Justia U.S. 6th Circuit Court of Appeals Opinion SummariesArticles Posted in Securities Law
Harris v. TD Ameritrade, Inc.
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
Secs. & Exch. Comm’n v. Zada
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
Ansfield v. Omnicare, Inc.
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
Laborers’ Local 265 Pension Fund v. iShares Trust
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
Kuyat v. BioMimetic Therapeutics, Inc.
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
Lukas v. McPeak
Lukas owns stock in Miller, a publicly owned corporation engaged in production of oil and natural gas. In 2009, Miller announced that it had acquired the “Alaska assets,” worth $325 million for only $2.25 million. Miller announced several increases in the value of the Alaska assets over the following months, causing increases in its stock price. In 2010, Miller amended its employment agreement with its CEO (Boruff), substantially increasing his compensation and giving him stock options. The Compensation Committee (McPeak, Stivers, and Gettelfinger) recommended the amendment and the Board, composed of those four and five others, approved it. In 2011 a website published a report claiming that the Alaska assets were worth only $25 to $30 million and offset by $40 million in liabilities. In SEC filings, Miller acknowledged “errors in . . . financial statements” and “computational errors.” The stock price decreased., Lukas filed suit against Miller and its Board members, alleging: breach of fiduciary duty and disseminating materially false and misleading information; breach of fiduciary duties for failing to properly manage the company; unjust enrichment; abuse of control; gross mismanagement; and waste of corporate assets. The district court dismissed. The Sixth Circuit affirmed. Lukas brought suit without first making a demand on the Miller Board of Directors to pursue this action, as required by Tennessee law, and did not establish futility. View "Lukas v. McPeak" on Justia Law
Daley v. Mostoller
Daley opened an IRA with Merrill Lynch, rolling over $64,646 from another financial institution. He signed a contract with a "liens" provision that pledged the IRA as security for any future debts to Merrill Lynch. No such debts ever arose. Daley never withdrew money from his IRA, borrowed from it or used it as collateral. Two years later, Daley filed a Chapter 7 bankruptcy petition and sought protection for the IRAs, 11 U.S.C. 522(b)(3)(C). The trustee objected, contending that the IRA lost its exempt status when Daley signed the lien agreement. The bankruptcy court and the district court ruled in favor of the trustee. The Sixth Circuit reversed. An IRA loses its tax-exempt status if the owner "engages in any transaction prohibited by section 4975 of the tax code. There are six such transactions, including “any direct or indirect” “lending of money or other extension of credit” between the IRA and its owner, 26 U.S.C. 4975(c)(1)(B). Daley never borrowed from the IRA, and Merrill Lynch never extended credit to Daley based on the existence of the IRA. View "Daley v. Mostoller" on Justia Law
IN State Dist. Counsel v. Omnicare, Inc.
Plaintiffs are investors who purchased Omnicare securities in a 2005 public offering. They sold their securities a few weeks later and sought relief under the Securities Act of 1933,15 U.S.C. 77k, alleging that the registration statement was materially misleading. Omnicare is the nation’s largest provider of pharmaceutical care services for the elderly and other residents of long-term care facilities in the U.S. and Canada. Plaintiffs claimed that Omnicare was engaged in a variety of illegal activities including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid. The Registration Statement stated “that [Omnicare’s] therapeutic interchanges were meant to provide [patients with] . . . more efficacious and/or safer drugs than those presently being prescribed” and that its contracts with drug companies were “legally and economically valid arrangements that bring value to the healthcare system and patients that we serve.” The district court dismissed the suit against Omnicare, its officers, and directors, holding that plaintiffs had not adequately pleaded knowledge of wrongdoing. The Sixth Circuit reversed with regard to claims of material misstatements or omissions of legal compliance, but affirmed with respect to claims that revenue was substantially overstated in violation of Generally Accepted Accounting Principles. View "IN State Dist. Counsel v. Omnicare, Inc." on Justia Law
Kepley v. Lanz
The Kepleys owned 30% of ATA’s outstanding capital stock. Lanz bought one share of Series A Convertible Preferred Stock in the corporation and a right to purchase common stock. At that time, Lanz, ATA, and its shareholders entered into an agreement, prohibiting sale of restricted shares (including Lanz’s share) to ATA’s competitors. In 2010, the Kepleys learned that Lanz sought to sell his share and purchase option to Crimson, an ATA competitor, for $2,799,000. The Kepleys sued, contending that Crimson’s president told them that they could not afford the Lanz shares or litigation and that Crimson would “shut it down or squeeze them out.” The Kepleys sold their shares to Crimson. Lanz did not complete the sale of his stock and remained a shareholder in ATA, 30 percent of which Crimson then owned. The Kepleys sought the difference between the sale price and the fair market value of the shares. The district court dismissed, finding that the Kepleys lacked standing because their alleged injury amounted to diminution in stock value, suffered by the corporation, and only derivatively shared by the Kepleys. The Sixth Circuit reversed, holding that the Kepleys, who are no longer shareholders and cannot pursue derivative claims, have standing for a direct suit. View "Kepley v. Lanz" on Justia Law
Secs. & Exch. Comm’n v. Sierra Brokerage Servs, Inc.
The Securities and Exchange Commission filed a civil enforcement action against 12 defendants, alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law, in connection with a “reverse merger” that involved creation of a shell company for the purpose of OTC trading, followed my merger of a private company into the shell, with an exchange of stock. A reverse merger enables a private company to access public markets without undertaking the expensive process of an initial public offering. One of the defendants, Tsai, has formed more than 100 shell companies.The district court granted the SEC partial summary judgment and granted permanent injunctions against the defendants. Tsai appealed. The Sixth Circuit affirmed entry of the injunction. Tsai’s failure to challenge findings with respect to his industry experience and education means the court did not abuse its discretion in finding he had at least some degree of scienter. View "Secs. & Exch. Comm'n v. Sierra Brokerage Servs, Inc." on Justia Law