Articles Posted in Securities Law

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Plaintiffs, who purchased EveryWare securities in 2013-2014, alleged a “pump and dump” scheme by EveryWare’s principal shareholders and officers to inflate the price of EveryWare shares and then sell their EveryWare shares before prices plummeted. They claim that EveryWare’s CEO released EveryWare’s financial projections for 2013, despite actually knowing those projections to be false and misleading and, months later, told investors, with the intent to deceive, manipulate, or defraud, that EveryWare was on track to meet its projections and that when EveryWare offered a portion of its shares to investors in September 2013, and submitted a registration statement and a prospectus in connection with that offering, EveryWare’s underwriters and directors signed documents, incorporating EveryWare’s financial projections and failing to disclose material downward trends in the business. The Sixth Circuit affirmed dismissal of plaintiffs’ claims under the Securities Exchange Act of 1934 and the Securities Act of 1933. The Exchange Act claims failed because plaintiffs did not allege particularized facts giving rise to a strong inference that defendants acted with the requisite scienter; the Securities Act claims failed because plaintiffs did not allege any well-pleaded material statement or omission in the registration statement or the prospectus. View "IBEW Local No. 58 Annuity Fund v. EveryWare Global, Inc." on Justia Law

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Ohio Public Employees Retirement System (OPERS) filed a class action suit alleging securities fraud against Federal Home Loan Mortgage Corporation (Freddie Mac), a government sponsored entity chartered by Congress that operates in the secondary mortgage market. OPERS alleged that Freddie Mac concealed its overextension in the nontraditional mortgage market (subprime mortgages or low credit and high-risk instruments) and its materially deficient underwriting, risk management, and fraud detection practices through misstatements and omissions to investors. OPERS claimed that the fund suffered foreseeable losses triggered when the risk that had been concealed materialized. The district court dismissed, concluding that OPERS failed to show loss causation. The Sixth Circuit reversed. Considering “the relationship between the risks allegedly concealed and the risks that subsequently materialized,” as well as the close correlation between the alleged revelation or materialization of the risk and the immediate fall in stock price, the court concluded that OPERS had alleged sufficient facts to support a plausible claim. View "Oh. Pub. Employees Ret. Sys. v. Fed. Home Loan Mortgage Corp." on Justia Law

Posted in: Securities Law

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In October 2012, and again a year later, General Cable announced that it would reissue several public financial statements because they included material accounting errors. Soon after, City of Livonia Employees’ Retirement System initiated a class-action suit against General Cable, under the 1934 Securities Exchange Act, 15 U.S.C. 78j(b), 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5. Livonia asserted that defendants acted at least recklessly in issuing or approving materially false public financial statements. The defendants countered that the misstatements resulted from accounting errors and a theft scheme in its Brazilian operations of which the defendants were unaware and that they promptly sought to remediate upon discovering them. The district court dismissed Livonia’s complaint with prejudice because it failed to plead scienter adequately. The Sixth Circuit affirmed. Seven factors favored rejecting a scienter inference. Livonia cited no facts with sufficient particularity implicating suspicious insider trading or failure to disclose impending stock sales. View "Doshi v. General Cable Corp." on Justia Law

Posted in: Securities Law

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When the five investment funds at issue lost nearly 90 percent of their value in 2007-2008, investors lost large sums. Various plaintiffs (investors) initially filed claims with the Financial Industry Regulatory Authority, participated in arbitration, or filed state suits. In 2013, they filed suit under the Securities Act of 1933, 15 U.S.C. 77k, 77l, and 77o, the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and 78t(a), and SEC Rule 10b-5. They alleged that the funds were overvalued and concentrated in risky securities and that investors relied on misrepresentations in purchasing the funds. The district court initially granted class certification, but dismissed the claims as barred by the statutes of limitations. The Sixth Circuit affirmed, holding that the suits were barred by the applicable statutes of repose. The court declined to “toll” those statutes View "Stein v. Regions Morgan Keegan Select High Income Fund, Inc." on Justia Law

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Internal Revenue Code section 1256 provides that an investor who holds certain derivatives at the close of the taxable year must “mark to market” by treating those derivatives as having been sold for fair market value on the last business day of the taxable year. A “foreign currency contract” is a “section 1256 contract” that an investor must mark to market. Contending that a foreign currency option is within the definition of “foreign currency contract," the Wrights claimed a large tax loss by marking to market a euro put option upon their assignment of the option to a charity. The Wrights’ assignment of the option was part of a series of transfers of mutually offsetting foreign currency options that they executed over three days. These transactions apparently allowed the Wrights to generate a large tax loss at minimal economic risk or out-of-pocket expense. The Tax Court held that the Wrights could not recognize a loss upon assignment of the euro put option because the option was not a “foreign currency contract” under section 1256. The Sixth Circuit reversed. While disallowance of the claimed tax loss makes sense as tax policy, the statute's plain language clearly provides that a foreign currency option can be a “foreign currency contract.” View "Wright v. Comm'r of Internal Revenue" on Justia Law

