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

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

Sentinel, a cash-management firm, invested customers' cash in liquid low-risk securities. It also traded on its own account, using money borrowed from BNYM, pledging customers’ securities; 7 U.S.C. 6d(a)(2), 6d(b)), and the customers’ contracts required the securities to be held in segregated accounts. Sentinel experienced losses that prevented it from maintaining its collateral with BNYM and meeting customer demands for redemption of their securities. Sentinel used its BNYM line of credit to meet those demands. In 2007 it owed BNYM $573 million; it halted customer redemptions and declared bankruptcy. BNYM notified Sentinel that it planned to liquidate the collateral securing the loan. The bankruptcy trustee refused to classify BNYM as a senior secured creditor, considering the use of customer funds as collateral to be fraudulent transfers, 11 U.S.C. 548(a)(1)(A) and claiming that BNYM was aware of suspicious facts that should have led it to investigate. The district judge dismissed the claim, finding that Sentinel had not been shown to have intended to defraud its customers. The Seventh Circuit reversed, holding that Sentinel made fraudulent transfers. On remand, the judge neither conducted an evidentiary hearing nor made additional findings, but issued a “supplemental opinion” that BNYM was entitled to accept the collateral without investigation. The Seventh Circuit reversed in part. BNYM remains a creditor in the bankruptcy proceeding, but is an unsecured creditor because it was on inquiry notice that the pledged assets had been fraudulently conveyed. View "Grede v. Bank of New York" on Justia Law

Defendants are national securities exchanges registered with the U.S. Securities and Exchange Commission (SEC) and operate as self‐regulatory organizations that regulate markets in conformance with securities laws under the Securities Exchange Act of 1934, 15 U.S.C. 78a. Plaintiffs are securities firms and members of the defendant exchanges. They compete for customer order flow by displaying buy and sell quotations for particular stocks. Between at least January 2004 and June 2011, each defendant charged “payment for order flow” (PFOF) fees. Each defendant exchange imposes PFOF fees when a trade is made for a customer; however, these fees are not imposed for proprietary “house trades,” where a firm trades on its own behalf. The Seventh Circuit affirmed dismissal of plaintiffs’ suit, in which they sought to recover PFOF fees they claim were improperly charged. The district court lacked subject matter jurisdiction based on plaintiffs’ failure to exhaust administrative remedies before the SEC. View "Citadel Sec., LLC v. Chicago Bd. Options Exch., Inc." on Justia Law

This appeal was the most recent appeal in a series of lawsuits that have arisen over the sale of bonds by a corporation wholly owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians (collectively, “the Tribal Entities”). In a prior action, the Seventh Circuit held that a bond indenture constituted an unapproved management contract under the Indian Gaming Regulatory Act (“IGRA”) and was therefore void. Following more than three years of litigating the validity of other bond-related documents in federal and state court, the Tribal Entities instituted a tribal court action seeking a declaration that the bonds are invalid under the IGRA as well as tribal law. Certain “Financial Entities” and Godfrey & Kahn S.C. sought an injunction in the Western District of Wisconsin to preclude the Tribal Entities from pursuing their tribal court action. The district court preliminarily enjoined the Tribal Entities from proceeding against the Financial Entities but allowed the tribal action to proceed against Godfrey. The Seventh Circuit affirmed in part and reversed in part, holding that the district court (1) did not abuse its discretion in enjoining the tribal court action against the Financial Entities; but (2) made several errors of law in assessing whether Godfrey had established a likelihood of success on the merits. Remanded. View "Stifel, Nicolaus & Co., Inc. v. Lac Du Flambeau Band of Lake Superior Chippewa Indians" on Justia Law

Plaintiff, a stockholder in DeVry, which operates for-profit colleges and universities, filed a shareholders’ derivative suit against DeVry’s board of directors. A 2005 incentive plan authorized awards of stock options to key employees, including the CEO. The plan limited awards to 150,000 shares per employee per year. Nonetheless, the company granted Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. DeVry, discovering its mistake, reduced each grant under the 2005 plan to 150,000 shares, but allocated Hamburger 87,910 shares available under the company’s 2003 incentive plan, which held shares that had not been allocated. Only the company’s Plan Committee, not the Compensation Committee, was authorized to grant stock options under the 2003 plan; there was no Plan Committee in 2012. The grant of 87,910 stock options was approved by the Compensation Committee, and then by the independent directors as a whole. The Seventh Circuit affirmed dismissal. The directors who approved the Compensation Committee’s recommendation were disinterested: the recommendation was a valid exercise of business judgment. Administration of the 2003 plan by the Compensation Committee, given the nonexistence of the Plan Committee, was not “a clear or intentional violation of a compensation plan,” View "Donnawell v. Hamburger" on Justia Law

Bebo is the respondent in an administrative enforcement proceeding before the Securities and Exchange Commission, alleging that she violated federal law by manipulating internal books and records, making false representations to auditors, and making false disclosures to the SEC. Rather than wait for a final decision in the administrative enforcement proceeding, Bebo filed suit in federal court challenging on constitutional grounds the authority of the SEC to conduct the proceeding. She invoked federal question jurisdiction under 28 U.S.C. 1331. The district court dismissed for lack of subject matter jurisdiction, based on the administrative review scheme. The Seventh Circuit affirmed. The administrative law judge assigned to the case is expected to issue an initial decision within the coming months. If the decision is adverse to Bebo, she will have the right to file a petition for review with the SEC. The SEC will then have the power either to adopt the ALJ’s initial decision as the final decision of the agency or to grant the petition and conduct de novo review. If the SEC’s final decision is adverse, Bebo will then have the right under 15 U.S.C. 78y(a)(1) to seek judicial review and will be able to raise her constitutional claims. View "Bebo v. Sec. Exchange Comm'n" on Justia Law

