The SEC recently issued an investor alert to warn investors about potential fraudulent investment schemes involving popular social media sites such as Facebook, YouTube and Twitter, turning its eye towards investor fraud perpetuated via social media. The alert, issued by the SEC’s Office of Investor Education and Advocacy, provides five tips to help consumers recognize and avoid investment fraud, easily made anonymous online, using social media websites and services: (1) be wary of unsolicited offers to invest; (2) look for “red flags,” e.g., offers that sound too good to be true or that “guarantee” returns; (3) look for “affinity frauds,” which are “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups;” (4) be thoughtful about privacy and security settings; and (5) ask questions and investigate investment opportunities thoroughly. The alert also describes common investment scams that have used social media and the internet to gain traction, including “Pump-and-dump” schemes, fraudulent “research opinions” or “investment newsletters,” high-yield investment programs, and offerings that just fail to comply with applicable registration provisions of the federal securities laws.
Richard A. Martin
Richard A. Martin, a partner in Orrick’s New York office, is a member of the Securities Litigation and Regulatory Enforcement Group. His practice focuses on accountants’ liability, securities and commercial litigation, as well as arbitration and international and domestic white-collar criminal law.
Mr. Martin has been involved in litigation in the state and federal courts of the United States, Europe and Asia for more than 30 years. From June 1987 to July 1990, Mr. Martin served as Special Representative of the Attorney General, located at the United States Embassy in Rome, Italy. There, he represented the Department of Justice in Europe and handled extradition and mutual assistance matters. In August 1990, Mr. Martin’s contributions were recognized when he was named “Commendatore al Merito della Repubblica Italiana,” the Italian Legion of Honor.
Prior to transferring to Rome, Mr. Martin served as an Assistant United States Attorney for the Southern District of New York, from January 1980 to June 1987. Mr. Martin received numerous commendations for his work in the United States Attorney’s Office, including the Distinguished Service Award from the Department of Justice.
- Bain Capital Partners, LLC v. Ernst & Young Global, Ltd, et al (No. 14-1765-D). (Mass. Sup. Ct. 2014). Represents India-based audit firms in litigation alleging fraud and negligent misrepresentation arising from a Bain subsidiary’s investment in an Indian business. Plaintiffs claim losses of $60 million. A motion to dismiss is pending.
- Securities and Exchange Commission v. BDO China Dahua CPA CO. Ltd., et al, Adm. Proceeding 3-14872-315116. Co-lead counsel for EY Ernst & Young China member firm (EY Hua Ming) in SEC proceeding against big 4 China firms for failing to produce documents directly to the SEC. EY Hua Ming and the other firms established at trial in July, 2013, that China law prohibited them from producing documents directly to the SEC without review and approval of the Chinese authorities. In January 2014, the SEC administrative law judge ruled in favor of SEC. That ruling is presently on appeal to the Securities and Exchange Commission.
- Athale, et al v. SinoTech Energy Ltd, et al (CA No. 11-cv-05831) S.D.N.Y. 2011. Successfully defended Ernst & Young Hua Ming in class action brought by investors in a China-based energy company that was publicly traded in the U.S. Successfully obtained dismissal of case in February 2014. See Athale v. SinoTech Energy Ltd., No. 11-cv-05831, 2014 WL687218 (S.D.N.Y. Feb. 21, 2014). Motion to dismiss amended complaint pending.
- Midaminses SPLR, Ltd. v. KBC Bank, N.V. et al. Represents Belgian Bank in an action in New York federal court alleging RICO-type claims. Motion to dismiss based on forum selection clause granted (No. 12 Civ. 8089, March 18, 2014). An appeal is pending.
- AXA Mediterranean Holdings S.A. v. ING International B.V. (No. 652110/2010) NY State Supreme Court. Successfully defended third party motion to compel Ernst & Young Mexican member firm to produce documents in New York Supreme Court. In a matter of first impression the court rejected claims by AXA that by stipulating to accept service of a subpoena for discovery (to avoid recourse to Hague process) the EY firm did not subject itself to personal jurisdiction in New York. 2013 N.Y. Misc. LEXIS 5645, Index No. 652110/2010 (Sup. Ct. N.Y. Cty. March 5, 2013).
