Articles Posted in Securities Law

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In 2009, Lopez created financial investment business entities and solicited funds from family and friends. He received approximately $450,000 total from five people, stating that he intended to invest in companies such as Coca-Cola, ExxonMobil, Wells Fargo, Visa, American Express, and Procter & Gamble. Documents the investors signed reserved Lopez’s discretion to invest where he saw fit. Lopez deposited their funds into accounts that he controlled and never invested in the companies listed in his advertising materials. Lopez used much of the money for personal expenses. Lopez unilaterally changed the terms of each investors’ promissory note; they were not aware of these changes, did not give Lopez permission to make them, and did not sign documents. After an investor complained to the Indiana Secretary of State and the IRS investigated Lopez’s businesses, Lopez was convicted of 15 counts of wire fraud, 18 U.S.C. 1343; four counts of money laundering, 18 U.S.C. 1957; and securities fraud, 15 U.S.C. 78j(b), 77ff(a). The Seventh Circuit affirmed, rejecting claims that the district court erred in allowing a government witness to testify that payments Lopez made to his investors were “lulling payments,” that the government’s references to Bernie Madoff in its closing argument denied him a fair trial, that the court erred in denying Lopez’s request to label his witness an “expert” in front of the jury, that the court improperly prevented him from introducing extrinsic evidence of a government witness's prior inconsistent statement. View "United States v. Lopez" on Justia Law

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Patel saved $560,000, enough to purchase a 7-Eleven franchise. He kept the money with Portfolio; the contract gave Wagha discretion over the funds’ deployment. Wagha invested much of the money in options. By the time Patel needed the funds (four months later), the market was down and he had lost a considerable sum. A jury concluded that Wagha and Portfolio had broken their promise to invest the money conservatively and awarded Patel $136,000 for breach of contract plus $64,000 for securities fraud. The district court remitted the $64,000 award, ruling that Patel has not shown loss causation, but entered judgment on the $136,000 award. The Seventh Circuit affirmed, holding that the district court retained jurisdiction after it resolved the federal law claim. In addition, the federal-law claim should not have been dismissed. The premise of that holding—that the securities laws are concerned only with inaccurate pricing—was incorrect. Securities laws forbid fraud in all aspects of securities transactions, whether or not the fraud affects the instruments’ prices. One kind of fraud is procuring securities known to be unsuitable to a client’s investment goals, after promising to further those goals. View "Patel v. Portfolio Diversification Group, Inc." on Justia Law

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During October 2008 the Trust lost $3.6 million trading futures contracts. Contending that errors by Dorman, a futures commission merchant, caused some of these losses, in October 2011 the Trust asked the Commodity Futures Trading Commission to order Dorman to make reparation, 7 U.S.C. 18(a)(1). The Commission dismissed the claim as untimely. The Trust had made a claim within the two-year limitations period, but with the National Futures Association, which referred it to arbitration. The arbitrators awarded the Trust $500,000 against several defendants but ruled in favor of Dorman because the Trust’s contract with that entity set a one‐year time limit for financial claims. The Commission rejected the Trust’s claim of equitable tolling. The Seventh Circuit denied a petition for review. The Trust knew about the trading losses as soon as they occurred but did nothing for almost two years; it did not diligently pursue the Commission’s processes. The Trust did not say that any circumstance, let alone an extraordinary one, prevented timely filing. The court reasoned that the arbitral award, right or wrong, has nothing to do with equitable tolling. View "Conway Family Trust v. Commodity Futures Trading Commission" on Justia Law

