTO Energy Inc., 2012 WL 407385 (Tex. App. Feb. 9, 2012). .................................. 396
Stuckey v. Online Res. Corp., ---F.Supp.2d ---, 2012 WL 5467522 (S.D. Ohio Nov. 9,
2012) .................................................................................................................................................... 82
Sunrise Trust v. Morgan Stanley & Co., 2012 U.S. Dist. LEXIS 148485 (D. Nev. Oct. 16,
2012). ................................................................................................................................................. 450
Superior Offshore Int’l, Inc. v. Schaefer, No. Civ. H-11-3130, 2012 WL 1551703 (S.D.
Tex. Apr. 30, 2012) ............................................................................................................................ 81
Susman v Commerzbank Capital Mkts. Corp., 95 A.D.3d 589 (N.Y. App. Div. 1st Dep't
2012) .................................................................................................................................................. 431
Swanson v. Weil, 2012 US. Dist. LEXIS 138182 (D. Colo. Sept. 26, 2012) ................................ 122
Szulik v. TAG Virgin Islands, Inc., 858 F. Supp. 2d 532 (E.D.N.C. 2012). .................................. 406
Szymborski v. Ormat Tech., Inc., 2012 WL 4960098 (D. Nev. Oct. 16, 2012). ........................... 394
TAGG Mgmt. v. Lehman, 842 F. Supp. 2d 575 (S.D.N.Y. 2012). ................................................. 368
Talley v. Mann, No. CV 11-05003, 2012 WL 946990 (C.D. Cal. Feb. 14, 2012) ......................... 85
Tapang v. Wells Fargo Bank, N.A., No. CV-12-02183-LHK, 2012 WL 3778965 (N.D.
Cal. Aug. 30, 2012). ......................................................................................................................... 374
Taylor v. Cmty. Bankers Sec., LLC, 2012 U.S. Dist. LEXIS 179266 (S.D. Tex. Dec. 19,
2012) .................................................................................................................................................. 420
Taylor v. Kissner, No. 11-1184, 2012 WL 4461528 (D. Del. Sept. 27, 2012) ............................... 79
Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 282 F.R.D. 216
(D. Ariz. 2012) .................................................................................................................................. 153
Thomas v. Westlake, 204 Cal. App. 4th 605 (Cal. App. 4th Dist. 2012)....................................... 428
Thorpe v. Ameritas Inv. Corp., 2012 U.S. Dist. LEXIS 134049 (E.D.N.C. Sept. 19, 2012)234, 285
Thrivent Fin. for Lutherans v. Countrywide Fin. Corp., 2012 U.S. Dist. LEXIS 71376
(C.D. Cal. Feb. 17, 2012) ................................................................................................................. 334
Tim Haug v. VSR Fin. Servs. Inc., 2012 WL 259180 (FINRA Jan. 17, 2012) ............................... 62
Tong v. Dunn, 2012 NCBC 16 (N.C. Super. Ct. 2012) .................................................................. 347
xlvi

Touchstone Grp., LLC v. Rink, 2012 Fed. Sec. L. Rep. (CCH) 97,241 (D. Colo. Dec. 21,
2012) .................................................................................................................................................. 306
Touchtone Group, LLC v. Rink, 2012 WL 6652850 (D.Colo. 2012) ............................................ 154
Tsereteli v. Residential Asset Securitization Trust, 283 F.R.D. 199 (S.D.N.Y. 2012) ................... 15
Tucker v. Soy Capital Bank & Trust Co., 974 N.E.2d 820 (7th Cir. 2012) .................................. 349
Tuminello v. Richards, 2012 U.S. Dist. LEXIS 30827 (W.D. Wash. Mar. 8, 2012). .................. 451
Turk. Creek Dev., LLC v. TD Bank, 2012 S.C. App. Unpub. LEXIS 490 (S.C. Ct. App.