From 2004-2007, CUNA purchased residential mortgage-backed securities from RBS. The housing market crashed and the securities declined in value. CUNA commissioned a forensic study of the loan pools underlying the securities and found that 40.8 percent of the loans were materially defective: “they violated applicable underwriting guidelines in a manner that materially increased the credit risk of the loan and that was not justified by sufficient compensating factors.” CUNA alleged that RBS induced it to purchase the securities by materially misrepresenting that the underlying loans complied with underwriting guidelines by repeatedly assuring CUNA that extensive due diligence was conducted on the loan pools and that the relevant prospectuses represented that the loans complied with guidelines related to borrower ability to pay and sufficiency of collateral. The court granted summary judgment in RBS’s favor on all but one of CUNA’s rescission claims, finding claims with regard to nine of the securities time-barred. The Seventh Circuit affirmed in part, finding that rescission claims were not time-barred. A reasonable factfinder could find that CUNA actually relied on the prospectuses' representations and that the representations were material. CUNA was entitled to a trial on the claims and with respect to the claims of due diligence. View "CMFG Life Ins. Co. v. RBS Sec., Inc." on Justia Law

Just before investing in Zhongpin on behalf of Prestige, Yang, a Chinese citizen employed at a U.S. investment firm, purchased Zhongpin shares and option contracts for himself. Yang was Prestige’s only officer and employee and sole investment manager. Yang did not disclose the purchases to Prestige. After its purchases, Prestige owned more than five percent of Zhongpin’s common stock, triggering an obligation to file Schedule 13D, 15 U.S.C. 78m(d). Yang and two others associated with Prestige filed Schedule 13D on behalf of Prestige, disclosing that Yang shared voting and dispositive power over Prestige’s Zhongpin shares, but failing to list the shares that Yang had purchased for himself, as required. The Schedule 13D misleadingly stated that, except for transactions listed on the form, “no transactions in the Common Stock were effected by any Reporting Person” in 60 days prior to Prestige’s attainment of its interest. Claiming deceptive “front-running,” the Securities and Exchange Commission instituted a civil suit. The jury found that Yang had violated the law by front-running and by filing a fraudulent disclosure. The court imposed a $150,000 penalty and enjoined Yang from future violations of U.S. securities law. The Seventh Circuit affirmed. Yang forfeited his arguments regarding the illegality of front-running and the materiality of his disclosure. View "Sec. & Eexch. Comm'n v. Yang" on Justia Law

In 2003, the SEC filed a civil suit against Custable, charging fraud involving “penny stocks” that yielded him at least $4 million. Criminal proceedings resulted in a long prison sentence for Custable. In 2010 he consented to entry of a judgment that ordered him to pay a $120,000 penalty plus $6.4 million in disgorgement of profits, 15 U.S.C. 78u(d). The SEC may either to remit the penalty money to the Treasury or to place it in the same fund as the disgorged profits, 15 U.S.C. 7246. Deciding that locating the defrauded victims would not be feasible, the Commission asked the court to allow it to pay to the Treasury all the disgorged profits that it had recovered. Hare, a purported victim of another Custable fraud and not a party, claimed to have an interest in the fund and asked the court to allow him to respond to any motion to disburse. The judge rejected Hare’s argument and granted the SEC’s motion to disburse the entire fund to the Treasury. The Seventh Circuit dismissed an appeal. Hare failed to establish that he is within an exception to the rule that forbids a nonparty to appeal; the grounds that he advanced for relief were frivolous View "Sec. & Exch. Comm'n v. Custable" on Justia Law

Because a 1999 issue of cumulative preferred stock was impairing the company’s ability to raise capital, Emmis signed holders of 60% of the preferred shares to swaps. Emmis purchased shares; the owners delivered their shares to an escrow. Closing was deferred for five years, during which the sellers agreed to vote their shares as Emmis instructed. Emmis did this because, once it purchased any share outright, it would be retired and lose voting rights, Ind. Code 23-1-25-3(a). Emmis repurchased addition preferred stock in a tender offer and reissued it to a trust for bonuses to workers who stuck with the firm through the financial downturn. The trustee was to vote this stock at management’s direction. Senior managers and members of the board were excluded, leaving them free to propose and vote without a conflict of interest. The plans allowed Emmis to control more than 2/3 of the votes. Emmis then called on owners of common and preferred stock to vote on whether the terms of the preferred stock should be changed. The cumulative feature of the stock’s dividends and other rights were eliminated. Plaintiffs, who own remaining preferred stock, sued. The district court rejected claims under federal and Indiana law. The Seventh Circuit affirmed. Indiana, apparently alone among the states, allows a corporation to vote its own shares, which may be good, or may be bad, but the ability to negotiate better terms, or invest elsewhere, rather than judicially imposed “best practices,” is how corporate law protects investors View "Corre Opportunities Fund, LP v. Emmis Commc'ns Corp." on Justia Law