securities fraud

Where There’s Smoke, There’s FIRREA (Part Two)

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We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.

The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.

On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language. READ MORE →

Where There’s Smoke, There’s FIRREA

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Few can ignite a legal firestorm like U.S. District Judge Jed Rakoff of the Southern District of New York. Last week, in a mortgage fraud suit against Bank of America and Countrywide, Judge Rakoff refused to dismiss a novel claim for civil penalties under the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”). The ruling will surely encourage civil prosecutors to make wider use of FIRREA, which provides a generous ten-year statute of limitations and low burden of proof, in pursuing financial fraud cases.

FIRREA was enacted in response to the Savings and Loan debacle of the 1980s, as well as the fraud scandals that emerged during that era. The statute includes a clause imposing a civil penalty for mail and wire fraud and other violations “affecting a federally insured financial institution.” Until recently the civil penalty provision has been ignored by prosecutors, leaving courts without occasion to decide what exactly the statute means by “affecting” a financial institution. READ MORE →

Supreme Court Hears Argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds

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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 →

SEC Suffers Defeat in Trial Against “Break the Buck” Executives

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A federal court jury in Manhattan returned verdicts on Monday, November 12, largely exonerating the two most senior Reserve Management Company executives in a Securities and Exchange Commission enforcement action accusing them of fraud.

The SEC alleged that Bruce R. Bent, the company’s CEO, and his son, Bruce R. Bent II, the company’s president, as well as their investment advisory firm Reserve Management Co. and Resrv Partners Inc., had defrauded investors and the fund’s trustees by falsely claiming they would support the fund financially when it faced a run by investors after Lehman Brothers’ bankruptcy (the fund held about $785 million in Lehman debt on the day it filed for bankruptcy). The bankruptcy announcement caused investors to flee the fund, leading the fund to “break the buck,” i.e., to have a net asset value (“NAV”) of less than $1 per share. The SEC alleged that, on the morning after Lehman announced its bankruptcy, the Bents falsely assured investors and the trustees that they would use money from their firm to support the $1 NAV.

Following a trial lasting approximately a month, the jury found the elder Bent not liable on all counts and the younger Bent not liable on six of seven counts. The only count on which Bent II was found liable was a negligence-based claim, not the more serious claims that he had “knowingly and recklessly” defrauded investors and the trustees. The jury found the Bents’ two entities liable for the more serious scienter-based fraud charges. The case will now proceed for United States District Judge Paul Gardephe to determine what relief and sanctions, if any, are warranted against the entities and against Bent II for the one negligence-based count on which the jury found him liable. READ MORE →

Supreme Court to Resolve Split on Timing for SEC Penalty Actions

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Today, the Supreme Court granted a petition for certiorari in Gabelli v. Securities and Exchange Commission (11-1274). In the appeal from a Second Circuit opinion, the Court will decide whether a governmental claim for penalties accrues on the date that the underlying violation occurs, or when the SEC discovers (or reasonably could have discovered) the violation, for purposes of the 5-year statute of limitations for governmental penalty actions embodied in 28 U.S.C. s. 2462. The precise question presented is:

“When Congress has not enacted a separate controlling provision, does the government’s claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. s. 2462 when the government can first bring the action for a penalty?”

The Second Circuit, in an opinion adopting the SEC’s position, held that the discovery rule applies to SEC enforcement actions rooted in fraud. Under that rubric, the SEC could bring an enforcement action within five years of learning about a fraud, which, in many cases, can be far more than five years after the underlying violation occurred. The Supreme Court’s decision to take the case follows closely on the heels of the Fifth Circuit’s August 7, 2012 decision in SEC v. Bartek, previously discussed here. In Bartek, the Fifth Circuit held that the statute of limitations for penalties in SEC enforcement actions began to run on the date of the underlying in violation, and that the discovery rule does not apply to 28 U.S.C. s. 2462. The Bartek decision therefore created a clear Circuit split that the Supreme Court is poised to resolve next term.

Fifth Circuit Tells the SEC “Time’s Up”

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In SEC v. Bartek, filed August 7, 2012, the Fifth Circuit held that the discovery rule does not apply to 28 U.S.C. § 2462, the statute of limitations governing penalties in SEC civil enforcement actions, thus affirming a district court’s grant of summary judgment in favor of the defendants. Under the Fifth Circuit’s ruling, the SEC’s claims for penalties accrue on the date of the violation, not on the date that the SEC discovers the violation. This opinion creates a circuit split after the Second Circuit’s decision in SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011), which held that the discovery rule applied to Section 2462, and increases the likelihood that the Supreme Court will weigh in on the issue. READ MORE →