July 11, 2012).................................................................................................................................... 426
Twenty-First Sec. Corp. v. Crawford, 2012 U.S. App. LEXIS 23233 (2d Cir. Nov. 9,
2012) ......................................................................................................................................... 414, 438
U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., 2012 WL 3100778 (N.D. Tex. July 31,
2012). ................................................................................................................................................. 463
U.S. Commodity Futures Trading Comm’n v. Sarvey, 2012 U.S. Dist. LEXIS 16881
(N.D. Ill. Feb. 10, 2012) ................................................................................................................... 329
U.S. v. Contorinis, 692 F.3d 136 (2d Cir. 2012) .........................................................................64, 69
U.S. v. Fleishman, 2012 U.S. Dist. LEXIS 65165 (S.D.N.Y. May 7, 2012) ................................ 350
U.S. v. Gupta, 2012 WL 1066804 (S.D.N.Y. Mar. 27, 2012) ......................................................... 72
U.S. v. Gupta, 2012 WL 1066817 (S.D.N.Y. Mar. 27, 2012). ........................................................ 71
U.S. v. Gupta, 848 F. Supp. 2d 491 (S.D.N.Y. 2012) ................................................................71, 77
U.S. v. Hagen, 468 F. App’x 373 (4th Cir. 2012) ........................................................................... 348
U.S. v. McGee, --- F.Supp.2d ---, 2012 WL 4025342 (E.D. Pa. Sept. 13, 2012) ........................... 80
U.S. v. Ovist, No. 11-CV-00076-BR, 2012 WL 5830296 (D. Or. Nov. 16, 2012)......................... 90
U.S. v. Rajaratnam, No. 09 CR 1184 RJH, 2012 WL 362031 (S.D.N.Y. Jan. 31, 2012)69, 99, 142
U.S. v. Sklena, 692 F.3d 725 (7th Cir. 2012) .................................................................................. 349
U.S. v. Skowron III, 839 F. Supp. 2d 740 (S.D.N.Y. 2012) ............................................................. 70
U.S. v. Sutton, 2012 U.S. Dist. LEXIS 75103 (E.D. Mo. Jan. 17, 2012) ...................................... 353
U.S. v. Whitman, No. 12 CR 125 JSR, 2012 WL 5505080 (S.D.N.Y. Nov. 14, 2012).................. 78
xlvii

UBS Fin. Servs. v. Carilion Clinic, 2012 U.S. Dist. LEXIS 106120 (E.D. Va. July 30,
2012). ................................................................................................................................................. 445
UBS Fin. Servs. v. City of Pasadena, 2012 U.S. Dist. LEXIS 115365 (C.D. Cal. July 31,
2012). ........................................................................................................................................ 434, 447
Underland v. Alter, No. 10-3621, 2012 WL 2912330 (E.D. Pa. July 16, 2012) ................... 43, 284
Union Asset Mgmt. Holding A.G. v. Dell, Inc., 669 F.3d 632 (5th Cir. 2012). ............................ 388
United Food and Commercial Workers Union, 281 F.R.D. 641 (W.D. Okla. 2012)..................... 23
United States v. Behrens, 644 F.3d 754 (8th Cir. 2011) ................................................................ 111
United States v. Johnson, 413 Fed. App’x 151 (11th Cir. 2011) ................................................... 111
Urman v. Novelos Therapeutics Inc., 867 F. Supp. 2d 190 (D. Mass. 2012) ............................... 244
UTHE Tech. Corp. v. Aetrium, Inc., 2012 U.S. Dist. LEXIS 139538 (N.D. Cal. Sept. 27,
2012). ................................................................................................................................................. 434
Uthe Tech. Corp. v. Aetrium, Inc., No. C 95-02377 WHA, 2012 WL 4470536 (N.D. Cal.
Sept. 27, 2012). ................................................................................................................................. 374
Valley Forge Renaissance, L.P. v. Greystone Servicing Corp., Inc., No. 09-CV-00131,
2012 WL 1340802 (S.D. Ind. Apr. 18, 2012). .................................................................................... 2
Velecela v. WMC Mortgage Corp., No. 3:11-cv-1720 AWT, 2012 WL 5868125 (D.
