Securities Law Updates - Commentaries Only - from Lawupdates.com

Kirleis v. Dickie McCamey & Chilcote: Express Consent to Arbitrate Required, Even with Arbitration Provision in Corporate Bylaws

2009-05-28T23:02:00+00:00

The Third Circuit had to weigh two competing principles – the contract law requirement that a party must explicitly consent to an arbitration agreement versus the corporate law principle that directors and shareholders of a corporation are charged with constructive knowledge and acceptance of the corporation’s bylaws. In Kirleis v. Dickie McCamey & Chilcote, 560 F.3d 156 (3rd Cir. 2009), under Pennsylvania law, the Court determined that even though the plaintiff was a shareholder and director of a law firm that contained within its bylaws an arbitration agreement, the plaintiff was not bound by that agreement because she had never signed any document explicitly expressing her consent to arbitrate.

Day v. Staples: The “Reasonable Belief” Required for SOX Whistleblower Protection

2009-04-21T20:16:00+00:00

In Day v. Staples, 555 F.3d 42 (1st Cir. 2009), the Court of Appeals for the First Circuit ruled that the “reasonable belief” requirement for whistleblower protection under the Sarbanes-Oxley Act of 2002 (“SOX”) includes both “objective” and “subjective” reasonableness. In this case of first impression before the First Circuit, the court agreed with the Fourth Circuit’s interpretation of SOX whistleblower protection requirements and denied the protection to an aggrieved employee whose allegations failed to meet the basic elements of a securities fraud claim. The court’s ruling also suggests that employers who take seriously and investigate their employee’s claims may have a viable defense in whistleblower protection cases.

Katz v. Gerardi: CAFA Trumps Anti-Removal Provisions of 1933 Act

2009-03-11T20:13:00+00:00

In Katz v. Gerardi, 552 F.3d 558 (7th Cir. 2009), the Seventh U.S. Circuit Court of Appeals splits with the Ninth Circuit in determining that a securities class action can be removed to federal court under the Class Action Fairness Act of 2005 despite the anti-removal provisions of the Securities Act of 1933. Writing for the court, Judge Frank Easterbrook takes the Ninth Circuit to task for failing to properly read and apply the statutes at issue.

Huff v. Deloitte & Touche: Investment Advisor Lacked Standing to Sue for Clients

2009-03-3T18:20:00+00:00

In W.R. Huff Asset Management Co. LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2nd Cir. 2008), the Second Circuit Court of Appeals held that an investment advisor who held the power of attorney to sue on behalf of his clients still lacked the standing to sue because it did not actually have ownership or title to the underlying claim itself. In rendering this decision, the Court makes it clear that a valid assignment of a claim is required to fulfill the constitutional requirement of an injury-in-fact and enable an advisor to conduct litigation as its client’s representative.

Guyden v. Aetna: SOX Whistleblower Claims Are Arbitrable

2009-01-1T04:25:00+00:00

In Guyden v. Aetna, 544 F.3d 376 (2nd Cir. 2008) – a case of first impression in the federal circuit courts -- the Second Circuit confirmed that arbitration provisions are enforceable against an employee who claims that her termination violated the whistleblower protections of the Sarbanes-Oxley Act. The opinion confirms the federal court’s strong support of arbitration provisions, and provides some guidance for employers seeking to implement arbitration agreements.

In re Salomon Analyst Metromedia Litig.: Rebuttable Presumption of Fraud-on-the-Market Extended to Analysts

2008-12-12T18:19:00+00:00

In Douglas Millowitz v. Citigroup Global Markets et al (“In Re Salomon Analyst Metromedia Litigation”), 544 F.3d 474 (2nd Cir. 2008), the Second Circuit extended the fraud-on-the-market presumption of reliance, first set forth in Basic v. Levinson, 485 U.S. 224 (1988), to analyst reports. The Court also stated that defendants should be afforded the opportunity to rebut that presumption at the class certification stage in an effort to prevent certification. The opinion may make it harder to pursue class actions in some securities fraud cases.

In re Merck: Class Plaintiffs Were Not on Inquiry Notice Sufficient to Time Bar Claims

2008-11-17T19:45:00+00:00

In In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litig., ___ F.3d ___, 2008 WL 4138476 (3rd Cir. 2008), a federal circuit court revived a securities fraud class action suit against Merck that accuses the pharmaceutical company of hiding the truth about Vioxx and its link to cardiac problems. The district court had dismissed the class action as time barred, claiming that the plaintiffs were on inquiry notice more than two years before filing the suit. In a split decision on appeal, the Circuit Court disagreed, finding that reassuring messages from Merck and the market prevented plaintiffs from being on inquiry notice until much later.

