SW Legal Educational Publishing
SW LEGAL'S CASE UPDATES—SECURITIES LAW
SW Legal's Case Updates is a SW Legal Studies service to provide briefs of the latest state and federal court cases. Review the summaries and, for cases of interest, select the case brief. If you cannot find a case of interest, return to Topic Index .
Title
Summary
No Private Right to Sue to Enforce Investment Company Act
Briefed Case
Appeals court held that the Investment Company Act may be enforced only by the Securities and Exchange Commission. The Act does not provide a right of action for a private party who claims a registered investment company failed to follow the investment strategy explained in the registration statement with the SEC.
(Updated October 2010 )
Falling Stock Price Does Not Preclude Class Action for Securities Fraud
Briefed Case
Appeals court held that the district court properly certified a class action suit for securities fraud against the managers of a company who are alleged to have stated the company was doing well despite the stock price falling constantly during the time period in question. It does not matter if the price was rising or falling if there was fraud.
(Updated October 2010 )
Broker May Be Sued for Misleading Client Due to Underlying Conflict of Interest
Briefed Case
Georgia high court held that there is a separate common law action, distinct from federal securities action, by a client against a broker, for fraud, negligent misrepresentation, and breach of fiduciary duty when a client alleges that a broker knowingly misled the client due to a conflict of interest.
(Updated April 2010 )
Federal Bankruptcy Law Does Not Bar Fraud Claims in Ponzi Scheme
Briefed Case
Idaho high court held that the victims of a Ponzi scheme had the right to sue another investor in the scheme who earned a profit. They had the right to contend that the transfer of their money by the scheme promoter to another investor was improper. The fact that the scheme operator was bankrupt does not preclude this claim.
(Updated January 2010 )
Shareholder Breached No Duty By Selling Stock After Being Provided Non-Public Information
Briefed Case
District court dismissed an SEC action against a shareholder of a private firm who was told, in confidence by the firmís CEO, of a planned public offering. As the shareholder opposed the offering, he sold his shares. That breached no duty and was not a basis for a claim of insider trading based on misappropriation of information.
(Updated November 2009 )
Investor in Mutual Fund Has No Right to Sue Over Fees Charged by Advisor to Fund
Briefed Case
Appeals court affirmed that an investor in a mutual fund had no right of action under the Investment Company Act to contend that fees paid by the fund to an investment advisor were excessive. The mutual fund would have to bring such suit.
(Updated September 2009 )
Consultants to Firms Involved in Securities Fraud May Be Liable
Briefed Case
Appeals court held that a consultant to a firm that sold securities based on SEC filings that contained material misstatements and omissions, as did later financial reports filed with the SEC, could be liable for violating the securities law the same as if he had been an employee of the firm that engaged in the fraud.
(Updated May 2009 )
Securities Fraud Claim Must Make Strong Inference of Scienter
Briefed Case
The Supreme Court held that, under the Private Securities Litigation Reform Act, plaintiffs claiming securities fraud must make a strong inference of scienter in initial pleadings for the suit to proceed. The inference must be at least as strong as the alternative inference offered by defendants.
(Updated September 2007 )
NASD Arbitrators Protected by Arbitral Immunity
Briefed Case
Appeals court held it proper to dismiss a suit by an unhappy investor who sought to overturn a NASD award against him and also held the arbitrators protected against suit for allegedly losing or destroying evidence critical to his lawsuit.
(Updated June 2007 )
Loans to Brokerage Houses Not Covered by Federal Insurance
Briefed Case
Appeals court held that investors who lent money to a Ponzi scheme run by the manager of a brokerage houses could not recover for their losses as they were lenders to the houses, not customers, under the Securities Investor Protection Act.
(Updated January 2007 )
Class Certification Denied for Failure to Show Cause-and-Effect
Briefed Case
District court refused to certify a request for class certification in a securities fraud case. The plaintiff failed to show cause-and-effect between corporate acts and changes in stock prices that would be related to the claimed losses.
(Updated October 2006 )
When Both Parties to Securities Deal Have Dirty Hands, Neither Can Win
Briefed Case
Court held that where a seller of securities deceived the buyer about the status of the company, and the buyer deceived the seller about its funds to buy the securities, the doctrine of in pari delicto would apply and neither could recover against the other.