Conn. Nov. 19, 2012). ...................................................................................................................... 367
Viking Global Equities LP et al. v. Porsche Automobil Holding SE et al., No. 650435/11,
2012 WL 6699216 (N.Y. App. Div., 1st Dep't Dec. 27, 2012). .................................................... 474
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 4955 (N.D. Ill. Jan. 17,
2012). ................................................................................................................................................. 446
Virchow Krause Capital, LLC v. North, 2012 U.S. Dist. LEXIS 74288 (N.D. Ill. May 30,
2012) .................................................................................................................................................. 420
Wachovia Bank Nat’l Assoc. v. Beane, 725 S.E.2d 715 (S.C. App. 2012). .................................. 386
Wachovia Sec., LLC v. Brand, 671 F.3d 472 (4th Cir. 2012). ...................................... 388, 436, 536
Wade v. WellPoint, Inc., ---F.Supp.2d ---, 2012 WL 3779201 (S.D. Ind. Aug. 31, 2012). .. 83, 164
Wallace v. IntraLinks Holdings, Inc., 2012 WL 1108572 (S.D.N.Y. Apr. 3, 2012) .................... 176
Warchol v. Green Mountain Coffee Roasters, Inc., No. 10 Civ. 227, 2012 WL 256099
(D.Vt. Jan. 27, 2012) ......................................................................................................... 78, 151, 279
xlviii

Warwick v. Morgan Keenan & Co., Inc., No. 10-02682, 2012 WL 689087 (FINRA Feb.
23, 2012).............................................................................................................................................. 25
Washtenaw Cnty. Employees’ Ret. Sys. v. Princeton Review, Inc., No. Civ. 11-11359-
RGS, 2012 WL 727125 (D. Mass. Mar. 6, 2012) ............................................................ 28, 166, 200
Waterford Inv. Serv., Inc. v. Lewis Bosco, 682 F.3d 348 (4th Cir. 2012) ............ 240, 414, 439, 536
Waveland Capital Partners, LLC v. Tommerup, 840 F. Supp. 2d 1243 (D. Mont. 2012). .......... 450
Wealth Rescue Strategies, Inc. v. Thompson, 2012 U.S. Dist. LEXIS 157355 (S.D. Tex.
Nov. 2, 2012). ................................................................................................................................... 445
Wehrs v. Benson York Group, Inc., No. 07 C 3312, 2011 WL 4435609 (N.D. Ill. Sept. 23,
2011) .................................................................................................................................................. 113
Weinstein v. McClendon, 2012 WL 2994291 (W.D. Okla. July 20, 2012)................................... 188
Wells Fargo Advisors, LLC v. Watts, 858 F. Supp. 2d 591 (W.D.N.C. 2012). ................... 436, 444
Westley v. Oclaro, Inc., 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012) ....................................... 199
Westley v. Oclaro, Inc., ---F.Supp.2d ---, 2012 WL 4343401 (N.D. Cal. Sept. 21, 2012) ............ 88
White Pac. Sec., Inc. v. Mattinen, 2012 U.S. Dist. LEXIS 37753 (N.D. Cal. Mar. 19,
2012) ......................................................................................................................................... 423, 448
White Pacific Securities, Inc. v. Mattinen, 2012 WL 952232 (N.D. Cal. March 19, 2012). ....... 538
Wiand v. Lee, 2012 WL 6923664 (M.D. Fla. Dec. 13. 2012). ....................................................... 411
Wiederhorn v. Merkin, 952 N.Y.S.2d 478 (N.Y. App. Div. 2012). .............................................. 399
Wierzba v. E*Trade Fin. LLC, 471 Fed. Appx. 709 (9th Cir. 2012)............................................. 442
Wilson v. Wells Fargo Advisors, LLC, 2012 WL 5240815 (D. Del. Sept. 25, 2012) .................. 210
Winifred B. Loria et. al. v. Elmer Wayne Bullis Arnold Dorman Next Fin. Group, Inc.,
2012 WL 1795777 (FINRA May 7, 2012)........................................................................................ 62
Wolfe v. AspenBio Pharma, Inc., 2012 U.S. Dist. LEXIS 130490 (D. Colo. Sept. 13,
2012) .................................................................................................................................................. 306
Wolfe v. Aspenbio Pharma, Inc., 2012 WL 4040344 (D. Colo. Sept. 13, 2012) .......................... 155
Wolfe v. Bellos, No. 11–CV–02015, 2012 WL 652090 (N.D. Tex. Feb. 28, 2012) ......................... 3
Wootten v. Fisher Invs., 688 F.3d 487 (8 th Cir. 2012). .......................................................... 431, 440
xlix

Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012) .......................... 86, 198, 300
Wu v. Stomber, 2012 WL 3276975 (D.D.C. 2012) ............................................................... 150, 219
Wu v. Stomber, 883 F. Supp. 2d 233 (D.D.C. 2012). ..................................................................... 105
XL Specialty Ins. Co. v. Level Global Investors, L.P., 874 F. Supp. 2d 263 (S.D.N.Y.