Posted in: Securities Law, Tax Law

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In 2005, the Harrises bought tens of thousands of shares in Bancorp through a TD Ameritrade account. Six years later, the Harrises sought to hold some of their Bancorp stock in another form, registered in their name and reflected in a physical copy of a certificate signifying their ownership. TD Ameritrade refused to convert the Harrises’ form of ownership, stating that all Bancorp stock was in a “global lock,” prohibiting activity in the stock, including changing the Harrises’ form of ownership. The lock was created because someone had fraudulently created hundreds of millions of invalid shares of Bancorp stock. The Harrises sued, alleging that TD Ameritrade had violated SEC Rule 15c3-3 and Nebraska’s version of the Uniform Commercial Code. The Sixth Circuit affirmed dismissal.. Neither the SEC Rule nor Nebraska’s Commercial Code creates a private right of action to vindicate the alleged problem. View "Harris v. TD Ameritrade, Inc." on Justia Law

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Zada sold fake investments in Saudi Arabian oil, raising about $60 million from investors in Michigan and Florida. Zada gave investors promissory notes that, on their face, say nothing about oil-investment. They say that Zada will pay a principal amount plus interest (at rates far lower than Zada had promised). Zada stated that the notes were necessary only to ensure that investors would be repaid by Zada’s family if something happened to him. Little of what Zada said was true. Zada paid actors to pose as a Saudi royalty. Zada never bought any oil; he used investors’ money to pay his personal expenses. When Zada paid investors anything, he used money raised from other victims. The SEC discovered Zada’s scheme and filed a civil enforcement action, alleging violation of the Securities Act of 1933 and the Securities Exchange Act of 1934, 15 U.S.C. 77. The district court granted the SEC summary judgment, ordering Zada to pay $56 million in damages and a civil penalty of $56 million more. The Sixth Circuit affirmed, rejecting arguments that the investments were not securities and that the civil penalty improperly punishes him for invoking his Fifth Amendment privilege against self-incrimination. View "Secs. & Exch. Comm'n v. Zada" on Justia Law

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KBC Asset Management sued Omnicare (a pharmaceutical company) and affiliated individuals, on behalf of Ansfield and other similarly situated shareholders, alleging that the defendants had committed securities fraud in violation of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and 78t(a), and Securities and Exchange Commission (SEC) Rule 10b-5. KBC charged the defendants with making various material misrepresentations and omissions between January 10, 2007 and August 5, 2010 in public and in SEC filings regarding Omnicare’s compliance with Medicare and Medicaid regulations. The district court dismissed. The Sixth Circuit affirmed, based on the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4, which created heightened pleading standards for securities-fraud cases and requires that plaintiffs identify each misleading or false statement and explain how it is misleading. Plaintiffs also must “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind.” KCB did not meet those requirements. View "Ansfield v. Omnicare, Inc." on Justia Law

Posted in: Securities Law

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Securities lending is a common practice: securities are temporarily transferred by the lender to a borrower, who is obliged to return the securities, either on demand, or at the end of any agreed term. For the period of the loan the lender is secured by acceptable collateral (in the U.S., often cash) valued at 102% [to] 105% of the market value of the loaned securities. The borrower may be motivated by desire to cover a short position, to sell the borrowed securities in hopes of buying them back at a lower price before returning them, or to gain tax advantages associated with the temporary transfer of ownership. The plaintiffs are pension funds that are shareholders in exchange-traded funds issued by iShares. iShares, as part of its mutual-fund operations, lends its securities holdings to various borrowers to generate substantial revenue. BTC, a related company, serves as iShares’s middleman between iShares and those who seek to borrow iShares’s securities and receives 35% of all securities-lending net revenue. BFA, another related company, is the investment adviser for iShares and manages its portfolios for a separate fee. Plaintiffs alleged that BFA and BTC violated the Investment Company Act, 15 U.S.C. 80a-35(a), (b), by charging an excessive lending fee because the fee charged by BTC bears no relationship to actual services rendered. The district court dismissed. The Sixth Circuit affirmed, finding that the Act does not create a private cause of action. View "Laborers' Local 265 Pension Fund v. iShares Trust" on Justia Law

Posted in: Securities Law

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Investors filed a securities fraud action, claiming that BioMimetic misled them about Augment Bone Graft’s prospects for FDA approval. The product is designed to encourage bone growth in patients that undergo foot and ankle surgeries without the need to harvest and transplant tissue. They claim that the FDA privately communicated to BioMimetic that the FDA expected the device’s clinical trials to prove that Augment was effective based on an analysis of all study participants. The clinical trials did not achieve those results. But if BioMimetic removed from the analysis study participants that did not actually receive treatment, the data did indicate that the device was effective. Based on these two analyses, BioMimetic expressed optimism about Augment’s chances for approval to investors. The investors claim that those statements were misleading because BioMimetic did not tell them everything it knew about the FDA’s expectations, particularly the FDA’s desire for the trials to show that the device was effective based on an analysis of the entire study population. The district court dismissed, The Sixth Circuit affirmed. The complaint did not plead a strong enough inference of scienter. BioMimetic could legitimately have believed that the statistically significant results it achieved based on an analysis of the population would be sufficient to obtain approval. View "Kuyat v. BioMimetic Therapeutics, Inc." on Justia Law