(Updated May 2006 )
State Consumer Protection Statute Does Not Apply to Securities Industry
Briefed Case
SW Legal Virginia high court held that a suit by the state attorney general against the major securities firms for violating the state consumer protection statute should be dismissed as the statute did not cover securities transactions that are subject to detailed federal oversight.
(Updated November 2005)
Viatical Settlements Are Securities
Briefed Case
Appeals court held that financial instruments called viatical settlements, where life insurance rights are purchased by an investor prior to the death of the insured, are securities subject to federal securities regulation.
(Updated July 2005)
Federal Courts Have Exclusive Jurisdiction for Securities Misrepresentation Suits
Briefed Case
Appeals court held that an investor could not escape the federal preemption imposed by the Securities Litigation Uniform Standards Act by suing a broker under a claim of breach of contract and violation of state consumer protection laws.
(Updated July 2005)
Securities Fraud Plaintiff Must Show Causation between Misstatement and Loss
Briefed Case
Supreme Court held that there was no cause of action for securities fraud when shareholders asserted they suffered a loss because stock prices fell after bad news that was contrary to earlier statements by executives about the company's future. Reliance on misstatements and losses suffered must be shown for a cause of action to exist.
(Updated May 2005)
Sarbanes-Oxley Allows SEC to Force Extraordinary Payments to Execs into Escrow Accounts Pending Investigation
Briefed Case
Appeals court held that under Sarbanes-Oxley the SEC can intervene to request that extraordinary payments to executives may be put in escrow pending an investigation of company finances. In this case, the CEO and CFO were granted huge payments when they resigned amid an accounting scandal; the court held that to be extraordinary.
(Updated May 2005)
Suspicious Timing of Insider Sales and Release of Earnings Creates Needed Scienter
Briefed Case
Appeals court held that a suit by stockholders against a company and its executives could proceed. Stockholders showed the possibility of deliberate recklessness in the timing of earnings releases and insider trades. Since the element of scienter could be present, plaintiffs' claims may be heard.
(Updated December 2004)
Claim of Securities Fraud Must Be Brought Under Securities Statute
Briefed Case
Appeals court held that a trial court properly dismissed a claim that a company had engaged in unfair and deceptive business practices in the sale of public securities in what was claimed to be a Ponzi scheme. Such a suit must be brought under securities law; the FTC Act and its state counterpart laws do not apply to securities transactions.
(Updated April 2004)
Short-Swing Profits Earned by Insiders Must Be Disgorged
Briefed Case
Appeals court held that short-swing sales of company stock for profit by directors of a company did not violate the rule against such sales because they qualified for an exemption. The sales were approved in advance as part of the terms of a merger of companies and the directors had no discretion as to the details of the sales.
(Updated February 2004)
"Bespeaks Caution" Doctrine Applies to Prospective Statements, Not Historical Facts
Briefed Case
Appeals court held that an investor who lost money in the collapse of a firm could sue the firm and its officers for misrepresentation. While the firm's prospectus was cautionary and covered by the "bespeaks caution" doctrine, false statements about certain facts would not be protected by the doctrine and could be the basis for liability.
(Updated February 2004)
Short-Swing Sales that Profited Directors Fell within Exemption on Prohibition of Such Sales
Briefed Case
Appeals court held that short-swing sales of company stock for profit by directors of a company did not violate the rule against such sales because they qualified for an exemption. The sales were approved in advance as part of the terms of a merger of companies and the directors had no discretion as to the details of the sales.
(Updated November 2002)
Securities Regulators Do Not Have General Right of Access to Financial Records
Briefed Case
Illinois appeals court held that during a routine audit, the state securities regulators did not have the authority to demand that employees of a securities firm provide copies of their personal financial data, including personal checking account records. Unless there is suspicion of fraud, such a demand is a violation of constitutional rights.
(Updated November 2002)
No Federal Preemption for Breach of Contract Suit Against Brokerage Service
Briefed Case
Appeals court held that a suit by a brokerage firm subscriber for breach of contract could proceed in state court under state law. The suit was not preempted by the Securities Litigation Uniform Standards Act, which gives federal court jurisdiction over suits involving sales of securities. This suit involved failure to provide promised brokerage service, a matter of contract law.
