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

Zimmer manufactures orthopaedic reconstructive devices. One product, a replacement hip socket, was subject to a report of high failure rates. Zimmer announced preliminary findings in 2008, attributed the failures to improper surgical technique, stopped selling the product in the U.S. while preparing new instructions for implantation, and returned the item to the market. Owners of Zimmer stock sued, claiming that the problem was poor design or quality control, that Zimmer pretended otherwise to avoid hurting the price of its stock, and that Zimmer delayed revealing quality-control problems at its plant until after its 2008 quarterly report and earnings call. Zimmer had projected 10% to 11% revenue growth for the year and net earnings of $4.20 to $4.25 per share; months later it cut this projection to 8.5% to 9% growth and net earnings of $4.05 to $4.10 per share. The district court dismissed under the pleading standards of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4. The Seventh Circuit affirmed, holding that plaintiffs failed to establish scienter. The FDA has never concluded that the product was defectively designed or made and never issued a warning or caution; quality control issues at pharmaceutical and medical-device producers are endemic.

A corporation that wants its shares to be traded on an exchange or through broker-dealers that make national markets must register the securities under the Securities Act of 1933, 15 U.S.C. 77j. Section 13(a) of the 1934 Act, 15 U.S.C. 8m(a), requires the issuer to file periodic reports. Plaintiff registered securities and persuaded broker-dealers to make markets in them, but fell behind with its filings. After eight years, during which plaintiff fell farther behind, the SEC opened a formal proceeding. After a hearing and disclosure that plaintiff could not pay an auditor to certify recent financial statements, the SEC revoked plaintiff's registration; trading in its shares came to a halt. While judicial review was pending, plaintiff filed a new registration, which has not been revoked despite plaintiff's failure to catch up on reports. The Seventh Circuit dismissed the case as moot. To commence trading in any newly registered stock, a broker-dealer needs approval from the Financial Industry Regulatory Authority. When a potential market-maker sought approval, it noted SEC comments on plaintiff's new registration. Setting aside the SEC revocation decision would not oblige FINRA to allow trading to resume.

The SEC filed a complaint. The court appointed a receiver to handle defendants' assets for distribution among victims of the $31 million fraud. Assets included oil and gas leases. SonCo filed a claim. The parties came to terms; the court entered an agreed order that required SonCo to pay $580,000 for assignment of the leases. The wells were unproductive, because of freeze orders entered to prevent dissipation of assets; the lease operator, ALCO, had posted a $250,000 bond with the Texas Railroad Commission. The bond was, in part, from defrauded investors. SonCo was ordered to replace ALCO as operator and to obtain a bond. More than a year later, SonCo had not posted the bond or obtained Commission authorization to operate the wells, but had paid for the assignment. The judge held SonCo in contempt and ordered it to return the leases, allowing the receiver to keep $600,000 that SonCo had paid. SonCo returned the leases. The Seventh Circuit affirmed that SonCo willfully violated the order, but vacated the sanction. The judge on remand may: reimpose the sanction, upon demonstrating that it is a compensatory remedy for civil contempt; impose a different, or no sanction; or proceed under rules governing criminal contempt.

MGIC provides private insurance on mortgage loans and incurred large losses in the financial crunch that began with the decline of prices of securities based on packages of mortgage loans. Class-action suits filed under the Securities Exchange Act of 1934 were consolidated and were dismissed when the judge concluded that the complaint did not meet the standard set by the Private Securities Litigation Reform Act, 15 U.S.C. 78u–4(b). A single plaintiff appealed, based on fraud that allegedly occurred during MGIC's quarterly earnings call on July 19, 2007. The Seventh Circuit affirmed, holding that the complained-of statement was true and that the complaint failed PSLRA's requirement for pleading scienter. At most plaintiff could allege that MGIC’s managers should have seen the looming problem, and establish negligence rather than the state of mind required for fraud. MGIC's managers did not have any private information that they could have revealed.

In 2010 the Seventh Circuit held that California law applied to plaintiff’s securities fraud claims and remanded because California, unlike federal securities law, permits a person who did not purchase or sell stock in reliance on a fraudulent representation to sue for damages. On remand the district court dismissed, ruling that the complaint did not adequately allege defendants' state of mind and plaintiff's reliance on particular false statements. The Seventh Circuit affirmed. Plaintiff never explained how he could have avoided loss on his shares, had there been earlier disclosure. Mismanagement, not fraud, caused the loss. Any fraud just delayed the inevitable and affected which investors bore the loss. Plaintiff cannot show that earlier disclosure would have enabled him to sell and shift the loss to others before the price dropped.

