Justia U.S. 7th Circuit Court of Appeals Opinion SummariesArticles Posted in Securities Law
Carpenters Pension Trust Fund for Northern California v. Allstate Corp.
In 2013, Allstate announced a new strategy in its auto insurance business: attracting more new customers by “softening” its underwriting standards. Allstate disclosed that new and potentially riskier customers might file more claims and that Allstate would monitor and adjust business practices accordingly. Two years later, Allstate’s stock price dropped by more than 10 percent, immediately after Allstate announced that the higher claims rates it had experienced for three quarters had been fueled at least in part by the company’s recent growth strategy and that the company was “tightening" its underwriting parameters. The plaintiffs claim that Allstate initially intentionally misled the market by falsely attributing the increases to other factors.The Seventh Circuit vacated the certification of a plaintiff class after reviewing recent Supreme Court decisions concerning the fraud-on-the-market presumption of reliance, which allows plaintiffs to avoid proving individual reliance upon fraudulent misrepresentations and omissions. The issues of materiality, loss causation, and transaction causation are left for the merits but the court must consider evidence on those issues in deciding class certification using the presumption, if the defense offers it to show the absence of transaction causation (price impact). The district court granted class certification after admitting, but without engaging with, defense evidence offered to defeat the presumption--an expert opinion that the alleged misrepresentations had no impact on the stock price. Class certification may be appropriate here, but the district court must decide at the class stage the price impact issue. The court directed modification of any class certification to limit the class to buyers of Allstate common stock rather than any other securities. View "Carpenters Pension Trust Fund for Northern California v. Allstate Corp." on Justia Law
Walleye Trading LLC v. AbbVie Inc.
Wanting to repurchase outstanding shares. AbbVie began its auction at $114. Shareholders offered to sell at or below $114. AbbVie selected the lowest price that would allow it to purchase $7.5 billion of shares. AbbVie hired Computershare to receive all offers. At the end of bidding, AbbVie announced the preliminary result: it would purchase 71.4 million shares for $105 per share. AbbVie’s stock, which had been trading at roughly $100, closed at $103. An hour later, AbbVie announced that it had received corrected numbers from Computershare. Instead of purchasing 71.4 million shares at $105 a share, it would purchase 72.8 million shares at $103 a share. AbbVie’s share price fell to $99 the next day.Walleye contends that AbbVie’s actions violated sections 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and 78n(e). The Seventh Circuit affirmed the dismissal of Walleye’s complaint. A plaintiff bringing section 10(b) claims must plead the fraud with particularity and allegations of scienter must be as compelling as any opposing inference. Walleye has not pleaded that AbbVie made any statement that is false or misleading, much less a statement with the required mental state. AbbVie accurately reported Computershare’s preliminary numbers and was not required to verify third-party data before reporting. The end of the tender offer placed Walleye outside the zone of interests protected by section 14. View "Walleye Trading LLC v. AbbVie Inc." on Justia Law
Posted in: Securities Law
INTL FCStone Financial Inc. v. Farmer
Defendants, commodities futures investors, maintained trading accounts with FCStone, a clearing firm that handled the confirmation, settlement, and delivery of transactions. In 2018, extraordinary volatility in the natural gas market wiped out the defendants’ account balances with FCStone, leaving some defendants in debt. The defendants alleged Commodity Exchange Act violations against FCStone and initiated arbitration proceedings before the Financial Industry Regulatory Authority (FINRA). FCStone sought a declaratory judgment, claiming the parties must arbitrate their disputes before the National Futures Association (NFA), and that FINRA lacks jurisdiction over the underlying disputes. The district court ruled for FCStone, ordered arbitration and designated an arbitration forum, then stayed the case to address related issues, including the arbitration venue. The Seventh Circuit dismissed an appeal for lack of jurisdiction under 28 U.S.C. 1291 or the Federal Arbitration Act, ” 9 U.S.C. 16(a)(3). The district court’s decisions were non-final and no exception to the rule of finality applies. The court rejected an argument that the order amounted to an injunction prohibiting FINRA arbitration. A pro‐arbitration decision, coupled with a stay (rather than a dismissal) of the suit, is not appealable. The court noted that the district court did not decide whether the parties’ arbitration agreements relinquished defendants’ purported rights to FINRA arbitration. View "INTL FCStone Financial Inc. v. Farmer" on Justia Law
Securities & Exchange Commission v. Williky
