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

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

The Commodity Futures Trading Commission and the Securities and Exchange Commission concluded that Battoo committed fraud. Battoo and his companies, all located outside the United States, defaulted in the suits. The district judge froze all assets pending a final decision about ownership. The court appointed a Receiver to marshal the remaining assets and try to determine ownership. The Receiver has been recognized as the assets’ legitimate controller in several other nations, including China (Hong Kong), Guernsey, and the Bahamas. Battoo defied the injunction and transferred control of some investment vehicles, located in the British Virgin Islands, to court-appointed Liquidators, who asked the judge to modify the injunction and allow them to distribute assets located in the U.S. or England immediately. The Liquidators maintain that, because Battoo no longer has control, the justification for freezing the assets has lapsed. The court assumed that the Liquidators are now under judicial control, but declined to modify the injunction, ruling that the funds should remain available so that an eventual master plan of distribution can treat all investors equitably. The Seventh Circuit affirmed. It is not clear whether some investment interests can be disentangled reliably from those affected by Battoo’s frauds against U.S. investors; the Liquidators have not argued that any investor is suffering loss as a result of the Receiver’s investment decisions. View "Commodity Futures Trading Comm'n v. Battoo" on Justia Law

In a securities-fraud class action, plaintiffs won a verdict of $2.46 billion, apparently one of the largest to date, against Household International and three of its top executives. The suit was based on a dramatic increase (and subsequent collapse) in the price of Household’s stock that was driven by predatory lending practices and creative accounting to mask delinquencies. The Seventh Circuit ordered a new trial on two issues: whether plaintiffs failed to prove loss causation and instructional error concerning what it means to “make” a false statement in connection with the purchase or sale of a security. Plaintiffs’ expert’s testimony did not adequately address whether firm-specific, nonfraud factors contributed to the collapse in Household’s stock price during the relevant time period. View "Glickenhaus & Co. v. Household Int'l, Inc." on Justia Law

Accretive provides cost control, revenue cycle management, and compliance services to non-profit healthcare providers. Accretive and Fairview entered into a Revenue Cycle Operations Agreement (RCA), accounting for about 12% of Accretive’s revenue during the class period, and a Quality and Total Cost of Care (QTCC) contract, promoted as the future for healthcare services. In 2012, the Minnesota Attorney General sued Accretive for noncompliance with healthcare, debt collection, and consumer protection laws. Accretive wound down its RCA contract short of its term, expecting a loss of $62 to $68 million. The AG released a damaging report on Accretive’s business practices. Fairview cancelled its QTCC contract. Accretive’s stock fell from over $24 to under $10 per share. Plaintiffs filed a class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that Accretive concealed its practices to artificially inflate its common stock. The parties negotiated a settlement of $14 million: $0.20 per share ($0.14 with attorneys’ fees and expenses deducted). Notice was sent to 34,200 potential class members. Only one opted out; only Hayes filed an objection. At the fairness hearing, the district court granted approval, awarding attorneys’ fees of 30% and expenses of $63,911.14. Hayes did not attend. The Seventh Circuit affirmed. View "Hayes v. Accretive Health, Inc." on Justia Law

Plaintiffs, employees of Antioch, participated in an employee stock ownership, plan (ESOP). In 2003, Antioch borrowed money to buy back all stock except the stock owned by the ESOP. The buy-out left Antioch bankrupt and ESOP worthless. Plaintiffs filed suit under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001, claiming breach of fiduciary duties. The district court granted the defendants summary judgments. The presumptive limitation period for violations is six years from the date of the last action constituting part of the breach or violation, but the time is shortened to three years from the time the plaintiff gained “actual knowledge of the breach or violation.” Applying the three-year limitations period, section 1113(2), the court reasoned that proxy documents given to plaintiffs at the time of the buy-out and their knowledge of Antioch’s financial affairs after the transaction gave them actual knowledge of the alleged ERISA violations. The Seventh Circuit reversed. The claims for breach of fiduciary duty do not depend only on the disclosed substantive terms of the 2003 transaction, but also depend on the processes used to evaluate, negotiate, and approve the transaction. Plaintiffs’ knowledge of the substantive terms of the buyout, therefore did not give them “actual knowledge of the breach or violation” alleged in this case. View "Fish v. Greatbanc Trust Co." on Justia Law

In 1983, Birkelbach founded Birkelbach Investment Securities (BIS) and served as its president. Birkelbach was registered as a general securities representative and principal, a municipal securities representative and principal, an options principal, and a financial and operations principal. Birckelbach supervised Murphy’s control of one account held by an unsophisticated investor with assets of $1.7 million, while Murphy generated more than a million dollars in commissions, incurred substantial losses, and engaged in transactions that were not part of the investor-authorized strategy. The investor was unable to understand her statements, many of which included errors that overvalued the account. Lowry similarly mishandled, and Birkelbach supervised, the management of the smaller account of a college student/member of the U.S. military. Birkelbach knew that Murphy had been previously censured, suspended, and fined by the Chicago Board Options Exchange, for trading without authorization and had a history of customer complaints. Birkelbach also had a previous disciplinary history. He had been sanctioned by the Illinois Securities Department and, in 2005, additional supervision of Murphy had been requested by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization formed under the Securities Exchange Act, 15 U.S.C. 78o-3. Birkelbach did not do so. After FINRA investigated BIS and recommended sanctions, the Securities and Exchange Commission barred Birkelbach from participation in the securities industry for life. The Seventh Circuit denied a petition for review, rejecting arguments that the original disciplinary complaint was untimely and the lifetime bar was an excessive punishment.View "Birkelbach v. Sec. & Exch. Comm'n" on Justia Law