Securities Litigation

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In Roth v. The Goldman Sachs Group, Inc., No. 12-2509-cv, 2014 WL 305094 (2d Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit held that the short-swing profits rule imposed by Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), requiring corporate insiders (including ten-percent stockholders) to disgorge profits earned from certain purchases and sales of their company’s securities that take place within a six month period, does not apply where the purchaser was an insider when it wrote call options, but was no longer an insider by the time that the same options expired less than six months later.  This decision, which adopts the views expressed by the Securities and Exchange Commission (“SEC”) in an amicus curiae brief, also clarifies that the expiration of a call option within six months is considered a “purchase” within the meaning of Section 16(b), and that “purchase” is paired with the “sale” which is deemed to occur at the time when the option was originally written.
Continue Reading Second Circuit Affirms Dismissal of Short-Swing Profit Claim Against Goldman Sachs Arising from Six-Month Call Options

In United States v. Vilar, Case Nos. 10-521(L), 10-580(CON), 10-4639(CON), 2013 WL 4608948 (2d Cir. Aug. 30, 2013), the United States Court of Appeals for the Second Circuit held that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, do not apply to extraterritorial conduct in both the civil and criminal context.  In so holding, the Second Circuit made clear that the United States Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) [blog article here], that civil liability under Section 10(b) does not apply extraterritorially, extends to criminal conduct as well.  In light of that ruling, a criminal conviction for securities fraud can only be found if the defendant “engaged in fraud in connection with (1) a security listed on a U.S. exchange, or (2) a security purchased or sold in the United States.”  While this holding did not disturb the defendants’ convictions in this case, the ruling provides guidance for future prosecutions under Section 10(b), which now require proof of a domestic sale or listing as a necessary element for conviction.
Continue Reading Second Circuit Applies Morrison to Criminal Prosecution Under Section 10(b) and Rule 10b-5

In Trezziova v. Kohn (In re Herald, Primeo & Thema Sec. Litig.), No. 12-156-cv, 2013 U.S. App. LEXIS 19132 (2d Cir. Sept. 16, 2013), the United States Court of Appeals for the Second Circuit affirmed the dismissal of state law class action claims alleging, among other claims, that defendants had aided and abetted Bernard Madoff Investment Securities’ (“BMIS”) Ponzi scheme.  Plaintiffs were investors in the defendant investment companies and funds, which had, in turn, invested large sums of money in BMIS.  The Court held the claims were precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 78bb(f), even though plaintiffs did not actually purchase any “covered securities” under SLUSA and did not style their claims as securities fraud allegations.  The fact that plaintiffs’ allegations centered on purported sales of covered securities by BMIS was sufficient to trigger SLUSA.
Continue Reading Second Circuit Clarifies Scope of SLUSA Preclusion

In Pension Trust Fund for Operating Engineers v. Mortgage Asset Securitization Transactions, Inc., No. 12-3454, 2013 WL 5184064 (3d Cir. Sept. 17, 2013), the United States Court of Appeals for the Third Circuit joined the Seventh, Ninth and Eleventh Circuits, holding that Section 13 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77m, does not require plaintiffs asserting a claim under the 1933 Act to plead with particularity compliance with the statute of limitations.  In doing so, the Third Circuit split from the First, Eighth and Tenth Circuits, potentially triggering review by the United States Supreme Court.
Continue Reading Third Circuit Joins With the Seventh, Ninth and Eleventh Circuits in Holding That Plaintiffs Asserting 1933 Act Claims Need Not Plead Compliance With the Statute of Limitations, Splitting With the First, Eighth and Tenth Circuits

In United States v. McKye, No. 12-6108, 2013 U.S. App. LEXIS 17297 (10th Cir. Aug. 20, 2013), the United States Court of Appeals for the Tenth Circuit reversed the conviction of Brian William McKye for securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b).  The Tenth Circuit held that in a criminal action for securities fraud, the jury must be permitted to determine whether a “security” actually exists.  The Tenth Circuit held that the United States District Court for the Western District of Oklahoma erred in not leaving this issue for the jury to decide and instead giving the jury an instruction that “notes” are “securities.”
Continue Reading Tenth Circuit Finds that Jury Must Determine Whether “Notes Are Securities” in a Securities Fraud Action

