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Second Circuit Affirms Acquittal of NYSE Trader Finnerty of Interpositioning Charges
U.S. v. Finnerty
No. 07-1104-cr,
U.S. Court of Appeals for the Second Circuit, 07/18/2008
Holding: The U.S. Court of Appeals affirmed a district court's acquittal of New York Stock Exchange ("NYSE") floor trader David Finnerty, who was accused of committing interpositioning. The government had argued at trial that Finnerty committed securities fraud by engaging in interpositioning, or improperly stepping in between public buy and sell orders and trading for his own or firm's gain on the difference between the bid and ask prices. Prosecutors said such conduct resulted in illegal profits to his dealer account of approximately $4.5 million. But the U.S. District Court for the Southern District of New York rejected the government's argument, holding that the prosecution failed to prove that Finnerty’s customers were misled, defrauded or otherwise deceived. On appeal, the Second Circuit agreed with the district court's finding, ruling that government’s evidence showed Finnerty knew he had broken NYSE rules and tried to cover it up, but that did not mean he committed criminal fraud. More...
NY District Court Rejects Pension Fund's Bid to Gain Class Rep Status, But Certifies Backdated Stock Option Class Suit Versus Monster Worldwide
In Re Monster Worldwide Inc. Securities Litigation
No. 07 Civ. 2237,
U.S. District Court for the Southern District of New York, 07/15/2008
Holding: In this backdated stock option fraud suit against employment web site parent company Monster Worldwide, Inc., the U.S. District Court for the Southern District of New York denied the motion of Steamship Trade Association-International Longshoremen’s Association Pension Fund to be accorded class representative status for failure to meet the requirements of the law. According to the district court, the basic requirement for appointment as class representative was that the representative must have an awareness of the "basic facts underlying the lawsuit" and be unlikely to "abdicate his obligations to fellow class members." Here, the pension fund's co-chairman Horace Alston failed to meet that standard when he displayed barely any knowledge of the action at deposition. The district court was thus prompted to conclude that the pension fund could not remotely be relied upon to protect the interests of the class against the possibly competing interests of the attorneys. No such inadequacy was apparent, however, in the case of the other lead plaintiff, Middlesex County Retirement System, which was therefore approved as class representative. The district court likewise granted the plaintiffs' motion for class certification, stating that defendant Monster provided no direct evidence that any putative class member actually knew about option backdating at Monster before the scandal became public. More...
CA District Court Issues Summary Judgment to SEC, Imposes Sanctions Against Indigenous Global and Its CEO
SEC v. Indigenous Global Development Corporation, et al.
Civil Action No. C-06-5600-JCS,
U.S. District Court for the Northern District of California, 06/30/2008
Holding: The U.S. District Court for the Northern District of California of California issued a summary judgment against Indigenous Global Development Corporation (“IDGC”) and its former Chairman and CEO on claims that they misled investors about the company's expected revenues and its sources of financing. Specifically, the order found IGDC and Deni G. Leonard liable for fraud in connection with the purchase and sale of IGDC securities. According to the district court, undisputed evidence established that Leonard and IGDC made a series of statements, in press releases and SEC filings, about various natural gas purchases and financing deals. Because they were made in press releases and filings with the Securities and Exchange Commission (“SEC”), they satisfied the requirement that the statements must be made in connection with the purchase and sale of securities. On the basis of these findings, the district court enjoined Leonard from violations of securities laws; required him to pay disgorgement of $249,793.68 (representing the proceeds from his sales of IGDC stock to the public during the course of his fraud) plus prejudgment interest of $37,586.84; imposed a monetary penalty of $249,793.68; prohibited Leonard from serving as an officer or director of any public company; and also prohibited Leonard from involvement in the offering of any penny stock. More...
Second Circuit: Securities Class Suit Failed to Plead Corporate Scienter Against Dynex and Merit
Local 445 Freight Division Pension Fund v. Dynex Capital Inc., et al.