The brokerage entered into agreements with customers that set a fee for handling, postage, and insurance for mailing confirmation slips after each securities trade. Plaintiff filed claims of breach of contract and unjust enrichment, seeking class certification and recovery of fees charged since 1998. The brokerage removed to federal court under the Class Action Fairness Act, 28 U.S.C. 1332(d), or the Securities Litigation Uniform Standards Act 15 U.S.C. 78p(b) and (c) and 78bb(f), and obtained dismissal. The Seventh Circuit affirmed, first holding that SLUSA did not apply because any alleged misrepresentation was not material to decisions to buy or sell securities, but CAFA's general jurisdictional requirements were met. The agreement did not suggest that the fee represents actual costs, and it was not reasonable to read this into the agreement. Nor did the brokerage have an implied duty under New York law to charge a fee reasonably proportionate to actual costs where it notified customers in advance and they were free to decide whether to continue their accounts.

In November 2010 Ladish agreed to be acquired by Allegheny for $24 cash plus .4556 shares of Allegheny stock per share. At the closing price after the announcement, the package was worth $46.75 per Ladish share, a premium of 59% relative to Ladish's trading price before the announcement. The transaction closed in May, 2011. Ladish became ATI. Investors' reactions implied that Allegheny bid too high: the price of its shares fell when the merger was announced. No Ladish shareholder dissented and demanded an appraisal. But one shareholder filed a suit seeking damages, claiming breach of federal securities law and Wisconsin corporate law by failing to disclose material facts. The district court granted judgment on the pleadings in defendants' favor. On appeal, the shareholder abandoned federal claims. The Seventh Circuit affirmed on the state law claims, citing the business judgment rule.

Plaintiff and her husband divorced in 2002. He was an executive of defendant, a closely held corporation, a supermarket chain. The divorce decree transferred to wife some of his stock "until such time as [he] is first able to sell" them. He was to pay alimony until 2012 unless he sold the shares sooner and forwarded proceeds to wife. Wife claims that defendant's financial officer told her falsely that husband's shares could be sold only if he died, ceased to be employed by defendant, or ceased being employed in a position that entitled him to buy company stock. She claims she was induced to accept stock in lieu of a cash settlement and to agree that alimony payments would terminate as soon as husband was allowed to sell the stock. Less than two weeks after the earliest day on which husband could stop paying alimony, the company agreed to buy back the shares. The price was $908,000. Wife lost state court litigation and surrendered the shares in exchange $712,000. The district court dismissed, as untimely, wife's suit under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and SEC Rule 10b-5. The Seventh Circuit affirmed, finding that any violation occurred with the 2002 misrepresentation, more than five years before suit was filed.

The district court dismissed a claim of breach of fiduciary duty, filed by owners of common stock in a closed-end investment fund, under the Securities Litigation Uniform Standards Act of 1998, which prohibits securities class actions if the class has more than 50 members, the suit is not exclusively derivative, relief is sought on the basis of state law, and the class action is brought by "any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. 78bb(f)(1). The Seventh Circuit affirmed, finding that the suit alleged misrepresentation and misleading omission. The law is designed to prevent plaintiffs from migrating to state court in order to evade rules for federal securities litigation in the Private Securities Litigation Reform Act of 1995.

Companies filed suit, alleging that an employee engaged in a collusive trading scheme in violation of the Securities Exchange Act of 1934. Under section 9(a) of the Act, a private plaintiff must plead that: a series of transactions in a security created actual or apparent trading in that security or raised or depressed its market price; scienter; the purpose of the transactions was to induce the security's sale or purchase by others; plaintiffs relied on the transactions; and the transactions affected plaintiff's purchase or selling price. The district court dismissed for failure to state a claim. The Seventh Circuit reversed and remanded. The complaint adequately stated with particularity the circumstances constituting the securities fraud, and the economic loss impact on the plaintiffs as a result of the fraud and satisfied the pleading requirements of FRCP 9(b).