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

Sentinel specialized in short-term cash management, promising to invest customers’ cash in safe securities for good returns with high liquidity. Customers did not acquire rights to specific securities, but received a pro rata share of the value of securities in an investment pool (Segment) based on the type of customer and regulations that applied to that customer. Segment 1 was protected by the Commodity Exchange Act; Segment 3 customers by the Investment Advisors Act and SEC regulations. Despite those laws, Sentinel lumped cash together, used it to purchase risky securities, and issued misleading statements. Some securities were collateral for a loan (BONY). In 2007 customers began demanding cash and BONY pressured Sentinel for payment. Sentinel moved $166 million in corporate securities out of a Segment 1 trust to a lienable account as collateral for BONY and sold Segment 1 and 3 securities to pay BONY. Sentinel filed for bankruptcy after returning $264 million to Segment 1 from a lienable account and moving $290 million from the Segment 3 trust to the lienable account. After informing customers that it would not honor redemption requests, Sentinel distributed the full cash value of their accounts to some Segment 1 groups. After filing for bankruptcy Sentinel obtained bankruptcy court permission to have BONY distribute $300 million from Sentinel accounts to favored customers. The trustee obtained district court approval to avoid the transfers, 11 U.S.C. 547; 11 U.S.C. 549. The Seventh Circuit, noting the unique conflict between the rights of two groups of wronged customers, reversed. Sentinel’s pre-petition transfer fell within the securities exception in 11 U.S.C. 546(e); the post-petition transfer was authorized by the bankruptcy court, 11 U.S.C. 549. Neither can be avoided.View "Grede v. FCStone LLC" on Justia Law

Through their companies, Pilon and her husband falsely represented that one investment program would generate significant returns that Pilon would use to pay off the investors’ mortgages within two years, and make a bonus cash payment to investors. Many investors refinanced mortgages to invest. With respect to another investment program, Pilon falsely represented that money would be invested in a high-yield fund and that investors would receive 100 percent on their investments within about 90 days. Pilon hinted at religious and humanitarian purposes. Pilon paid early investors’ mortgages with later investors’ money (a Ponzi scheme). About 40 people invested $4,000 to $110,000, losing a total of $967,702. The Illinois Department of Securities ordered Pilon to cease offering investments; she ignored the order. When the scheme unraveled and investors lost their homes, Pilon was indicted for wire fraud. Pilon, a member of a sovereign citizen movement, unsuccessfully moved to dismiss for lack of jurisdiction. Immediately before jury selection, Pilon stated her intent to plead guilty; when the government proffered the facts, Pilon denied everything. After testimony by eight government witnesses, Pilon admitted to the scheme and pleaded guilty. In calculating Pilon’s guideline range, the court applied an enhancement for abuse of a position of trust, declined to credit Pilon for acceptance of responsibility, and sentenced Pilon to 78 months’ incarceration, in the middle of the range, and imposed $967,702 in restitution. The Seventh Circuit affirmed. View "United States v. Pilon" on Justia Law

After the mutual funds, known as the Lancelot or Colossus group, folded in 2008, the trustee in bankruptcy filed independent suits or adversary actions seeking to recover from solvent third parties, including the Funds’ auditor, law firm, and some of the Funds’ investors, which the Trustee believes received preferential transfers or fraudulent conveyances. The Funds had invested in notes issued by Thousand Lakes, which was actually a Ponzi scheme, paying old investors with newly raised money. In these proceedings the trustee contends that investors who redeemed shares before the bankruptcy received preferential transfers, 11 U.S.C. 547, or fraudulent conveyances, 11 U.S.C. 548(a)(1)(B) and raised a claim under the Illinois fraudulent-conveyance statute, using the avoiding power of 11 U.S.C. 544. The bankruptcy court dismissed the claims against the law firm that prepared circulars for the Firms. The Seventh Circuit affirmed. No Illinois court has held that failure to report a corporate manager’s acts to the board of directors exposes a law firm to malpractice liability. The complaint does not plausibly allege that alerting the directors would have made a difference. View "Peterson v. Winston & Strawn, LLP" on Justia Law