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JPMorgan offers to manage clients’ securities portfolios. Its affiliates sponsor mutual funds in which the funds can be placed. Plaintiffs in a putative class action under the Class Action Fairness Act, 28 U.S.C. 1332(d)(2), alleged that customers invested in these mutual funds believing that, when recommending them as suitable vehicles, JPMorgan acts in clients’ best interests (as its website proclaims), while JPMorgan actually gives employees incentives to place clients’ money in its own mutual funds, even when those funds have higher fees or lower returns than third-party funds. The Seventh Circuit affirmed dismissal under the Securities Litigation Uniform Standards Act, 15 U.S.C. 78bb(f), which requires the district court to dismiss any “covered class action” in which the plaintiff alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” Under SLUSA, securities claims that depend on the nondisclosure of material facts must proceed under the federal securities laws exclusively. The claims were framed entirely under state contract and fiduciary principles, but necessarily rest on the “omission of a material fact,” the assertion that JPMorgan concealed the incentives it gave its employees. View "Holtz v. J.P. Morgan Chase Bank, N.A." on Justia Law

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If a LaSalle Bank custodial account had a cash balance at the end of a day, the cash would be invested in (swept into) a mutual fund chosen by the client. The Trust had a custodial account with a sweeps feature. After LaSalle was acquired by Bank of America, clients were notified that a particular fee was being eliminated. The trustee, who had not known about the fee, brought a putative class action in state court, claiming breach of the contract (which did not mention this fee) and violation of fiduciary duties. The bank removed the suit to federal court, relying on the Securities Litigation Uniform Standards Act, 15 U.S.C. 78bb(f), which authorizes removal of any “covered class action” in which the plaintiff alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” The statute requires that such state‑law claims be dismissed. The district court held that the suit fit the standards for removal and dismissal. The Seventh Circuit affirmed. The complaint alleged a material omission in connection with sweeps to mutual funds that are covered securities; no more is needed. The Trust may have had a good claim under federal securities law, but chose not to pursue it; the Act prohibits use of a state-law theory. View "Goldberg v. Bank of America, N.A." on Justia Law

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Witter contends that in August 2007 he telephoned Skelton, an employee of his broker, TransAct, with instructions to cancel several standing orders. Skelton did not do so, and Witter lost $23,000 on the resulting market position. Skelton claims that Witter never told him to cancel all seven of the working orders at issue. Witter filed a complaint with the Commodity Futures Trading Commission, 7 U.S.C. 18(a), which found no violation. The judgment officer refused to draw an adverse inference based on TransAct’s failure to produce a recording of the “one crucial conversation” because TransAct was not required to record the call; he found that Skelton’s version was more plausible and Witter had a “propensity to confuse trading terms” like “position” and “order.” The Seventh Circuit affirmed, finding the Commission’s decision was supported by the evidence. Federal regulations require that, before buying or selling a commodity, a merchant must receive either “specific authorization” or “authorization in writing,” 17 C.F.R. 166.2. No regulation requires the merchant to record phone calls to cancel previously authorized orders to buy or sell. View "Witter v. Commodity Futures Trading Comm'n" on Justia Law

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Stevens, an insurance salesman, wanted to sell investment products. Because he was not registered with the SEC, Stevens needed to associate himself with a registered investment advisor, 15 U.S.C. 80b-3(a). In 2003, he associated with IFA, a loosely confederated investment advisory firm. In exchange for sharing clientele and fees with IFA, Stevens had access to IFA’s market resources and proprietary information, including access to a cloud-based data system. Stevens uploaded sensitive nonpublic information, concerning both investment clients and insurance clients (who were not IFA clients). IFA did not know that Stevens had entered the non-IFA client information into the database. IFA learned that Stevens was involved in a Ponzi scheme, severed its association with Stevens, and blocked Stevens from accessing the database. Stevens sued, alleging conversion, violation of the Illinois Trade Secrets Act, and tortious interference with business expectancy. The Seventh Circuit affirmed summary judgment for IFA on claims relating to securities clients. Federal law prevents a financial institution from disclosing nonpublic information of its clients to a nonaffiliated third party like Stevens. The court also affirmed a verdict in favor of IFA concerning insurance clients, upholding the trial court’s response to a question sent by the jury during deliberations, “Can we consider [filing] the lawsuit a demand for property?” The court stated that filing did not constitute a demand for the purposes of an Illinois law conversion claim. View "Stevens v. Interactive Fin. Advisors, Inc." on Justia Law