- Lazare Kaplan International, Inc. v. KBC Bank N.V. and Antwerp Diamond Bank N.V. (No. 11 Civ. 9490 (ALC) (S.D.N.Y. Sept. 5, 2012), 2012 WL 3854618 (S.D.N.Y.)). Co-lead counsel for KBC Bank in a RICO action seeking US$1.5 billion against the bank and its subsidiary, Antwerp Diamond Bank, based on the banks’ alleged complicity in the loss of US$135 million in diamonds and diamond proceeds. The district court granted KBC’s motion to dismiss the action in favor of proceedings in Belgium based on forum non conveniens, and also rejected plaintiff’s application for an anti-suit injunction, (No. 11 Civ 9490, 2012 WL 3854618 (S.D.N.Y. Sept. 5, 2012)). That decision was remanded to the district court for limited jurisdiction and discovery, 528 F. App'x 33 (2d. Civ. 2013) which is presently underway.
- Sterling National Bank v. J.H. Cohn, LLP. (Index No. 650879/12 (MLS) (N.Y.Sup. Aug. 28, 2012.)). Successfully defended accounting firm J.H. Cohn in an action alleging fraud in connection with losses suffered by Sterling National Bank which made loans to J.H. Cohn’s audit client.
- Innospec Fuel Specialties, LLC v. Isochem North America, (Civ. No. 10-1642, 2012 WL 3682988 (D.N.J. Aug. 24, 2012). Lead counsel for Isochem North America (a subsidiary of French chemical supplier SNPE) in its defense of breach of contract and other claims brought by Innospec. The court granted summary judgment in favor of Isochem.
- Madoff Litigation. Successfully represented Ernst & Young Luxembourg (“EY Luxembourg”) in litigation in the Southern District of New York arising out of EY Luxembourg’s involvement in the audits of certain feeder funds that invested in Bernard Madoff securities. After intensive fact investigation, analysis of the legal issues and coordination, with counsel for nearly thirty other defendants, the Luxemburg firm joined in the motion to dismiss the claims against it and all other defendants. That motion was granted on November 29, 2011. The decision was affirmed (In Re Herald, Pringo and Thenar, 730 F. 3d 112 (2d Civ.2013)) and following application for the hearing consideration, affirmed again. F. 3d 110 (2d Civ. 2014).
- Stewardship Funds Litigation. Successfully defended Ernst & Young Bermuda (“EY Bermuda”) in litigations arising out of the Stewardship funds’ investment with a group of companies run by Thomas E. Petters, who was found guilty of running a US$3 billion Ponzi scheme. In response to investors’ initial filing in Connecticut state court, EY Bermuda successfully compelled arbitration in Connecticut federal court under the Federal Arbitration Act, on the ground that the investors’ claims were derivative, rather than direct, and, therefore, the investors were bound by the arbitration clause in the fund’s engagement letter. See Ernst & Young Ltd. Bermuda v. Quinn, 2009 WL 3571573 (D. Conn.). Mr. Martin also served as lead counsel for Ernst & Young Bermuda (”EY Bermuda”) and Ernst & Young Bahamas (“EY Bahamas”) in litigation arising out of the Stewardship funds’ investment brought by another group of investors. See, Isakov v. Ernst & Young Bermuda (Bermuda) and Ernst & Young Bahamas (Bahamas), 3:10-CV-1517 (D. Conn.). On March 9, 2012, the Court dismissed the federal securities claims against the Ernst & Young Firms and directed that all but one of their claims be sent to arbitration, as defendants had sought.
- Bear Stearns Hedge Fund Litigation. Lead counsel for Deloitte & Touche Cayman Islands against claims arising out of the collapse of the Bear Stearns Cayman Islands hedge funds. Plaintiffs, representing the interests of the Cayman Islands liquidators of the hedge funds, sought recovery of US$1.5 billion. Following argument on June 24, 2010, the Court dismissed all claims other than negligence against DT Cayman. A motion to dismiss the final claim against DT Cayman was granted on January 5, 2011, when the Court dismissed the action in its entirety.
- In re Parmalat Securities Litigation. Lead counsel for Deloitte & Touche SpA in the Parmalat Securities Litigation Class action (in re Parmalat Securities Litigation, 04 MD 1653), and the related action brought by the receiver of Parmalat, Dr. Enrico Bondi (Bondi v. Grant Thornton International et al., 322 B.R. 44 (S.D.N.Y. 2005). Successfully defended against remand motion filed by the receiver and had the action consolidated with other claims in the Southern District of New York. Also acted as coordinating counsel for related Italian civil, criminal and administrative proceedings.