Free Enterprise Fund v. PCOAB: Sarbanes-Oxley’s PCAOB Is Not Unconstitutional

2008-10-23T16:52:00+00:00

In its long-awaited opinion in Free Enterprise Fund v. PCAOB, 537 F.3d 667 (D.C. Cir. 2008), the Circuit Court for the D.C. Circuit upheld the Sarbanes-Oxley Act of 2002 – specifically that Act’s establishment of the Public Company Accounting Oversight Board (“PCAOB”) – against constitutional challenges. The plaintiffs argued that Act violates both the Appointments Clause of the Constitution as well as separation-of-powers principles by creating the PCAOB as a virtually independent, autonomous agency over which the President has minimal practical control and authority. The Court disagreed, finding that the Securities and Exchange Commission, over which the President has an appropriate amount of control, has sufficient legal authority over the PCAOB to support a finding that the Act is constitutional. But this case is far from over – appeals are expected, including to the U.S. Supreme Court, meaning that the future of Sarbanes-Oxley is still in question.

Teamsters Local 445 v. Dynex: “Corporate Scienter” Possible Without Naming Names

2008-09-19T15:37:00+00:00

In its highly anticipated opinion in Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2nd Cir. 2008), the Second Circuit affirmed that a securities fraud plaintiff can plead corporate scienter without specifically identifying the culpable corporate officer or director whose individual scienter could be imputed to the corporation. The plaintiff need only plead facts sufficient to establish a “strong inference” that someone in the corporation whose acts could be imputed to the corporation acted with the requisite scienter. However, the court warns that the standard for making such a pleading is very high, requiring heightened specificity.

The Dissent in Jones v. Harris Associates – Defending Gartenberg, Requesting Review (Re: The August 8, 2008 Opinion)

2008-08-26T16:57:00+00:00

The renowned legal minds of 7th Circuit judges Frank Easterbrook and Richard Posner have clashed again, this time over the validity and applicability of the Gartenberg approach to claims of excessive mutual fund management fees. Judge Easterbrook, currently chief judge of the 7th Circuit, served on the panel that issued a per curiam opinion in Jones v. Harris Associates, 527 F.3d 627 (7th Cir. 2008) on May 19, 2008. In that case, the judicial panel dismissed the Gartenberg standard that has been relied upon by courts, practitioners and fund managers for more than 25 years.

Jones v. Harris Associates: The Market (Not the Courts) Should Set Fund Advisor Fees

2008-07-16T20:50:00+00:00

Jerry N. Jones v. Harris Associates, 527 F.3d 627 (7th Cir. 2008), was one of about a dozen cases brought in 2003 and early 2004 based on the “excessive fee” provisions of the Investment Company Act of 1940. In the case, a group of individual investors claimed that Harris Associates, manager of the Oakmark funds, charged excessive fees to individual investors in violation of the Act. The Seventh Circuit Court of Appeals affirmed the lower court’s judgment dismissing the claims against Harris Associates, holding that the market, not the judiciary, should determine manager fees. The mutual fund industry celebrates the decision, which will likely make it harder for investors to challenge funds’ investment-advisory fees as excessive.

Seventh Circuit Looks at Corporate Scienter and Scheme Liability Rules in Pugh v. Tribune Co.

2008-05-21T20:49:00+00:00

At the heart of these two consolidated cases is the clear, admitted, egregious fraud perpetrated by employees of a subsidiary of the Tribune Company. The plaintiffs in both cases (a securities case and an ERISA case) tried to extend liability for those fraudulent acts up through the corporate ranks of the Tribune Company, arguing that higher-ups knew or should have known of the fraud while it was happening. Unfortunately for the plaintiffs, their allegations were based primarily on conclusory statements, speculative inferences and tenuous links. Their cases were dismissed with prejudice early in the litigation, and the 7th Circuit affirmed those dismissals, as discussed below. There has been, and still is, a split among jurisdictions as to the proper standard for proving corporate scienter for purposes of corporate liability under Section 10(b) of the 1934 Act. In Pugh, the 7th Circuit dismisses the collective scienter approach relied upon by a minority of courts and applies the more traditional, majority rule requiring individual scienter by officials who contributed to the public statements at issue in some meaningful way. Also, notably, in Pugh, the 7th Circuit became the first federal court to apply the U.S. Supreme Court’s ruling regarding scheme liability in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 128 S.Ct. 761 (2008).

When Sales of Interest in a Venture Equal Sales of Securities under Federal Law: Consolidated Case

2008-05-19T21:12:00+00:00

The analysis and conclusions reached by the California appellate court in Consolidated Management Group v. Dept. of Corporations, ___ Cal. Rptr. 3d___, 2008 WL 1850310 (Cal. App. 1st 2008), are not necessarily new. But rarely has an opinion so thoroughly and effectively laid out the prevailing law and its application. In Consolidated, the California appellate court analyzes two issues: 1) whether federal law preempts the California Department of Corporations’ authority to issue a desist and refrain order against the appellants, and 2) whether the interests being sold by the appellants were “securities” for purposes of being covered by the applicable laws.