No. 06-2902-cv,
U.S. Court of Appeals for the Second Circuit, 06/26/2008
Holding: In this appeal, the U.S. Court of Appeals for the Second Circuit overturned a district court's ruling that plaintiff-appellee Local 445 Freight Division Pension Fund was able to adequately plead scienter in its securities fraud complaint. The district court earlier dismissed fraud charges against top officers of financial services companies Dynex Capital, Inc. ("Dynex") and Merit Securities Corp. ("Merit"), but found that a strong inference of scienter was demonstrated against these corporate defendants-appellants. On appeal, the Second Circuit rejected the notion that a failure to show scienter on the part of individual officers should likewise give rise to a finding of no-scienter against corporate defendants in a securities case. Congress has imposed strict requirements on securities fraud pleading, but the Second Circuit did not believe they have imposed the rule that in no case can corporate scienter be pleaded in the absence of successfully pleading scienter as to an expressly named officer. Nonetheless, the Second Circuit ruled in favor of Dynex and Merit, stating that plaintiffs-appellees failed to allege the existence of misleading information given out to investors, and the existence as well of a motive to mislead. The Second Circuit thus remanded the case with instructions to dismiss as to Dynex and Merit with leave to replead. More...
Ninth Circuit Finds Director of Fidelity National Traded on Confidential Information about Planned Buy-out
Securities and Exchange Commission v. J. Thomas Talbot
No. 06-55561,
U.S. Court of Appeals for the Ninth Circuit, 06/30/2008
Holding: The Ninth Circuit ruled that defendant-appellee J. Thomas Talbot, a member of the Board of Directors ("Board") of Fidelity National Financial, Inc. ("Fidelity"), traded on confidential information about the impending acquisition of LendingTree, Inc. ("LendingTree"), a company where Fidelity holds a 10 percent interest. Talbot bought and sold LendingTree stocks after being informed during a Board meeting about such acquisition. In this regard, he misappropriated information from Fidelity, a source to which he owed a fiduciary duty arising from a relationship of trust and confidence by virtue of his position on its Board. Fidelity was the rightful owner of the information that was both nonpublic and confidential. This conduct, assuming the information on which Talbot traded was material, fell squarely within the range of conduct the Supreme Court contemplated in a previous case. But the Ninth Circuit could not say that the district court clearly erred in determining that the information on which Talbot traded was not material as a matter of law, given the genuine issues of material fact, particularly as to what information was actually conveyed to the Board. On this basis, the Ninth Circuit remanded the case for further proceedings. More...
Securities Law Commentaries
Following are Securities Law Commentaries elaborating on the significance of the most important of the Securities Law Summaries.
Jones v. Harris Associates: The Market (Not the Courts) Should Set Fund Advisor Fees
Jerry N. Jones v. Harris Associates, L.P.
Posted: 07/16/2008
Commentary: Jerry N. Jones v. Harris Associates, 527 F.3d 627 (7th Cir. 2008), was one of about a dozen cases brought in 2003 and early 2004 based on the “excessive fee” provisions of the Investment Company Act of 1940. In the case, a group of individual investors claimed that Harris Associates, manager of the Oakmark funds, charged excessive fees to individual investors in violation of the Act. The Seventh Circuit Court of Appeals affirmed the lower court’s judgment dismissing the claims against Harris Associates, holding that the market, not the judiciary, should determine manager fees. The mutual fund industry celebrates the decision, which will likely make it harder for investors to challenge funds’ investment-advisory fees as excessive. More...
Related summary: Circuit Court Turns Down Appeal against Harris Associates, Refusing to Put a Cap on Mutual Fund Advisory Fees
Seventh Circuit Looks at Corporate Scienter and Scheme Liability Rules in Pugh v. Tribune Co.
Pugh, et al. v. Tribune Company, et al.
