Justia U.S. 6th Circuit Court of Appeals Opinion Summaries

A publicly traded company, CoreCivic, which operates private prisons, faced scrutiny after the Bureau of Prisons raised safety and security concerns about its facilities. Following a report by the Department of Justice's Inspector General highlighting higher rates of violence and other issues in CoreCivic's prisons compared to federal ones, the Deputy Attorney General recommended reducing the use of private prisons. This led to a significant drop in CoreCivic's stock price and a subsequent shareholder class action lawsuit.The United States District Court for the Middle District of Tennessee, early in the litigation, issued a protective order allowing parties to designate discovery materials as "confidential." This led to many documents being filed under seal. The Nashville Banner intervened, seeking to unseal these documents, but the district court largely maintained the seals, including on 24 deposition transcripts, without providing specific reasons for the nondisclosure.The United States Court of Appeals for the Sixth Circuit reviewed the case. The court emphasized the strong presumption of public access to judicial records and the requirement for compelling reasons to justify sealing them. The court found that the district court had not provided specific findings to support the seals and had not narrowly tailored the seals to serve any compelling reasons. The Sixth Circuit vacated the district court's order regarding the deposition transcripts and remanded the case for a prompt decision in accordance with its precedents, requiring the district court to determine if any parts of the transcripts meet the requirements for a seal within 60 days. View "Grae v. Corrections Corp. of Am." on Justia Law

The United States Chamber of Commerce, Business Roundtable, and the Tennessee Chamber of Commerce and Industry sued the Securities and Exchange Commission (SEC) and its Chairman, alleging that the SEC’s partial rescission of a prior regulation did not comply with the Administrative Procedure Act (APA). The regulation in question involved proxy voting advice businesses (PVABs) and their role in the proxy voting process for public companies. The plaintiffs argued that the SEC’s actions were procedurally and substantively deficient under the APA.The United States District Court for the Middle District of Tennessee granted summary judgment in favor of the SEC. The court found that the SEC’s decision to rescind certain conditions of the 2020 Rule was not arbitrary and capricious. The court also held that the SEC had provided a reasonable explanation for its change in policy and had adequately considered the economic consequences of the rescission as required by the Exchange Act. Additionally, the court determined that the 31-day comment period provided by the SEC was legally permissible under the APA.The United States Court of Appeals for the Sixth Circuit reviewed the case de novo and affirmed the district court’s decision. The Sixth Circuit held that the SEC’s 2022 Rescission was not arbitrary and capricious because the SEC had acknowledged its change in position, provided good reasons for the change, and explained why it believed the new rule struck a better policy balance. The court also found that the SEC had adequately assessed the economic implications of the rescission, relying on data from the 2020 Rule and providing a qualitative analysis of the costs and benefits. Finally, the court concluded that the 31-day comment period was sufficient to provide a meaningful opportunity for public comment, as required by the APA. View "Chamber of Commerce v. Securities and Exchange Commission" on Justia Law

The case involves a technology company, Root Inc., which sought to disrupt the traditional car insurance market. The plaintiff, Plumber’s Local 290 Pension Trust Fund, invested in Root around the time of its initial public offering (IPO). The plaintiff alleged that Root made misleading statements about its customer acquisition cost (CAC), a key performance metric. Root's CAC was lower than traditional car insurance companies, giving it a competitive advantage. However, the plaintiff claimed that Root's CAC increased after its IPO, ending its competitive advantage. The plaintiff argued that Root had a duty to update investors about its CAC because it was higher than its historical average at the time of the IPO.The case was initially heard in the United States District Court for the Southern District of Ohio, which dismissed all of the plaintiff's claims for failure to state a claim for relief. The court found that the statements made by Root were not actionable because they were based on past performance or historical data, and were not false or misleading.On appeal, the United States Court of Appeals for the Sixth Circuit affirmed the lower court's decision. The appellate court held that the plaintiff's claims sounded in fraud and thus were subject to the heightened pleading standard of Rule 9(b). The court also found that Root's statements about its CAC were not misleading. Two of the statements were protected as statements of past or historical performance, and the third was protected by the "Bespeaks Caution" doctrine, which shields companies from liability when they make forward-looking statements accompanied by meaningful cautionary language. The court concluded that Root had no duty to update its CAC because the statements were about past performance and did not predict the future. View "Kolominsky v. Root, Inc." on Justia Law