After the mutual funds, known as the Lancelot or Colossus group, folded in 2008, the trustee in bankruptcy filed independent suits or adversary actions seeking to recover from solvent third parties, including the Funds’ auditor, law firm, and some of the Funds’ investors, which the Trustee believes received preferential transfers or fraudulent conveyances. The Funds had invested in notes issued by Thousand Lakes, which was actually a Ponzi scheme, paying old investors with newly raised money. In these proceedings the trustee contends that investors who redeemed shares before the bankruptcy received preferential transfers, 11 U.S.C. 547, or fraudulent conveyances, 11 U.S.C. 548(a)(1)(B) and raised a claim under the Illinois fraudulent-conveyance statute, using the avoiding power of 11 U.S.C. 544. The bankruptcy court rejected the claims, citing the statutory exception: “the trustee may not avoid a settlement payment or transfer made to a financial participant in connection with a securities contract, except under section 548(a)(1)(A) of this title.” The Seventh Circuit affirmed. A transfer from the Funds to each redeeming investor occurred “in connection with” a securities contract. View "Peterson v. Somers Dublin, Ltd." on Justia Law

A class of Motorola investors claimed that, during 2006, the firm made false statements to disguise its inability to deliver a competitive mobile phone that could employ 3G protocols. When the problem became public, the price of Motorola’s stock declined. The parties settled for $200 million. None of the class members contends that the amount is inadequate. Two objected to approval of counsel’s proposal that it receive 27.5 percent of the fund. One objector protested almost a month after the deadline and failed to file a claim to his share of the recovery. The Seventh Circuit dismissed his appeal, stating that he lacks any interest in the amount of fees, since he would not receive a penny from the fund even if counsel’s share were reduced to zero. The other objector claimed that fee schedules should be set at the outset, preferably by an auction in which law firms compete to represent the class. Noting the problems inherent in such a system, the court held that the district judge did not abuse her discretion in approving the award. View "Liles v. Motorola Solutions, Inc." on Justia Law

Greenblatt, the “bad boy of Chicago arbitrage” became involved in litigation concerning use of his “web of corporations,” including Loop Corporation and Banco. In 2000, Banco extended a $9.9 million line of credit in exchange for a blanket lien over Loop’s assets. Loop defaulted; nevertheless, Banco expanded the line of credit by several million dollars in 2002 and continued lending Loop money until 2004. Banco lost senior creditor status when the district court voided the lien in an earlier case. In 2001 Loop purchased millions of shares of EZ Links stock from Golf Venture, giving a promissory note. Loop defaulted; Golf Venture won a judgment of $1.2 million. Also in 2001, a failed margin transaction left Loop indebted to its brokerage firm, Wachovia, in the amount of $1,885,751. Wachovia took Loop to arbitration and won a $2,349,000 award in 2005. Wachovia is still trying to collect. Loop had transferred almost all of its valuable assets to another Greenblatt company, leaving only the EZ Links stock, in possession of Banco, and Banco claimed to have creditor priority over Wachovia. The district vourt pierced Loop’s corporate veil, allowing Wachovia to reach Greenblatt’s assets, and voiding Banco’s lien, and ordered the sale of Loop’s only asset, EZ Links stock. Banco attempted to contest the d decisions. The Seventh Circuit dismissed Banco’s appeal for lack of standing. View "Wachovia Sec., LLC v. Loop Corp." on Justia Law

