SW LEGAL'S
CASE UPDATES—SECURITIES LAW
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SW LEGAL'S
CASE UPDATES—SECURITIES LAW
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Title
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Summary
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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 ) |
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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 ) |
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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 ) |
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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 ) |
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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 ) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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"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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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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