(Updated April 2002)
Securities Exchanges Must Follow Their Own Rules When Disciplining Members
Briefed Case
Appeals court held that a suit filed by a securities firm against the NYSE for being expelled without a hearing may have violated NYSE self-regulation rules. However, before such a matter may be appealed to the courts, the SEC must hear an appeal of the NYSE's action.
(Updated April 2002)
Internet Stock Market Game Is Securities Fraud
Briefed Case
Appeals court held that an Internet game offering shares of stock in virtual companies earning high rates of return was the sale of unregistered securities, since the terms of the deal meet the Howey test of an investment contract. The operation was a Ponzi scheme to be halted immediately with all assets frozen.
(Updated December 1, 2001)
Higher Scienter Standard for Fraud Under Private Securities Litigation Reform Act
Briefed Case
Appeals court affirmed the dismissal of a securities fraud case brought by shareholders against a company and its executives for not having revealed certain information to investors. The suit may not proceed because it fails the stronger scienter test of the Private Securities Litigation Reform Act to show reckless misconduct.
(Updated November 1, 2001)
Nevada Securities Law Does Not Require Scienter and Reliance for Proof of Securities Fraud
Briefed Case
Nevada high court held that Nevada Securities law does not require the state securities authorities to show scienter and reliance on false or misleading information for there to be securities fraud under state law. This standard is different than the standard under the federal securities law.
(Updated October 1, 2001)
Federal Securities Law Does Not Apply to Transaction, But State Securities Law Might
Briefed Case
Appeals court held that in a case involving a loan made by an investor to a start-up company, as suggested by a stockbroker, there was no violation of federal securities law since a private loan is not a security. However, the claim of fraud involved may have violated Texas Securities Law and state common law, so the suit may proceed on that basis.
(Updated October 1, 2001)
Failure to Sell an Option for a Security Based on Oral Agreement Violates Securities Act
Briefed Case
Supreme Court affirmed a lower court holding that a company that orally promised another company an option for certain stock in exchange for services, breached the contract for sale of the securities when it failed to deliver the stock after the services were performed.
(Updated August 1, 2001)
Investor Had No Basis for Securities Fraud Suit So Court May Impose Sanctions
Briefed Case
Appeals court upheld the dismissal of a securities fraud suit brought by investor a in start-up airline that went bankrupt. The airline made proper warnings about income projections. Since the investor had no reasonable basis for the suit, the court could impose sanctions for having brought the suit.
(Updated March 1, 2001)
Overly Optimistic Earnings Projections Not Securities Fraud
Briefed Case
Appeals court affirmed dismissal of suit brought by investors in a company that saw its stock price fall after the company announced that its earlier projected earnings were too high due to a change in federal law affecting payments the company would receive. There was no evidence of intent to mislead.
(Updated September 1, 2000)
SEC May Order Permanent Bar from Securities Industry for Broker Who Churned Accounts
Briefed Case
Appeals court upheld an order of the SEC that a securities professional, who willfully and recklessly churned the accounts of clients who requested conservative portfolios, be permanently barred from the industry. The courts reverse such decisions only if there is no statutory basis for them.
(Updated August 1, 2000)
Foreign Currency Trading Pools Meet Howey Test for SEC Regulation
Briefed Case
Appeals court upheld an injunction issued by a federal judge at the request of the SEC to prevent further operation of a foreign currency trading pool run out of Florida, with trades executed in the Bahamas. The operation met the criteria of the Howey test, so there was a security in the trading pool subject to SEC regulation.
(Updated June 1, 2000)
Uniform Securities Act Gives Federal Courts Jurisdiction Over Suits Against Brokers
Briefed Case
Federal trial court held that it had exclusive jurisdiction in a suit brought by an investor against a broker for alleged misrepresentations in the trading of securities. The court held that the Uniform Securities Act preempts state law on matters regarding the purchase and sale of securities.
(Updated April 1, 2000)
Evidence of Fraud, Not Bad Motives, Needed to Prove Securities Fraud
Briefed Case
Appeals court dismissed a securities fraud suit based on assertions that the officers of a company had the motive and opportunity to engage in securities fraud. Such evidence may be useful in a showing of securities fraud, but are not enough to establish fraud under the Securities Litigation Reform Act of 1995.
(Updated February 1, 2000)
Misstatements in Registration Statement May Be Cited by Later Stock Buyers
Briefed Case
Appeals court held that buyers of stock in the aftermarket may sue the promoters for misstatements and omissions in the offering statement. The purchasers are protected by Section 11 of the Securities Act of 1933, which does not only apply to buyers of the initial public offering.
