A recent First Circuit decision raises the pleading bar for plaintiffs asserting violations of Section 11 of the Securities Act. Only would-be plaintiffs who acquired a security that is the direct subject of a prospectus and registration statement are entitled to sue under Section 11. That right to sue is limited to plaintiffs who either purchased their shares directly in the offering, or who otherwise can trace their shares back to the relevant offering. This has been referred to as the “traceability” requirement. Until now, Section 11 plaintiffs have generally sought to establish standing by pleading a simple statement to the effect that they “purchased shares of stock pursuant and/or traceable to the offering.” For companies whose stock is all traceable to a single offering, this pleading burden presents little burden, as all shares self-evidently derive from the offering. But when stock has been issued in multiple offerings, a plaintiff has to plead that his or her shares were issued under the allegedly false or misleading registration statement, and not some other registration statement.
Every year at around this time, the Mintz Levin securities lawyers are busy collaborating with our December fiscal year-end clients to prepare for the annual year-end reporting season, involving a flurry of 10-Ks, proxy statements, governance review and upkeep, and related matters. Pam Greene and I have worked together for several years now (more than we would care to admit!) on what we fondly refer to as the “year-end kickoff memo,” which you can find here. Each year, we focus on a combination of new developments, reminders of things to keep in mind, and anticipated “hot topics” from the perspective of regulators, shareholders and companies themselves. We are pleased this year to have some terrific contributions to the memo from our partner Bret Leone-Quick, who focuses on securities litigation and related governance issues. We welcome your questions on the memo and look forward to working with all of you on this important annual process.
By Chip Phinney and Geoff Friedman
As we have discussed before, the SEC’s increased use of in-house administrative proceedings in enforcement actions involving allegations of fraud has been a subject of considerable debate. Commentators have questioned the fairness of proceedings where the SEC gains an automatic home field advantage by bringing claims before its own administrative law judges (ALJs), with appeals being heard by the SEC’s own commissioners. But a determined defense can still defeat the SEC by ensuring that it plays by the rules, as demonstrated by a decision issued last week by the U.S. Court of Appeals for First Circuit in a case where Mintz Levin attorneys Jack Sylvia, Andy Nathanson, Jess Sergi, McKenzie Webster, and Geoff Friedman represented one of the petitioners.
The First Circuit vindicated two former employees of State Street Global Advisors (SSgA) who had been targeted by the SEC for alleged securities violations during the 2007 subprime mortgage crisis. Despite applying the highly deferential “substantial evidence” standard of review for agency factfinding, the First Circuit concluded that the SEC abused its discretion in holding Mintz Levin’s client, former SSgA Vice President James Hopkins, liable under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The First Circuit also vacated the Commission’s order holding Mr. Hopkins’ co-defendant, SSgA CIO John Flannery, liable under Section 17(a)(3) of the Securities Act.
Continue Reading First Circuit Overturns SEC Commissioners’ Sanctions Order
This summer the SEC has been aggressively pursuing claims against developers and others involved in the EB-5 Immigrant Investor Program, which permits foreign citizens to apply for U.S. residency if they make a qualified investment in a specified project that creates or preserves at least 10 jobs for U.S. workers. The latest example is a securities fraud suit by the SEC against Lobsang Dargey, a Bellevue, Washington-based real estate developer, who also happens to be a brother-in-law of tennis star Andre Agassi. According to the SEC, Dargey and his companies obtained investments from 250 Chinese investors under the auspices of the EB-5 program, misled those investors about their prospects for obtaining permanent residency, and diverted millions of dollars from their investments for unrelated projects and Dargey’s personal use, including a home purchase and cash withdrawals at casinos. Adam Sisitsky and Doug Hauer analyze the case in depth in this post for our sister blog, EB-5 Financing Matters.
The Dargey case is just the latest in a series of recent actions brought by the SEC involving the EB-5 Program. Other recent examples include SEC v. Luca International Group, LLC , which charged the defendants with defrauding Chinese investors in their oil and gas ventures under the EB-5 program, and In re Ireeco, where the SEC charged two companies with securities laws violations for failing to register as brokers in connection with advising foreign citizens about potential EB-5 investments. To learn more about these cases check out the posts on EB-5 Financing Matters here and here.