2012) .................................................................................................................................................... 74
Yannotti v. U.S., 475 Fed. Appx. 784 (2d Cir. 2012). .................................................................... 364
Yary v. Voigt, No. 11-694 (JNE/FLN), 2011 WL 6791003 (D. Minn. Dec. 27, 2011) ................ 113
Yenidunya Invs., Ltd. v. Magnum Seeds, Inc., 2012 WL 538263 (E.D. Cal. Feb. 17, 2012). ...... 394
Young v. Pacific Biosciences of Cal., Inc., Fed. Sec. L. Rep. P 96,800, 2012 WL 851509
(N.D.Cal. Mar. 13, 2012). ................................................................................................................ 472
Zazzali v. Hirschler Fleischer, P.C., 2012 U.S. Dist. LEXIS 118090 (D. Del. Aug. 21,
2012) ......................................................................................................................................... 326, 370
Zazzali v. Swenson, 852 F.Supp.2d 438 (D. Del. 2012). ................................................................ 369
l

RESEARCH CONTRIBUTIONS BY FIRM
Miller Canfield,
Paddock & Stone I. SECURITIES LITIGATION............................................................
A. Definition of a Security ........................................................................
Latham & Watkins B. Liabilities under the Securities Act of 1933........................................
1. Section 11 .................................................................................
Vinson &
Elkins LLP B. Liabilities under the Securities Act of 1933........................................
2. Section 12 .................................................................................
Foley & Lardner B. Liabilities under the Securities Act of 1933........................................
3. Section 17 .................................................................................
Greenberg Traurig C. Liabilities under the Securities Exchange Act of 1934 ......................
1. Section 10(b) and Rule 10b-5 ..................................................
a. Churning .......................................................................
b. Suitability .....................................................................
Loeb & Loeb c. Insider Trading .............................................................
Miller Canfield,
Paddock & Stone C. Liabilities under the Securities Exchange Act of 1934 ......................
d. Misrepresentations/Omissions ....................................
Greenberg Traurig e. Standing ........................................................................
f. Affirmative Defenses...................................................
Foley & Lardner C. Liabilities under the Securities Exchange Act of 1934 ......................
2. Section 14 .................................................................................
3. Section 15(c) .............................................................................
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4. Section 16(b).............................................................................
5. Section 17 .................................................................................
6. Section 18 .................................................................................
7. Section 19(b).............................................................................
8. Margin Violations ....................................................................
Greenberg Traurig D. Liabilities under the Securities Litigation Reform Act of 1995 ........
1. Pleading ....................................................................................
Neal Gerber &
Eisenberg LLP D. Liabilities under the Securities Litigation Reform Act of 1995
2. Appointment of Lead Plaintiff/Class Counsel........................
3. Safe Harbor/Bespeaks Caution Defense .................................
E. Liabilities under the Uniform Standards Act of 1999 ........................
Miller Nash LLP F. Liabilities under State Statutory and Common Law ..........................
1. Blue Sky Laws..........................................................................
2. Consumer Protection and Other Statutes ................................
3. Common Law Fraud ................................................................
4. Breach of Fiduciary Duty and Other
Common Law Claims ..............................................................
Keesal, Young
& Logan G. Liabilities Involving Clearing Brokers ................................................
H. Secondary Liability...............................................................................
1. Respondeat Superior ................................................................
2. Control Person ..........................................................................
3. Aiding & Abetting....................................................................
4. Conspiracy ................................................................................
5. Failure to Supervise..................................................................
Loeb & Loeb I. Private Rights of Action for Violations of SRO Rules ......................
J. RICO......................................................................................................
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Greenberg Traurig K. Damages and Other Relief in Private Actions ....................................
1. Damages as Element of Claim ................................................
2. Measure of Damages ................................................................
Maynard Cooper & Gale 3. Punitive Damages .....................................................................