Posted: 05/21/2008
Commentary: At the heart of these two consolidated cases is the clear, admitted, egregious fraud perpetrated by employees of a subsidiary of the Tribune Company. The plaintiffs in both cases (a securities case and an ERISA case) tried to extend liability for those fraudulent acts up through the corporate ranks of the Tribune Company, arguing that higher-ups knew or should have known of the fraud while it was happening. Unfortunately for the plaintiffs, their allegations were based primarily on conclusory statements, speculative inferences and tenuous links. Their cases were dismissed with prejudice early in the litigation, and the 7th Circuit affirmed those dismissals, as discussed below. There has been, and still is, a split among jurisdictions as to the proper standard for proving corporate scienter for purposes of corporate liability under Section 10(b) of the 1934 Act. In Pugh, the 7th Circuit dismisses the collective scienter approach relied upon by a minority of courts and applies the more traditional, majority rule requiring individual scienter by officials who contributed to the public statements at issue in some meaningful way. Also, notably, in Pugh, the 7th Circuit became the first federal court to apply the U.S. Supreme Court’s ruling regarding scheme liability in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 128 S.Ct. 761 (2008). More...
Related summary: Seventh Circuit Dismisses Circulation Fraud Suit Filed Against Tribune Co.
When Sales of Interest in a Venture Equal Sales of Securities under Federal Law: Consolidated Case
Consolidated Management Group, LLC., et al. v. Department of Corporations
Posted: 05/19/2008
Commentary: The analysis and conclusions reached by the California appellate court in Consolidated Management Group v. Dept. of Corporations, ___ Cal. Rptr. 3d___, 2008 WL 1850310 (Cal. App. 1st 2008), are not necessarily new. But rarely has an opinion so thoroughly and effectively laid out the prevailing law and its application. In Consolidated, the California appellate court analyzes two issues: 1) whether federal law preempts the California Department of Corporations’ authority to issue a desist and refrain order against the appellants, and 2) whether the interests being sold by the appellants were “securities” for purposes of being covered by the applicable laws. More...
Related summary: CA Appellate Court Rules Against Consolidated, Upholds Desist Order
Laperriere v. Vesta Insurance Case Defines the Scope of Controlling Party Liability
Kittie Laperriere, et al. v. Vesta Insurance Group, Inc., et al.
Posted: 05/19/2008
Commentary: In the precedent-setting case of Laperriere et al v. Vesta Ins. Group, et al, ____ F.3d ____, 2008 WL 1883482 (11th Cir. 2008), the 11th Circuit harmonized the proportionate liability scheme of the Private Securities Litigation Reform Act of 1995 (PSLRA) with the provisions of the Securities Exchange Act of 1934 (the “Act”) that provide for derivative liability of controlling persons. In this case of first impression, the Vesta court set forth a test for litigants and courts to apply to determine whether a controlling person has any liability for the acts of someone he controls, and, if so, whether proportionate or joint and several liability should apply. More...
Related summary: 11th Cir. Clarifies Parent Cos.’ Liability under the PSLRA in Vesta Insurance Case
Magnolia Capital Advisors v. Bear Sterns Teaches How to Make A Colorable Denial of An Agreement to Arbitrate
Magnolia Capital Advisors, Inc. v. Bear Sterns & Co. and Bear Stearns Securities Corp.
Posted: 05/14/2008
Commentary: In the case Magnolia Capital Advisors Inc. v. Bear Stearns, the 11th Circuit Court reversed a decision of the Northern District of Florida to order the parties to arbitration pursuant to their purported agreement. The 11th Circuit found that Magnolia had met the requirements set forth by court precedent and 9 USC § 4 to challenge the enforcement of the arbitration agreement, thus compelling the district court to hold a trial on the issue of the agreement’s enforceability before compelling arbitration. Because the district court failed to hold such a trial, the 11th Circuit reversed the district court’s decision and remanded the case for that trial. The requirements to challenge the enforcement of an arbitration agreement and compel a trial under 9 USC § 4 are not new. However, there have not been that many reported cases where a plaintiff has actually succeeded in meeting those requirements. The Magnolia case is instructive, therefore, in demonstrating the type of evidence a plaintiff can submit to make a “colorable denial” of the arbitration agreement. More...
Related summary: Circuit Court Remands Bear Stearns Fraud Case for Trial