Imperial fraudulently purchased finished biodiesel and resold it while claiming government incentives and tax credits for producing biodiesel from raw feedstock. Imperial’s CEO (Wilson) hired Williky to artificially inflate Imperial’s stock by “wash and match trades” and “scalping” emails. In the 1990s, Williky had engaged in “wash and match trades” for another company led by Wilson. Williky acquired millions of shares of Imperial stock but failed to report his ownership levels when his shares surpassed five percent. By mid-2011, Williky knew Imperial misrepresented the source of its biodiesel to investors and, by November, knew the extent of Imperial’s fraud. Williky sold all of his Imperial shares and avoided a loss of $798,217. The SEC sued, seeking to permanently enjoin Williky from violating federal securities law and from acting as an officer or director of a public company; to disgorge his financial gains; and to impose a civil penalty for insider trading. Williky entered into a bifurcated settlement with the SEC, conceding his involvement in the fraudulent scheme and agreeing that the court would determine the financial remedies. The SEC requested the statutory maximum civil penalty of $2,394,651 for insider trading, calculated as three times Williky’s avoided losses. Williky argued that the SEC’s proposed judgment ignored his cooperation with governmental agencies. The district court entered a judgment of $1,596,434, equal to two times the avoided losses. The Seventh Circuit affirmed. The district court adequately assessed the value of Williky’s cooperation. View "Securities & Exchange Commission v. Williky" on Justia Law
Posted in: Securities Law
Effex Capital, LLC v. National Futures Association
NFA is a self‐regulatory organization registered under the Commodity Exchange Act, subject to the authority of the Commodity Futures Trading Commission (CFTC), 7 U.S.C. 21, including review of NFA disciplinary actions. Effex, a closely held, foreign‐currency trading firm controlled by Dittami, is not subject to NFA regulation. NFA determined that its member, FXCM, had violated NFA rules. NFA released several documents related to a settlement, including allegations that Effex was involved in FXCM's misconduct. The press release did not specifically reference Effex but directed the public to the NFA’s website. Effex alleged that NFA’s findings are false and that their publication was defamatory. NFA had not contacted Effex or provided Effex notice of the investigation. CFTC conducted its own investigation, subpoenaed documents from Effex, and took the depositions of Dittami and other Effex employees. Effex alleged that NFA obtained documents from CFTC despite Effex’s request that its responses as a third party be kept confidential. CFTC issued its decision, finding that FXCM had concealed an improper trading relationship with a “high‐frequency trader” and the trader's company (HFT). Although not explicitly named, HFT is Effex. CFTC found materially the same facts as NFA did regarding Effex. The Seventh Circuit affirmed the dismissal of the suit. The Commodity Exchange Act regulates comprehensively all matters relating to NFA discipline, so a federal Bivens remedy is unavailable, and preempts Effex’s state law claims. View "Effex Capital, LLC v. National Futures Association" on Justia Law
Cornielsen v. Infinium Capital Management, LLC
Plaintiffs, 39 former employees of Infinium Capital, voluntarily converted loans they had made to their employer under the company’s Employee Capital Pool program into equity in the company. A year later their redemption rights were suspended; six months after that, they were told their investments were worthless. Plaintiffs filed suit against Infinium, the holding company that owned Infinium, and members of senior management, asserting claims for federal securities fraud and state law claims for breach of fiduciary duty and fraud. The Seventh Circuit affirmed the dismissal, with prejudice, of their fifth amended complaint for failure to state a claim. Reliance is an element of fraud and each plaintiff entered into a written agreement that contained ample cautionary language about the risks associated with the investment. Federal Rule of Civil Procedure 9(b) provides that a party alleging fraud or mistake “must state with particularity the circumstances constituting fraud or mistake,” although “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Plaintiffs failed to identify the speakers of alleged misrepresentations with adequate particularity, failed to adequately plead scienter, and failed to plead a duty to speak. View "Cornielsen v. Infinium Capital Management, LLC" on Justia Law
Jackson County Bank v. DuSablon
JCB, an Indiana state-chartered bank, had an agreement with INVEST, a registered broker-dealer, to offer securities to JCB customers. In 2017, JCB assigned DuSablon to assist in identifying and establishing an investment business with a new third-party broker-dealer. DuSablon failed to do so and abruptly resigned. JCB learned that DuSablon had transferred customers’ accounts from INVEST into his own name and had started a competing business. JCB sought a preliminary injunction, asserting violations of the Indiana Uniform Trade Secrets Act, breach of contract, breach of fiduciary duty, tortious interference, unfair competition, civil conversion, and computer trespass. DuSablon moved to dismiss, arguing that JCB lacked standing and that Financial Industry Regulatory Authority (FINRA) rules barred the suit; he removed the case, asserting exclusive federal jurisdiction under 15 U.S.C. 78aa and the Securities and Exchange Act. Although JCB did not plead a federal claim, DuSablon contended that JCB’s response to his motion to dismiss “raises a federal question as all of [JCB’s] claims ... rest upon the legality of direct participation in the securities industry which is ... regulated by the [Securities] Act.” The district court remanded,, concluding that it lacked jurisdiction and that removal was untimely, ordering DuSablon to pay JCB costs and fees of $9,035.61 under 28 U.S.C. 1447(c). The Seventh Circuit dismissed an appeal. DuSablon lacked an objectively reasonable basis to remove the case to federal court. View "Jackson County Bank v. DuSablon" on Justia Law