- FraternityFund Ltd. v. Beacon Hill Asset Management, LLC, 376 F.Supp.2d 385 (S.D.N.Y. 2005); Bullmore et al. v. Ernst & Young et al. 861 N.Y.S.2d 578. Successfully defended Ernst & Young Cayman Islands in hedge fund securities litigation claims by fund investors in federal action, where claims were dismissed. Successfully defended parallel action in New York State Court, where claims asserted by Cayman liquidators were dismissed on summary judgment, and recovered substantial reimbursement of legal fees and costs from the liquidator through an indemnification claim.
- Sniado v. Bank of Austria et al., 174 F. Supp. 2d 159 (S.D.N.Y. 2001); 02-77012; 378 F.3d 210 (2nd Cir. 2004). Successful defense of Banca Intesa on claim of antitrust violation for alleged fixing of exchange rates in Italy. Certiorari granted, and dismissal affirmed by U.S. Supreme Court pursuant to ruling in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).
- NYSE Euronext. On behalf of client, submitted amicus curiae brief in Morrison v. National Australia Bank Ltd., urging adoption of the bright-line transactional test which the Supreme Court enunciated in its June 2010 opinion 130 S.Ct. 2869.
International Civil and Arbitration Matters
- Core Furnace Systems Corp. v. DeAcero S.A. de C.V., 50T 110 00537 03. Representation of Mexican steel manufacturer in AAA arbitration and coordination of parallel patent/trade use claims in Mexico and Italy.
- Confidential advice to an Italian energy supplier regarding arbitration provisions concerning joint venture with a U.S. company in Argentine energy supplier.
- Confidential advice to a Hong Kong supplier in Singapore arbitration case applying New York law.
- Representation in AAA proceeding of eyewear manufacturer.
- Representation in AAA of Italian clothing designer and manufacturer against joint venture partner and distributor in the United States.
International Regulatory Proceedings and Investigations
Mr. Martin has conducted internal investigations of numerous multinational Fortune 500 corporations and presented results to corporate boards, U.S. authorities and committees, as well as foreign law enforcement and legislative authorities. He has also represented numerous corporate defendants and individuals investigated by foreign criminal and administrative authorities and in parallel U.S. proceedings, including the following.
- Advised numerous foreign member firms regarding parallel U.S. and foreign regulatory investigation including Switzerland, Italy, Luxembourg, Mexico, the Cayman Islands, Bermuda and Bahamas.
- Advised J. Paul Getty Museum regarding claims seeking forfeiture of antiquities, and claims against curator in criminal action relating to receipt of illegally excavated antiquities. Advised a U.S. medical supply manufacturer regarding investigation of commercial bribery in European subsidiary.
- Advised a U.S. pharmaceutical manufacturer relating to investigation of sales through compensation to doctors recommending the use of the company’s product and claims of “permanent establishment.”
- Defended three U.S. directors named in an asbestos-related prosecution and civil proceedings in Italy.
- Advised a major cigarette distributor regarding claims of tax evasion by Italian authority based on presence of “permanent establishment” in Italy.
- Advised a large U.S. securities dealer concerning investigation by CONSOB, the Italian equivalent of the SEC.
- Assisted in the defense of a major U.S. banking institution in criminal charges against former officer who structured a “usufruct” transaction in Italy, and in related civil claims.
- Advised several individuals prosecuted in Italy for possession of allegedly stolen artworks, and assisted with defense of civil claims in U.S. courts.
- Assisted in the defense of the management of an Italian office of a U.S. public relations firm regarding commercial bribery charges.
Prior to joining Orrick, Mr. Martin was a shareholder at Heller Ehrman LLP, where he had served as Managing Partner and Head of Litigation in the New York office.
A lack of sweaty models trying on yoga pants may be problematic, but does it give rise to securities fraud? Not in the Southern District of New York. In In re lululemon Securities Litigation, decided on April 18, 2014, Judge Katherine B. Forrest dismissed in its entirety a class action complaint against lululemon based on sheer yoga pants alleging violations of Section 10(b) and Section 20(a) of the Exchange Act and SEC Rule 10b-5. As summarized by the court, lead plaintiff alleged, “if only lululemon had someone try on its black luon yoga pants before they shipped, it would have realized they were sheer; similarly, if lulumeon had only had someone exercise in certain athletic wear (enough to produce sweat), it would have realized that the colors bled.” Based on these purported shortcomings, plaintiff alleged that statements touting the high quality of the company’s products were materially false and misleading. The court, however, disagreed: “This narrative requires the Court to stretch allegations of, at most, corporate mismanagement into actionable federal securities fraud. This is not the law.” Read More
Corporations contemplating going private should take note of recent rulings from the Delaware Court of Chancery, which provide clear guidance on how to structure their transactions to reduce the risk of being subjected to the “entire fairness” standard of review.