Pest-control company Terminix faced a “super termite” crisis from 2018-2019 that predominately affected homeowners in Alabama. The Fund alleged that Terminix’s parent company, ServiceMaster and its executives (Defendants), violated federal securities laws through a series of misrepresentations and omissions that understated ServiceMaster’s liability for the resulting termite-damage claims, concealed the risk of such claims from investors, and falsely touted the company’s customer-retention and growth efforts while strategically using price increases to cause affected customers to drop their service contracts in an attempt to limit future liability. The Fund claims that these actions and omissions constituted a scheme to defraud ServiceMaster’s investors by inflating the company’s reported financial results relative to its true financial condition, causing a financial loss to investors in ServiceMaster’s stock.The Sixth Circuit affirmed the dismissal of the suit. Although the Fund alleged potentially actionable misstatements and omissions, it had failed to plead a “strong inference” that the Defendants had acted with the scienter required by the Private Securities Litigation Reform Act, 109 Stat. 737. The Fund’s “allegations can be read to plausibly suggest that Defendants knew they had a problem in Alabama and then misled investors about the extent of the problem” but the opposing inference is also plausible–that the Defendants had developed what they thought was a solution to larger problems at Terminix and disclosed the existence of the Alabama problem with reasonable promptness. View "Teamsters Loc. 237 Welfare Fund v. ServiceMaster Global Holdings, Inc." on Justia Law

Following a 29% drop in Federal Home Loan Mortgage Corporation (Freddie Mac) stock prices in 2007, OPERS, a state pension fund, filed a securities fraud case against Freddie Mac. The district court dismissed, concluding that OPERS failed to adequately plead loss causation because the theory OPERS pursued (materialization of the risk) had not been adopted in the circuit. The Sixth Circuit reversed, “join[ing] our fellow circuits in recognizing the viability of alternative theories of loss causation and apply[ing] materialization of the risk.” On remand, the district court denied OPERS’ motion for class certification, granted Freddie Mac’s motion to exclude OPERS’ expert, and denied OPERS’ motion to exclude Freddie Mac’s experts.The Sixth Circuit denied OPERS’s petition for leave to appeal. OPERS asked the district court to enter “sua sponte” summary judgment for Freddie Mac, arguing that the class certification decision prevented OPERS’ case from proceeding, as it doomed OPERS’ ability to prove loss causation. The district court summarily agreed and entered summary judgment for Freddie Mac. The Sixth Circuit reversed and remanded, citing its lack of jurisdiction. The summary judgment decision was manufactured by OPERS in an apparent attempt to circumvent the requirements of Federal Rule 23(f). The decision was not final. View "Ohio Public Employees Retirement System v. Federal Home Loan Mortgage Corp." on Justia Law

Astec sold its first wood-pellet plant to Hazlehurst in 2013, providing $60 million in financing. In 2015, Astec sold its second wood-pellet plant to Highland for $152.5 million. Highland required the plant to pass a “Reliability Run” by April 2018; otherwise, Astec was to refund the purchase price. Astec did not inform its investors of this clawback provision. Both plants failed to perform. Astec CEO Brock repeatedly told investors that everything was progressing well. In 2017, Astec issued a press release that described the issues occurring at the wood-pellet plants. Brock asserted that Astec had just discovered the design flaws and still had a rosy outlook. The plants’ performance never improved. During secret negotiations with Highland, Brock reassured investors but was aware of inspection results. In 2018, Astec filed a Form 10-K, reporting the possibility that Astec would have to refund the Highland purchase price. Brock sold his Astec stock, earning $3.2 million. Days later, Astec filed its quarterly 10-Q Form, publicly disclosing Highland’s clawback provision. Brock announced Astec’s decision to “exit” the Highland plant. Astec’s stock price dropped 20%, A subsequent poor earnings report drove the stock price further down.Investors filed a securities-fraud action under the Securities Exchange Act of 1934 and Rule 10b-5 and Section 20(a) of the Exchange Act. The district court dismissed the complaint, holding that plaintiffs had not met the heightened pleading requirements of FRCP 9(b) and the Private Securities Litigation Reform Act of 1995. The Sixth Circuit reversed in part. The plaintiffs pleaded plausible claims against Astec and Brock but have abandoned or forfeited their claims against the other individual defendants. View "City of Taylor General Employees Retirement System v. Astec Industries, Inc." on Justia Law