Nielen-Thomas v. Concorde Investment Services, LLC
Nielen-Thomas, on behalf of herself and others similarly situated, filed a complaint in Wisconsin state court alleging she and other class members were defrauded by their investment advisor. Defendants removed the case to federal court and argued the action should be dismissed because it was a “covered class action” precluded by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. 78bb(f)(1), (f)(5)(B), According to Nielen-Thomas, her lawsuit did not meet SLUSA’s “covered class action” definition because she alleged a proposed class with fewer than 50 members. The district court held that Nielen-Thomas’s suit was a “covered class action” because she brought her claims in a representative capacity, section 78bb(f)(5)(B)(i)(II), and dismissed her claims. The Seventh Circuit affirmed. The plain language of SLUSA’s “covered class action” definition includes any class action brought by a named plaintiff on a representative basis, regardless of the proposed class size, which includes Nielen-Thomas’s class action lawsuit and her complaint meets all other statutory requirements, her lawsuit is precluded by SLUSA. View "Nielen-Thomas v. Concorde Investment Services, LLC" on Justia Law
Orgone Capital III, LLC v. Daubenspeck
In 2008, Fisker, a manufacturer of luxury hybrid electric cars, became part of a trend in venture capital investments toward green energy technology start-ups. The Department of Energy advanced Fisker $192 million on a $528.7 million loan, secured with assistance from the Kleiner venture capital firm, a Fisker controlling shareholder. Tech-industry rainmakers and A-list movie stars invested in Fisker, which was competing with another emerging player, Tesla. In 2009, before sales began on its first-generation vehicles, Fisker announced that its second-generation vehicles would be built in Delaware. Delaware agreed to $21.5 million in state subsidies. Vice President Biden and Delaware Governor Markell participated in Fisker’s media unveiling of the collaboration. Riding this publicity, Fisker secured funding from additional venture capital firms and high net worth investors, including the five plaintiffs, who collectively purchased over $10 million in Fisker securities. In 2011, Fisker began selling its flagship automobile. In 2012, it stopped all manufacturing. In April 2013, Fisker laid off 75% of its remaining workforce; the U.S. Government seized $21 million in cash for Fisker’s first loan payment. The Energy Department put Fisker’s remaining unpaid loan amount ($168 million) out to bid. Fisker filed for bankruptcy. In October 2016, the plaintiffs filed a class action, alleging fraud, breach of fiduciary duty, and negligent misrepresentation. The Seventh Circuit affirmed the dismissal of plaintiffs’ claims as precluded by Illinois law’s three-year limitations period. Those claims accrued no later than April 2013. View "Orgone Capital III, LLC v. Daubenspeck" on Justia Law
Straits Financial LLC v. Ten Sleep Cattle Co.
Carter, through broker Perkins, opened a commodities trading account to secure the prices his Wyoming ranch would receive for its cattle using financial instruments (hedging). After Perkins changed offices, those accounts were part of a “bulk transfer” to Straits. Carter did not sign new agreements. At Perkins’s request, Carter opened another Straits account to speculate in other categories. After Carter and Perkins split a $300,000 profit, Carter instructed Perkins to close the account. Perkins did not do so but continued speculating on Treasury Bond futures, losing $2 million over three months. Straits liquidated Carter’s livestock commodities holdings to satisfy most of the shortfall and sued for the deficiency. Carter established his right to the seized funds and an award of attorney fees but the court significantly reduced damages, finding that Carter failed to mitigate by not closely reading account statements and trading confirmations. The Seventh Circuit affirmed the interpretation of the contract but remanded for recalculation of damages. Finding Carte responsible for losses resulting from Perkins's fraud would apply a guarantee or ratification that was never given. Fraud victims are not responsible for their agent’s fraud before they learn of unauthorized activity. Under Illinois law, the injured party must have actual knowledge before it must act to mitigate its damages. The court affirmed the attorney fee award under the Illinois Consumer Fraud and Deceptive Business Practices Act. View "Straits Financial LLC v. Ten Sleep Cattle Co." on Justia Law