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

Plaintiff purchased auction-rate securities from defendant, a securities broker-dealer. ARS are long-term bonds whose interest rates periodically reset through auctions and typically offer higher returns than treasuries or other money market instruments. Investors can liquidate at each auction, if demand exceeds supply. If sellers outnumber buyers, the auction fails. ARS underwriters may place proprietary bids, to prevent auctions from failing. If an auction fails, there is a penalty interest rate to compensate for temporary illiquidity and entice new buyers. When plaintiff wanted to sell in 2008, neither defendant nor underwriters would place proprietary bids, leaving plaintiff with $194 million in illiquid securities. Plaintiff discounted the price by millions of dollars. The district court dismissed a suit claiming: violation of the Securities and Exchange Act of 1934 (15 U.S.C. 78j(b)), violation of Kentucky Blue Sky Laws, common-law fraud, promissory estoppel, and negligent misrepresentation. The Sixth Circuit affirmed. Many of defendant's purported misstatements and omissions are not actionable, either because they lacked materiality or because defendant had no duty to disclose them. Facts alleged in the complaint fall short of establishing scienter, as required to establish securities fraud.

Plaintiffs alleged that corporate officers committed securities fraud (15 U.S.C. 78j, 78t) by making false statements about about the corporation's financial health and controlled other persons regarding false statements by the corporation and other employees. The district court dismissed; the Sixth Circuit remanded. The district court again dismissed and the Sixth Circuit reversed. The complaint adequately alleged scienter by alleging that the defendants received internal reports and information showing financial distress, yet continually made false, positive statements regarding financial health. The court noted allegations concerning temporal proximity between false statements and corrective statements, defendants' financial motivations, the retirement of one defendant, and that the SEC investigated the company's accounting practices.

Shareholders of Abercrombie & Fitch claimed that false statements by officers and directors in 2005 caused the price of the stock to rise and fall. The company formed a special litigation committee to investigate, as permitted under Delaware law. The district court dismissed the derivative action, based on the committee's findings. The Sixth Circuit conducted de novo review and reversed. The corporation had the burden of proving that the committee was independent, carried out its investigation in good faith, and reached a reasonable conclusion. One member of the committee, a board member subsequently named as a defendant, recused himself from consideration of certain allegations, but had relationships with the accused such that partial recusal was ineffective and he could not be considered independent. The recusal also left only one member able to consider certain accusations, where the company intended a two-member committee. The remaining member was a named defendant, a member of the audit committee, and played a role in the challenged actions.