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Trachte, a Wisconsin manufacturer, established an employee stock ownership plan (ESOP) in the mid-1980s. In the late 1990s, Fenkell and his company, Alliance, began buying ESOP-owned, closely-held companies with limited marketability. Typically, Fenkell would merge the acquired company's ESOP into Alliance’s ESOP, hold the company for a few years with its management in place, and then spin it off at a profit. Alliance acquired Trachte in 2002 for $24 million and folded its ESOP into Alliance’s ESOP. Trachte’s profits, however, were flat and its growth stalled, so Fenkell arranged a complicated leveraged buyout involving creation of a new Trachte ESOP managed by trustees beholden to Fenkell. The accounts in the Alliance ESOP were spun off to the new Trachte ESOP, which used the employees’ accounts as collateral to purchase Trachte’s equity back from Alliance, Trachte and its new ESOP paid $45 million for Trachte’s stock and incurred $36 million in debt. The purchase price was inflated; the debt load was unsustainable. By the end of 2008, Trachte’s stock was worthless. The employee participants in the new ESOP sued Alliance, Fenkell, and trustees, alleging breach of fiduciary duty in violation of the Employee Retirement Income Security Act. The district court found the defendants liable, crafted a remedial order to make the class whole, awarded attorney’s fees, and approved settlements among some of the parties. Fenkell conceded liability. The Seventh Circuit​ affirmed the order requiring him to indemnify his cofiduciaries. View "Chesemore v. Fenkell" on Justia Law

Posted in: ERISA, Securities Law

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The Commodity Futures Trading Commission regulates contracts concerning commodities for future delivery when offered on margin or another form of leverage, 7 U.S.C. 2(c)(2)(D), with an exception for contracts that “results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved”. The CFTC began investigating whether Monex's precious-metals business was within this exception. Monex refused to comply with a subpoena, arguing that since 1987, when it adopted its current business model, the CFTC has deemed its business to be in compliance with all federal rules and that, because it satisfies the exception, the Commission lacked authority even to investigate. The district court enforced the subpoena. Monex turned over the documents. Monex appealed, seeking their return and an injunction to prevent the CFTC from using them in any enforcement proceeding. The Seventh Circuit affirmed, stating that Monex was impermissibly using its opposition to the subpoena to get a judicial decision on the merits of its statutory argument, before the CFTC makes a substantive decision. The propriety of an agency’s action is reviewed after the final administrative decision. Contesting the agency’s jurisdiction does not change the rules for determining when a subpoena must be enforced. View "Commodities Futures Trading Comm'n v. Monex Deposit Co." on Justia Law

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Magruder bought 940,000 shares of Bancorp through his Fidelity account, paying $9,298. Years later he asked Fidelity for a certificate showing his ownership. When Fidelity did not comply, Magruder initiated arbitration through the Financial Industry Regulatory Authority. Magruder and Fidelity chose simplified arbitration, in which the arbitrator cannot award more than $50,000 in damages or order specific performance that would cost more than $50,000. Magruder had demanded $28,000 (actual plus punitive damages). The arbitrator directed Fidelity to deliver a stock certificate or explain why it could not do so. Fidelity explained that in 2005 the Depository Trust & Clearing Corporation, responsible for issuing Bancorp paper certificates, had placed a “global lock” on that activity as a result of Bancorp reporting that fraudulent shares bearing identification number 106 were flooding the market. In 2012 Bancorp offered to swap series 106 shares for new series 205 shares, but by then Bancorp had been delisted from stock exchanges and FINRA blocked the swaps. The arbitrator accepted this explanation. Magruder then filed suit. The district judge sided with Fidelity. The Seventh Circuit vacated for lack of jurisdiction. Even assuming that the parties are of diverse citizenship, the stakes cannot exceed $50,000, and the minimum under 28 U.S.C. 1332(a) is $75,000. View "Magruder v. Fidelity Brokerage Servs., LLC" on Justia Law