Mohlman became a licensed securities professional in 2001. The Financial Industry Regulatory Authority, a not-for-profit member organization, regulates practice in the securities industry and enforces disciplinary actions against its members. In 2012, Mohlman had conversations with several individuals concerning WMA. Mohlman did not attempt to sell WMA investments and did not receive compensation from WMA. Mohlman learned in 2014 that WMA was a Ponzi scheme and immediately informed all persons who had invested in WMA. Mohlman appeared for testimony as part of FINRA’s investigation. Another day of testimony was scheduled but instead of appearing, Mohlman and his counsel signed a Letter of Acceptance, Waiver, and Consent, agreeing to a permanent ban from the securities industry. FINRA agreed to refrain from filing a formal complaint against him. Mohlman waived his procedural rights under FINRA’s Code of Procedure and the Securities Exchange Act, 15 U.S.C. 78a and agreed to “not take any position in any proceeding brought by or on behalf of FINRA, or to which FINRA is a party, that is inconsistent with any part of [the Letter].” FINRA accepted the Letter in 2015.In 2019, Mohlman filed suit, alleging that FINRA fraudulently avoided considering mitigating factors in administering the sanction. The Sixth Circuit affirmed the dismissal of the suit without addressing the merits. Mohlman failed to exhaust administrative remedies under the Exchange Act by appealing to the National Adjudicatory Council and petitioning the SEC for review. View "Mohlman v. Financial Industry Regulatory Authority" on Justia Law

The plaintiffs are shareholders in mutual funds. JPMIM is paid a fee for managing the Funds’ securities portfolio and researching potential investments. The plaintiffs sued under the Investment Company Act (ICA), 15 U.S.C. 80a-1, which allows mutual fund shareholders to bring a derivative suit against their fund’s investment adviser on behalf of their fund. The plaintiffs claimed that JPMIM charged excessive fees in violation of section 36(b), which imposes a fiduciary duty on advisers with respect to compensation for services.The Sixth Circuit affirmed summary judgment in favor of JPMIM. Under section 36(b), a shareholder must prove that the challenged fee “is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” The district court considered the relevant factors in making its determination: the nature, extent, and quality of the services provided by the adviser to the shareholders; the profitability of the mutual fund to the adviser; “fallout” benefits, such as indirect profits to the adviser; economies of scale achieved by the adviser as a result of growth in assets under the fund’s management and whether savings generated from the economies of scale are shared with shareholders; comparative fee structures used by other similar funds; and the level of expertise, conscientiousness, independence, and information with which the board acts. View "Campbell Family Trust v. J.P. Morgan Investment Management, Inc." on Justia Law

Olagues is a self-proclaimed stock options expert, traveling the country to file pro se claims under section 16(b) of the Securities and Exchange Act of 1934, which permits a shareholder to bring an insider trading action to disgorge “short-swing” profits that an insider obtained improperly. Any recovery goes only to the company. In one such suit, the district court granted a motion to strike Olagues’ complaint and dismiss the action, stating Olagues, as a pro se litigant, could not pursue a section 16(b) claim on behalf of TimkenSteel because he would be representing the interests of the company. The Sixth Circuit affirmed that Olagues cannot proceed pro se but remanded to give Olagues the opportunity to retain counsel and file an amended complaint with counsel. View "Olagues v. Timken" on Justia Law

From 2008-2016, Brennan and Dyer (Defendants) operated Broad Street, to incorporate Tennessee corporations (Scenic City). They claimed that once Scenic City was appropriately capitalized, Defendants would register its common stock with the SEC using Form 10, would publicly trade Scenic City, and would acquire small businesses as a legal reverse merger. Investors sent money by mail and electronic wire from other states. Defendants moved the funds through Broad Street’s bank accounts, diverting significant funds to their personal bank accounts. They issued stock certificates and mailed them to investors, but never filed Form 10 nor completed any reverse mergers. Investors lost $4,942,070.18. Defendants reported the embezzled funds as long-term capital gains, substantially reducing their personal tax liability and treated payments to themselves from Broad Street as nontaxable distributions. For 2010-2014, Dyer owed an additional $312,799 in taxes; Brennan owed $164,542. The SEC began a civil enforcement suit under 15 U.S.C. 77(q)(a)(1), 77(q)(a)(2), 77(q)(a)(3), and 78j(b), and Rule 10b-5. Defendants pleaded guilty to conspiracy to commit mail and wire fraud, 18 U.S.C. 371, 1341 and tax evasion, 26 U.S.C 7201. The court sentenced them to prison, ordered restitution ($4,942,070.18), and ordered payments for their tax evasion. The SEC sought and the court entered a disgorgement order to be offset by the restitution ordered in the criminal case. The Sixth Circuit affirmed, rejecting an argument that the disgorgement violates the Double Jeopardy Clause under the Supreme Court’s 2017 “Kokesh” holding that disgorgement, in SEC enforcement proceedings, "operates as a penalty under [28 U.S.C.] 2462.” SEC civil disgorgement is not a criminal punishment. View "United States v. Dyer" on Justia Law