Securities Fraud

Defrauded Defendant Defenseless Against Investors: Ninth Circuit Imputes Scienter of Embezzling CEO to Corporation for 10b-5 Claims

Paul RuganiPosted on October 28, 2015

Malfeasance by a corporate insider against his company has the potential to leave a gaping wound. Facing a securities lawsuit due to that malfeasance is like salt in that wound. Corporations targeted with such lawsuits have turned to the adverse interest exception to try to protect themselves from further liability stemming from the rogue executive’s wrongdoing. But on October 23, the U.S. Court of Appeals for the Ninth Circuit issued a precedent-setting decision rendering that salve unavailable. In In re ChinaCast Education Corp. Securities Litigation, the court held that under the federal securities laws, an executive’s scienter is imputed to the corporation where he “acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.” Slip op. at 4.

Carrying the Halli-burden: District Court Takes Up Price Impact at Class Certification in the Wake of Halliburton v. Erica P. John Fund

Amy RossPosted on August 4, 2015

In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance. This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation. The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.

Flawed Valuation Leads Delaware Court to Award Damages to Option Holders

Editorial BoardPosted on August 4, 2015

On July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”). See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015). CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately. Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.

You Can’t Cover Up Fraud with TARP Funds: US Government Sues Bank President’s Estate

Danielle Van Wert, Suzette Barnes and Jim KramerPosted on July 14, 2015

On July 1, 2015, the United States for the District of Columbia sued the estate and trusts of the late Layton P. Stuart – the former owner of One Financial Corporation and its subsidiary One Bank & Trust– and the trust’s beneficiaries, for alleged fraud on the Treasury Department and its Troubled Asset Relief Program (“TARP”). This civil suit is the latest in a growing list of cases brought by the government to recover TARP funds that it alleges were fraudulently procured.

Reversals of Fortune: Putting the Brakes on Section 10(b) and Section 11 Claims Against Auditors of China-Based Companies

Danielle Van WertPosted on February 4, 2015

A federal court’s recent dismissal of Securities Exchange Act claims against the auditor of a Chinese company prompted us to examine the state of recent U.S. civil securities litigation against accounting firms that audited China-based companies that were listed on US exchanges.

Ninth Circuit Applies Heightened Pleading Standards for Loss Causation

M. Todd Scott and Suzette BarnesPosted on December 30, 2014

On December 16, 2014, the Ninth Circuit affirmed the U.S. District Court of Arizona’s dismissal of a Section 10(b) class action against Apollo Education Group, Inc., a for-profit education company, and several of its officers and directors. In doing so, the Ninth Circuit held that the heightened pleading standard of Federal Rule of Civil Procedure Rule 9(b) applies to all elements of a securities fraud action, including loss causation.

Tweet, Tweet: The SEC Gets Social

Editorial BoardPosted on November 18, 2014

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.

When the Whistle Blows, What Follows?

Lily BeckerPosted on November 4, 2014

Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.

How Far Does Section 10(b) Reach? The Second Circuit Says That A Domestic Transaction Is Necessary, But Not Sufficient, To Invoke U.S. Securities Laws

Kevin AskewPosted on August 26, 2014

In a long-awaited opinion issued on August 15 in Parkcentral v. Porsche, the Second Circuit limited the extraterritorial reach of the U.S. securities laws, affirming the dismissal of securities claims brought by parties to swap agreements that were entered into in the United States but were based on the price of foreign securities. Although the Parkcentral opinion offers an important interpretation of the Supreme Court’s 2010 opinion in Morrison v. National Australia Bank, the Second Circuit declined to set forth a bright-line rule for determining when a securities fraud claim based on domestic transactions in foreign securities is sufficiently “domestic” to be subject to U.S. securities laws, thereby leaving the door open to future litigants to confront this issue in securities cases involving foreign elements.

In Morrison, the Supreme Court found that Section 10(b) of the Exchange Act does not apply extraterritorially based on a lack of congressional intent to overcome the strong presumption against the extraterritorial application of domestic laws. In so holding, the Court rejected a long line of Second Circuit cases that allowed the application of Section 10(b) to claims involving foreign securities so long as the claims involved either significant conduct in the U.S. or some effect on U.S. markets or investors. The Supreme Court reasoned that the Second Circuit’s so-called “conduct test” and “effects test” improperly extended the geographic reach of the U.S. securities laws beyond Congress’s intent, and would interfere with foreign countries’ own securities regulations. Instead, the Court adopted a new “clear test,” holding that Section 10(b) applies only to claims based on: (1) “transactions in securities listed on domestic exchanges” or (2) “domestic transactions in other securities.”

Insider Trading Gets Political: Trading on Political Intelligence

William AldermanPosted on July 1, 2014

Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.

The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. READ MORE →

Securities Litigation, Investigations and Enforcement