Several months ago, the Delaware Court of Chancery issued an important MFW decision, in which Chancellor Strine set forth the procedural mechanisms a company can employ so that a going-private transaction with its controlling stockholder can be reviewed under the deferential business judgment rule, as opposed to the more stringent entire fairness standard. In that decision, Chancellor Strine held that the business judgment rule would apply if: (1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.
More recently, in SEPTA v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 5, 2013), Vice Chancellor Noble provided further clarity on when a sale of a company with a controlling stockholder will be entitled to business judgment rule review. In SEPTA, Vice Chancellor Noble applied the business judgment rule and granted summary judgment to the defendants in case that challenged the acquisition of SRA International by Providence Equity Partners. Like the change-in-control transaction in MFW, the change-in-control transaction in SEPTA was negotiated by a disinterested and independent special committee and approved by a majority of the minority stockholders. Unlike MFW, however, where the controlling stockholder was the buyer in the transaction, SEPTA involved a transaction in which a third party was the buyer, and in which the controlling stockholder agreed to roll over a portion of his shares into the merged entity. Read More
Almost two years after the Supreme Court issued its momentous decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), lower courts continue to reach significantly different conclusions concerning its scope. The Supreme Court held that, for purposes of SEC Rule 10b-5, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at 2302. Specifically, in Janus, the Supreme Court held that an investment advisor could not be liable for statements in prospectuses filed by a related, but legally separate entity. Because the investment advisor did not “make” the statements—that is, did not have “ultimate authority” over them—it could not be liable as a primary violator of Rule 10b-5 for any misstatements or omissions contained therein.
Janus established a bright-line rule. But the Southern District of New York, in particular, has split over whether Janus applies beyond the context of private actions brought under Rule 10b-5(b). In the most recent decision from that district to address the issue, SEC v. Garber, No. 12 Civ. 9339, 2013 WL 1732571 (S.D.N.Y. Apr. 22, 2013), Judge Shira A. Scheindlin deepened this divide. Read More
Securities class action lawyers are looking to the U.S. Supreme Court this term to clear up an issue that has been at the center of several prominent securities class actions, specifically, what is the standard for class certification where the class members’ reliance on defendants’ alleged misstatements is presumed under the fraud-on-the-market theory of reliance. Last term, in a class action ruling in an employment case, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 1541 (2011), the Court signaled that class certification may require “a preliminary inquiry into the merits of a suit,” singling out elements of the fraud-on-the-market theory as an example.
On November 5, the Supreme Court heard argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities fraud putative shareholder class action presenting the question of how far a court should consider a merits issue when deciding whether to certify a class. The appeal in Amgen is from a Ninth Circuit decision that affirmed the district court’s order certifying a plaintiff class of purchasers of Amgen stock. Defendants opposed class certification on the ground that the rebuttable presumption of reliance under the fraud-on-the-market theory requires not only that the market for Amgen stock was efficient, but that the alleged misstatements were material. Defendants offered evidence that the alleged misstatements in the case were immaterial. Therefore, according to defendants, reliance could not be presumed, and the proposed plaintiff class could not be certified because common issues did not predominate. The Supreme Court took the case in order to determine whether the district court was correct to disregard defendants’ evidence of immateriality on the ground that materiality is an issue appropriately considered at trial or at summary judgment rather than at the class certification stage. Read More
Imagine a plaintiff who buys stock in a company that subsequently discloses a misstatement in its financial statements that existed at the time plaintiff invested. The stock price drops upon the initial disclosure, and then rebounds back above the purchase price. Can that plaintiff plead economic loss, as is required under Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)? According to the Second Circuit, the answer is yes. Read More
In its recently-released Report on the Municipal Securities Market, the Securities and Exchange Commission asked Congress to increase the SEC’s authority to regulate the municipal securities market, which it described as “decentralized . . . illiquid and opaque.” While the SEC has brought a handful of enforcement actions against issuers of municipal securities based on allegedly-misleading offering materials, most recently against the state of New Jersey in 2010 and the city of San Diego in 2006, it has done so rarely because municipal securities are exempted from most of the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Read More