(Updated December 1, 1999)
Blue Sky Laws That Effectively Quash Securities Offering Do Not Violate Commerce Clause
Briefed Case
Appeals court upheld constitutionality of New Jersey securities regulation that effectively killed an initial public offering that was exempt from federal registration requirements. Court held that the state had a valid interest in protecting securities coming from the state.
(Updated May 1, 1999)
ADR Owner Cannot Bring Shareholder Derivative Suit
Briefed Case
Appeals court affirmed district court decision to dismiss shareholder derivative suit brought by owner of ADRs (American Depository Receipts) in Honda, a Japenese company. Under the Japenese law that governs, ADR owners are not shareholder and may not bring derivative suits against company officials.
(Updated May 1, 1999)
Proxy Rules Do Not Allow Management to Bundle Major Proposals into One Vote
Briefed Case
Corporate proxy vote that bundled three major proposals into one voting item was held to violate SEC anti-bundling rules. Shareholder objection to the proposal bundling by management may proceed.
(Updated April 1, 1999)
Stock Appreciation Rights Are Not Securities
Briefed Case
Claim that exercise of cash appreciation of Stock Appreciation Rights involved insider trading and securities fraud rejected for lack of evidence of fraud and because the Rights are not securities.
(Updated January 1, 1999)
LLC Membership Interests May Be Securities
Briefed Case
Arizona appeals court upheld determination of state regulators that LLC membership interests in complex network of LLCs tied together by managerial control contact were securities as investors were passive and had no effective control of managers.
(Updated January 1, 1999)
Brokers Should Reveal Excessive Markups on Municipal Bonds
Briefed Case
Investors' suit against Merrill Lynch for non-disclosed excessive markups on municipal bonds allowed to go forward. While securities laws provide less protection in that market than in other securities markets, brokers have implied duty to disclose excessive markups.
(Updated October 19, 1998)
Disgorgement Order for Securities Fraud Not Discharged by Bankruptcy
Briefed Case
Appeals court rejected arguments that securities fraud is not common law fraud so that the disgorgement debt owed from a securities violation could be discharged in bankruptcy.
(Updated October 19, 1998)
Stock Trading by Insider in Possession of Inside Information Not Per Se Illegal
Briefed Case
Appeals court held that it is for the jury to determine if there was causation when insiders base stock trades upon material, nonpublic information.
(Updated May 29, 1998)
NASD Code Allows Arbitration of Claim of RICO Violation If Filed in Time
Briefed Case
Investors filed arbitration claim against Kidder for RICO violations. Kidder sued in federal court to block arbitration, claiming some events occurred outside the six-year window for eligibility for arbitration. Appeals court held that the arbitration would proceed if the court found that the event which gives rise to a claim occurred within the six-year window.
(Updated 1-16-97)
Quaker Oats May Have Breached Duty to Shareholders During Snapple Acquisition
Briefed Case
Court of Appeals reinstated shareholder suit against Quaker Oats that stems from its purchase of Snapple, which caused Quaker stock to fall. Prior to purchase, Quaker had make optimistic statements about its debt position and earnings position that were wiped out by the purchase.
(Updated 12-29-97)
Bad Securities Are Not Goods (or Services)
Briefed Case
Investors time barred from bringing a federal or state securities fraud suit may not seek relief under the Pennsylvania consumer protection law which, like the Federal Trade Commission Act, applies to consumer goods and services, which do not include investment securities.
(Updated 11-14-97)
No Deep Pockets to Bail Out Losing Stock Owners
Briefed Case
Accounting firm allowed dubious, but acceptable, financial calculations to be used in audit statements of public firms. When company collapsed, stockholders sued accounting firm. Appeals court held there was no proof of causation between the accounting statements and the losses investors incurred, so no securities fraud.
(Updated 10-3-97)
Merger Mania Statements Fuel Investments But Are Not Actionable As Fraudulent
Briefed Case
Court of Appeals upholds finding that forward-looking, vaguely optimistic statements regarding mergers are not actionable under securities law fraud statutes when defendant provided risk disclosures and other statements in SEC filings warning about stock price fluctuations.
(Updated September 12, 1997)

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