Walsh and Martin, principals of a futures and foreign currency trading company that acted as a “futures commission merchant” and as a “forex dealer member,” used customer funds for personal expenses, then concealed the company’s insolvency and their criminal conduct by misleading customers about the company’s ability to meet its obligations. Existing customers got account statements that falsely stated their available margin funds, and they solicited new customers by making false statements. They also used a Ponzi-like scheme for redemptions. Shortly before it was shut down, the company had $17,654,486 in unpaid customer liabilities and only $677,932 in assets. Walsh and Martin pleaded guilty to wire fraud, tax evasion, and to making false statements in a report to the Commodities Futures and Trading Commission, a Commodities Exchange Act (7 U.S.C. 6d(a)) violation. The district court sentenced them to terms of imprisonment of 150 and 204 months, respectively, and ordered each to pay $16,976,554 in restitution. The Seventh Circuit affirmed, rejecting challenges to a finding as to the amount of loss and restitution and to application of a sentencing enhancement based upon a finding that each was an officer or director of a futures commission merchant. View "United States v. Walsh" on Justia Law

Bauer served as an officer in investment companies, on the pricing committee, and as chief compliance officer, implementing policies to prohibit employees from trading on nonpublic information regarding the securities held in the companies’ portfolios. Following trades for her personal account, the Securities and Exchange Commission charge Bauer with insider trading in connection with mutual fund redemption. The district court granted the SEC summary judgment. The Seventh Circuit reversed, noting that the SEC rarely brings insider trading claims in connection with mutual fund redemption and that no federal court has ruled on the issue. The district court must determine whether Bauer’s alleged conduct properly fits under the misappropriation theory of insider trading, under which a corporate outsider misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information. The court noted that Bauer did not argue that mutual fund redemptions cannot entail deception under the classical theory, but conceded that insider trading liability could attach to mutual fund redemptions if it could be shown that she knew the product was priced incorrectly, but that the issue must be resolved at the trial court level. View "Sec. & Exch. Comm'n v. Bauer" on Justia Law

PFG and Acuvest had an agreement (later terminated) under which guaranteed Acuvest’s customers that Acuvest would conform its conduct to CEA mandates. Acuvest advised Prestwick with respect to an investment on which it suffered a substantial loss. Prestwick sued PFG, Acuvest, and two of Acuvest’s principals, alleging violations of the Commodity Exchange Act (CEA), 7 U.S.C. 1, a breach of fiduciary duty against the Acuvest defendants, and a guarantor liability claim against PFG. Prestwick argued that termination of PFG’s guarantee of Acuvest’s obligations under the CEA did not terminate protection “for existing accounts opened during the term of the guarantee.” The district court awarded summary judgment to PFG and dismissed the remaining defendants with prejudice so that Prestwick could appeal. The Seventh Circuit affirmed, stating that contracts between the parties were definitive and rejecting Prestwick’s assertion public policy and estoppel to overcome a decision that the guarantee agreement was properly terminated. View "Prestwick Capital Mgmt., Ltd. v. Peregrine Fin. Grp., Inc." on Justia Law

After accumulating a fortune in the technology business, Patel became a hedge fund manager. He formed a fund, and Sitara to serve as the fund’s investment adviser, and named himself managing director of Sitara. His acquaintances purchased interests in the fund. After initial success, Patel invested $6.8 million, nearly all of the fund’s assets, in Freddie Mac common stock in 2008, after the beginning of the subprime mortgage crisis. The fund incurred devastating losses. Owners of limited partnership interests sued Patel and Sitara, claiming federal and state securities fraud, fraudulent misrepresentation, and fraudulent inducement. Their second amended complaint asserted only failure to register securities in violation of federal law, failure to register as an investment advisor under Illinois law, and breach of fiduciary duty under ERISA, 29 U.S.C. 1109(a). Plaintiffs sought to file a third amended complaint, based upon purported misrepresentations discovered while deposing Patel: an offering memorandum statement that Patel “intends to contribute no less than one hundred thousand dollars” and Patel’s oral statement that he was investing some of the $18 million from the sale of a former business at the inception of the fund. Patel did not invest any proceeds from the sale of his company at the inception. The district court denied the motion. The Seventh Circuit affirmed. The new claims suffered from deficiencies that rendered the proposed amendment futile. View "Shailja Gandhi Revocable Trust v. Sitara Capital Mgmt., LLC" on Justia Law