Mintz Levin’s Institutional Investor Class Action Recovery practice recently launched a new blog: Class Action Recovery for Mutual Funds. This new blog will report on various happenings in class action cases that may not be covered in other securities litigation blogs or publications, and that will be of special interest to institutional investors. With the claims process itself becoming more adversarial, the blog will follow developments in the administration of claims, including ways in which defendants may be participating in the claims process with the intent to reduce valid claims Additionally, the blog will cover interesting developments in securities class action cases, such as noteworthy objections, motions and opt-outs, as well as new developments in non-U.S. securities actions that will be of interest to those seeking to recover in foreign jurisdictions against non-U.S. issuers.
Written by Chip Phinney and Josh Browning
Last week, the Massachusetts Supreme Judicial Court (SJC) handed down Hays v. Ellrich, a decision with important implications for the investor advising community. The case is significant for two reasons. First, even though the defendant advisor did not earn a commission or any other direct compensation for the plaintiff’s investment in a hedge fund, the SJC held the advisor liable as a “seller” under the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 410(a)(2). Second, despite extensive risk factor language in the hedge fund prospectus and many other “storm warnings,” the SJC held that the statute of limitations on the plaintiff’s Massachusetts Securities Act claim was not triggered until she had actual knowledge that this investment was unsuitable for her. Continue Reading Massachusetts Supreme Judicial Court Takes Expansive View of Investment Advisor’s Liability Under Blue Sky Law in Hays v. Ellrich
In its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, released yesterday, the U.S. Supreme Court held that a securities issuer’s statement of opinion in a registration statement, even though sincerely believed, may still give rise to liability under Section 11 of the Securities Act of 1933 if it omits material conflicting facts about the issuer’s basis for the opinion that render it misleading: “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” The decision marks a significant departure from previous decisions by the U.S. Courts of Appeals for the Second and Ninth Circuits, which held that to maintain a Section 11 claim concerning a statement of opinion, a plaintiff must plead and prove that the issuer did not believe the statement of opinion at the time it was made. But it does not go so far as the Sixth Circuit’s underlying Omnicare opinion in the same case, which held that under Section 11 a plaintiff need only allege that a statement of opinion ultimately proved to be incorrect, regardless of the issuer’s knowledge at the time it was made. In the wake of the Supreme Court’s Omnicare decision, issuers and their counsel will have to pay close attention to statements of opinion in registration statements and carefully consider whether they have provided sufficient factual disclosure relating to any such statements. Continue Reading Supreme Court Holds That Issuers Can Be Liable for Omitting Material Facts From Statements of Opinion in Omnicare Case
An increasingly popular hedge fund strategy, commonly referred to as “appraisal arbitrage,” recently received a significant boost from the Delaware Court of Chancery. Appraisal arbitrage refers to the practice of buying shares in a target corporation following announcement of a buyout transaction, and seeking value above the buyout price through the appraisal process. In In Re Appraisal of Ancestry.com, Inc. (January 5, 2015), the Court found that a beneficial owner had standing to seek appraisal in respect of an acquisition even though it had purchased its shares in the open market after the record date for the stockholder vote and was unable to show that its shares were not voted in favor of the transaction. In denying Ancestry’s motion for summary judgment, the Court reasoned that the record holder of the shares (here Cede & Co.) only needed to show that enough shares were not voted in favor of the acquisition to cover the number of shares for which it demanded appraisal. Once this hurdle is met, a beneficial owner of such shares (here Merion) does not need to show that its specific shares were among those not voted in favor of the acquisition in order to file the appraisal petition. Thus Merion had standing to pursue appraisal. As money continues to flow toward this strategy, it may result in more appraisal petitions and increased closing risk, as well as erosion of shareholder value in public M&A.
Written by Brian P. Keane
In a groundbreaking decision, the United States Court of Appeals for the Second Circuit has reversed the 2013 insider trading convictions of Todd Newman and Anthony Chiasson. The decision in United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), significantly raises the bar for the government’s burden of proof in “remote tippee” insider trading cases. The investment community (as well as government prosecutors) have been eagerly awaiting this decision since oral arguments were heard by the Second Circuit in April 2014. Nearly eight months later, the decision handed down has dealt a severe blow to the government’s efforts to push the envelope in prosecuting individuals who trade on inside information but have one or more “layers” between them and the “insider” who initially disclosed the tip (the “tipper”). To read more, click here.
The United States District Court for the District of Massachusetts recently held in Massachusetts Mutual Life Insurance Co. v. Residential Funding Co., LLC, that lack of loss causation is not available even as an affirmative defense under the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 410, in contrast with Section 12 of the federal Securities Act of 1933. Continue Reading Federal Court Holds That Lack of Loss Causation Is Not a Defense Under Massachusetts Blue Sky Law