Latham & Watkins K. Damages and Other Relief in Private Actions ....................................
4. Attorneys’ Fees and Costs .......................................................
L. Contribution, Indemnification..............................................................
M. Statute of Limitations ...........................................................................
1. Federal Securities Claims ........................................................
2. State Securities Claims ............................................................
3. RICO .........................................................................................
4. SRO Rules ................................................................................
Bressler, Amery
& Ross N. Arbitration .............................................................................................
1. Scope .........................................................................................
2. Eligibility/Limitations ..............................................................
3. Jurisdiction/Estoppel ................................................................
4. Motions to Vacate or to Enjoin ...............................................
a. Punitive Damages ........................................................
b. Attorneys’ Fees ............................................................
c. Other .............................................................................
Greenberg Traurig O. Practice and Procedures........................................................................
1. Rule 9(b) of the Fed. R. Civ. P. ...............................................
2. Rule 11 of the Fed. R. Civ. P. ..................................................
3. Rule 23 of the Fed. R. Civ. P. ..................................................
4. Venue, Pendent Jurisdiction Removal
and Other Issues .......................................................................
5. Discovery ..................................................................................
Foley & Lardner P. Failure to Supervise ..............................................................................
1. SEC Enforcement Actions .......................................................
2. NASDR Enforcement Actions ................................................
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3. NYSE Enforcement Actions ....................................................
Bingham McCutchen Q.
S.E.C. Litigation Affecting Broker-Dealers........................................
1. Direct S.E.C. Proceedings .......................................................
a. Sales Practice Violation...............................................
b. Unfair/Fraudulent Markups or Commissions ............
c. Other Fraudulent Practices ..........................................
(i) Misappropriation .............................................
(ii) Misrepresentation ............................................
(iii) Falsification of Documents .............................
(iv)
Failure to Maintain Accurate Books
and Records .....................................................
d. Regulation T Violations ..............................................
e. Trading Practice Violations.........................................
(i) Insider Trading ................................................
(ii) Market Manipulation.......................................
(iii) Securities Offering Violations ........................
f. Failure to Supervise .....................................................
g. Failure to Honor Arbitration Award/
Failure to Pay Fines and Costs/Failure
to Comply with Sanctions Imposed ............................
h. Procedural Issues .........................................................
(i) Jurisdiction and Time Bars .............................
(ii) Standard of Review .........................................
(iii) Due Process .....................................................
(iv) Prior Disciplinary Histories ............................
(v) Selective Prosecution ......................................
(vi) Sanctions ..........................................................
i. Registration Violations ................................................
Bingham McCutchen Q.
S.E.C. Litigation Affecting Broker-Dealers........................................
j. Miscellaneous ..............................................................
2. S.E.C. Review of SRO Proceedings .......................................
a. Sales Practice Violations .............................................
(i) Churning ..........................................................
(ii) Suitability .........................................................
(iii) Unauthorized Trading .....................................
b. Unfair/Fraudulent Markups or Commissions ............
c. Other Fraudulent Practices ..........................................
(i) Misrepresentation ............................................
(ii) Falsification of Documents .............................
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(iii) Failure to Maintain Accurate Books
and Records .....................................................
d. Financial Responsibility Violations............................
(i) Segregation of Customer Funds .....................
(ii) Regulations T Violations ................................
e. Trading Practice Violations/Market
Manipulation ................................................................
f. Failure to Supervise .....................................................
g. Registration Violation .................................................
h. Failure to Cooperate with NASD
Investigation/Failure to Comply with
NASD Requests for Financial Information ................
i. Failure to Honor Arbitration Award/
Failure to Pay Fines and Costs/Failure to Comply
with Sanctions Imposed...............................................
j. Procedural Issues .........................................................
(i) Evidence...........................................................
(ii) Due Process .....................................................
(iii) Jurisdiction and Time Bars .............................
(iv) Discovery .........................................................
(v) Sanctions ..........................................................
(vi) Right to Counsel ..............................................
k. Statutory Disqualification ...........................................
l. Miscellaneous ..............................................................
Stradley Ronon
Stevens & Young R. Broker-Dealer Employment Litigation and Arbitration .....................
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