In In re Trados Inc. Shareholder Litigation, Case No. 1512-VCL, 2013 Del. Ch. LEXIS (Del. Ch. Aug. 16, 2013), Vice Chancellor Laster of the Court of Chancery of the State of Delaware resolved the long-pending dispute involving the 2005 sale of Trados Inc. (“Trados”) to SDL plc for approximately $60 million. The Court held that the transaction, which benefited the preferred stockholders and certain executives of Trados but left the common stockholders with nothing, was procedurally flawed but ultimately fair to the company’s stockholders. The Court reviewed the decision of the board of directors approving the sale under the “entire fairness standard” which is the most stringent standard of review in Delaware. The decision serves as a cogent reminder to private equity and venture capital investors that they should run a proper sale process when planning a liquidity event in particular if certain constituents of the corporation will not benefit from the liquidation.Continue Reading Delaware Chancery Court Finds Merger “Entirely Fair” to Common Stockholders Despite the Merger Leaving Common Stockholders With No Consideration for Their Shares

In SEC v. Das, No. 12-2780, 2013 U.S. App. LEXIS 15327 (8th Cir. July 29, 2013), the United States Court of Appeals for the Eighth Circuit affirmed the district court’s delivery of jury instructions applying a negligence standard to alleged violations of Section 14(a) of the Securities Exchange Act of 1934 (“1934 Act”) and Securities & Exchange Commission (“SEC”) Rules 14a-9, 13b2-1 and 13b2-2. This decision indicates that it is becoming easier for corporate officers to be held liable for violations of Section 14(a), Rule 14a-9, Rule 13b2-1 and Rule 13b2-2.Continue Reading Eighth Circuit Applies Negligence Standard to SEC Enforcement Claims for Violations of Section 14(a) and Rules 14a-9, 13b2-1 and 13b2-2

The final rules for eliminating the prohibition against general solicitation and general advertising in Rule 506 and Rule 144A offerings will become effective on September 23, 2013, which is 60 days after the July 24, 2013 date they were published in the Federal Register. The rules prohibiting certain “bad actors” from participating in securities offerings conducted in reliance on Rule 506 also become effective September 23, 2013. For more information on these final rules, please see our prior blog entry here. For more information on the JOBS Act and Rule 506, please see our prior blog entry here.
Continue Reading Rules Eliminating the Prohibition on General Solicitation for Rule 506 and Rule 144A Offerings Become Effective September 23, 2013

In In re IndyMac Mortgage-Backed Securities Litigation, No. 11-2998-CV, 2013 WL 3214588 (2d Cir. June 27, 2013), the United States Court of Appeals for the Second Circuit held that the tolling rule established by the United States Supreme Court in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), which suspends the applicable statute of limitations for putative class members upon the commencement of a class action, does not apply to the three-year statute of repose contained in Section 13 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77m. The Court also held that the “relation back” doctrine of the Federal Rule of Civil Procedure 15(c) does not permit putative class members to intervene in the class action as named parties to revive claims that were previously dismissed for want of jurisdiction. This decision thus holds that litigants cannot circumvent Section 13’s statute of repose for 1933 Act claims by invoking American Pipe or Rule 15(c).
Continue Reading Second Circuit Rejects the Application of American Pipe’s Tolling Rule and Rule 15(c)’s “Relation Back” Doctrine to the Three-Year Statute of Repose for Section 11 and 12(a) Claims

In Erica P. John Fund, Inc. v. Halliburton Co., No. 12-10544, 2013 WL 1809760 (5th Cir. Apr. 30, 2013), the United States Court of Appeals for the Fifth Circuit held that a defendant in a securities fraud class action is not entitled to rebut the fraud-on-the-market presumption of reliance at the class certification stage by showing the alleged misstatement caused no market price impact. The Fifth Circuit adopted the same analysis the United States Supreme Court used in Amgen Inc. v. Connecticut Ret. Plans and Trust Funds, 133 S. Ct. 1184 (2013) [blog article here]. There, the Court held that class certification procedures afford securities fraud defendants no right to rebut the presumption through evidence showing the alleged misstatements were not material. The Fifth Circuit’s opinion now extends Amgen by further narrowing the range of rebuttal evidence a district court may consider at the class certification stage.Continue Reading Fifth Circuit Holds That Securities Fraud Defendants May Not Rebut the Fraud-on-the-Market Presumption at the Class Certification Stage Through Evidence of No Price Impact