Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

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

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

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

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, 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

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

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

Kohl’s operates more than 1000 stores, 65 percent of which are leased. In 2011, Kohl’s announced that it was correcting several years of its financial filings because of multiple lease accounting errors. Plaintiffs, led by the Pension Fund, filed suit under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), SEC Rule 10b-5, and the “controlling person” provisions of 15 U.S.C. 78t(a), alleging that Kohl’s and two executives defrauded investors by publishing false and misleading information prior to the corrections. The Fund argued that one can infer that the defendants knew that these statements were false or recklessly disregarded that possibility because Kohl’s recently had made similar lease accounting errors. Despite those earlier errors, it was pursuing aggressive investments in leased properties, and at the same time, company insiders sold considerable amounts of stock. The district court dismissed the complaint with prejudice for failure to meet the enhanced pleading requirements for scienter imposed by the Private Securities Litigation Reform Act. The Seventh Circuit affirmed, reasoning that the complaint fell short and the Fund did not suggest how an amendment might help. The Fund made a strong case that many of Kohl’s disclosures regarding its lease accounting practices were false but that is not enough. The Fund provided very few facts that would point either toward or away from scienter. View "Pension Trust Fund for Operating Engineers v. Kohl's Corp." on Justia Law

In “Citadel” the Seventh Circuit held that “the district court did not abuse its discretion in dismissing [the] case [of certain securities firms] for failure to exhaust administrative remedies.” After that decision, Securities Firms filed a petition before the Securities and Exchange Commission (SEC) seeking damages, claiming the Exchanges improperly imposed fees under Payment for Order Flow programs. The SEC dismissed that petition for lack of jurisdiction. The Exchanges, citing CitadeI, maintained the SEC had jurisdiction under Section 19(h)(1) of the Securities Exchange Act because the petition sought a determination that the Exchanges had violated their own rules. The SEC reasoned that Section 19(d), which authorizes it to review allegations that a national exchange has unduly “prohibit[ed] or limit[ed] … access to services,” 15 U.S.C. 78s(d)(1), did not apply; the petition did not allege that the Exchanges had denied or limited access to any service. The SEC further stated that seeking damages was “incongruous with” the SEC’s Section 19(d) remedial authority and that section 78s(h)(1) does not authorize claims by private parties. The Seventh Circuit affirmed, “the Petition alleges, in effect, a billing dispute” between two private parties, and requests the SEC order the Exchanges to pay damages for improperly charging fees under their PFOF programs. View "Chicago Board Options Exchange v. Securities and Exchange Commission" on Justia Law

Wilson was the Director, Chairman of the Board, President, and CEO of Imperial, which acquired e-Bio, which ran a fraud scheme, "Alchemy." It involved purchasing biodiesel from a third party and reselling it as though it had been produced by e-Bio, to take advantage of government incentives for renewable-energy production without expending production costs. Wilson was convicted of 21 counts: fraud in connection with the purchase or sale of securities, 15 U.S.C. 78j(b) and 78ff; fraud in the offer or sale of securities, 15 U.S.C. 77q(a) and 77x, and 18 U.S.C. 2; material false statements in required SEC filings, 15 U.S.C. 78ff and 18 U.S.C. 2; wrongful certification of annual and quarterly reports by a corporate officer, 18 U.S.C. 1350(c)(1); material false statements by a corporate officer to an accountant, 15 U.S.C. 78m(b)(5) and 78ff, and 18 U.S.C. 2; and false statements to government investigators, of 18 U.S.C. 1001. The dcourt sentenced Wilson to 120 months’ imprisonment and to pay $16,468,769.73 in restitution. The Seventh Circuit affirmed. None of Wilson’s contentions reach the high threshold of showing that a reasonable jury could not have found him guilty. Viewed in the light most favorable to the prosecution, the evidence adequately supports the jury’s finding that Wilson knowingly and willfully made false statements to investors, regulators, an outside accountant, and government agents, and the reasonable inference that Wilson participated in “Alchemy.” View "United States v. Wilson" on Justia Law