Laperriere v. Vesta Insurance Case Defines the Scope of Controlling Party Liability

2008-05-19T17:03:00+00:00

In the precedent-setting case of Laperriere et al v. Vesta Ins. Group, et al, ____ F.3d ____, 2008 WL 1883482 (11th Cir. 2008), the 11th Circuit harmonized the proportionate liability scheme of the Private Securities Litigation Reform Act of 1995 (PSLRA) with the provisions of the Securities Exchange Act of 1934 (the “Act”) that provide for derivative liability of controlling persons. In this case of first impression, the Vesta court set forth a test for litigants and courts to apply to determine whether a controlling person has any liability for the acts of someone he controls, and, if so, whether proportionate or joint and several liability should apply.

Magnolia Capital Advisors v. Bear Sterns Teaches How to Make A Colorable Denial of An Agreement to Arbitrate

2008-05-14T18:34:00+00:00

In the case Magnolia Capital Advisors Inc. v. Bear Stearns, the 11th Circuit Court reversed a decision of the Northern District of Florida to order the parties to arbitration pursuant to their purported agreement. The 11th Circuit found that Magnolia had met the requirements set forth by court precedent and 9 USC § 4 to challenge the enforcement of the arbitration agreement, thus compelling the district court to hold a trial on the issue of the agreement’s enforceability before compelling arbitration. Because the district court failed to hold such a trial, the 11th Circuit reversed the district court’s decision and remanded the case for that trial. The requirements to challenge the enforcement of an arbitration agreement and compel a trial under 9 USC § 4 are not new. However, there have not been that many reported cases where a plaintiff has actually succeeded in meeting those requirements. The Magnolia case is instructive, therefore, in demonstrating the type of evidence a plaintiff can submit to make a “colorable denial” of the arbitration agreement.

Makor: “Strong Inference” of Scienter – A New Standard, But No New Results

2007-10-19T21:12:00+00:00

The Tellabs tale really has two parts – part one is a Supreme Court decision, which ultimately remanded the case back to the 7th Circuit to apply its ruling, and part two is the subsequent 7th Circuit decision. The Supreme Court decision in Tellabs Inc. v. Makor Issues & Rights Inc., 127 S.Ct. 2499, 2511 (2007), set forth a new standard for proving scienter in cases alleging violation of Section 10(b) of the Securities Exchange Act of 1934, but many analysts questioned the wisdom of a standard they said would require the court to engage in a “mini-trial” even before discovery. Those concerns were given legs in the 7th Circuit’s opinion on remand – the court essentially came right out and found fraud against the corporate defendant before the case had really even begun.

Roth v. Jennings Seeks to Address Issue of What Constitutes a Group in Applying Section 16(b) of the Exchange Act

2007-10-19T19:42:00+00:00

In Roth v. Jennings, 489 F.3d 499 (2nd Cir. 2007), the Second Circuit Court revisited the issue of pleading a “group” 1 for purposes of Section 13(d) of the Securities Exchange Act of 1934. The court reversed a district court’s dismissal of a plaintiff’s Section 16(b) claim seeking disgorgement of short-swing profits. The appellate court said that the district court had improperly given too much weight to the defendants’ disclaimers of their “group” status in SEC filings and had misconstrued the final sentence of Section 16(b), which states that the section does not apply if the short-swing trader is not a “beneficial owner” at both ends of the purchase-sale transaction.

Ring: Establishing a Fine Distinction of What Is a Covered Security under SLUSA

2007-08-29T18:33:01+00:00

While the cases of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), Lander v. Hartford Life & Annuity Life Ins. Co., 251 F.3d 101 (2d Cir.2001), SEC v. Variable Annuity Life Ins. Co. of Am., 359 U.S. 65 (1959) (“VALIC”), and Fisher v. Kanas, 2007 WL 1352713 (E.D.N.Y.), 487 F.Supp.2d 270 may have heightened the bar for filing class action lawsuits before state courts involving a “purchase and sale” of a “covered security” both as defined under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), the instant case of Ring v. Axa was a deviation from this line of cases, as the Court of Appeals established a fine distinction of what is a “covered security” and what is not within the meaning of the SLUSA.

Fisher v. Kanas Continues Line of Cases That Puts Limit on the Right to Initiate Class Action Suits

2007-08-23T23:31:01+00:00

This case is a continuation of a line of jurisprudence that seeks to impose a strict limitation on the right of stockholders to initiate class action law suits in state courts.

Merck: Difference Between Mutual Fund and Direct Investor Crucial in Resolving Motion to Dismiss

2007-08-14T20:48:00+00:00

In this case, the court considers whether there is a difference between a mutual fund investor and a direct investor in determining whether or not a securities action should be dismissed for failing to heed a storm warning.