Justia U.S. 2nd Circuit Court of Appeals Opinion Summaries

In 2004, securities fraud class actions were filed against AIG and other corporate and individual defendants, including Gen Re. The district court consolidated the actions and appointed as lead plaintiffs three Ohio public pension funds, for a putative class of investors who purchased AIG’s publicly traded securities between October 28, 1999, and April 1, 2005. The complaint alleged that AIG and Gen Re violated Rule 10b-5(a) and (c), (Securities Exchange Act, 15 U.S.C. 78j(b)), by entering into a sham $500 million reinsurance transaction designed to mislead the market and artificially increase AIG’s share price. After the parties reached a settlement agreement, the district court denied plaintiffs’ motion to certify a settlement class, finding that the class could not satisfy the predominance requirement of FRCP 23(b)(3) because the fraud-on-the-market presumption does not apply to the class’s securities fraud claims. The Second Circuit vacated, holding that, under Amchem Products, Inc. v. Windsor, 521 U.S. 591(1997), a securities fraud class’s failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating “intractable management problems” at trial. Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims to satisfy the predominance requirement. View "In Re: Am. Int'l Grp. Sec. Litigation" on Justia Law

Terex manufactures equipment. Apuzzo was its Chief Financial Officer. URI is an equipment rental company. Nolan was URI’s Chief Financial Officer. URI and Nolan, carried out fraudulent “sale-leaseback” transactions, to allow URI to recognize revenue prematurely and inflate profits. URI sold used equipment to GECC, a financing corporation, and leased it back. To obtain GECC’s participation, URI convinced Terex to agree to resell the equipment after the lease periods. Terex guaranteed that GECC would receive at least 96 percent of the purchase price for the equipment. URI secretly agreed to indemnify Terex for losses from the guarantee and to purchase new equipment from Terex. Apuzzo knew that if the extent of the transactions was transparent, URI would not be able to claim increased revenue under Generally Accepted Accounting Principles. Apuzzo disguised URI’s risks and obligations, and approved inflated invoices to conceal indemnifications. Following transactions under the scheme, the SEC charged that Apuzzo aided and abetted securities laws violations through his role in a fraudulent accounting scheme. The district court dismissed; the complaint plausibly alleged that Apuzzo had actual knowledge of the primary violation, but did not allege “substantial assistance.” The Second Circuit reversed, holding that Apuzzo associated himself with the venture, participated in it as in something that he wished to bring about, sought by his action to make it succeed. . View "Sec. & Exch. Comm'n v. Apuzzo" on Justia Law

Aladdin’s purportedly gross mismanagement allegedly caused plaintiffs to lose their entire $60 million investment in a collateralized debt obligation. A CDO pays investors based on performance of an underlying asset. The CDO at issue was “synthetic” in that its asset was not a traditional asset like a stock or bond, but was a derivative instrument, whose value was determined in reference to still other assets. The derivative instrument was a “credit default swap” between Aladdin CDO and Goldman Sachs based on the debt of approximately 100 corporate entities and sovereign states. The district court held that, because of a contract provision limiting intended third-party beneficiaries to those “specifically provided herein,” plaintiffs could not bring a third-party beneficiary breach of contract claim and could not “recast” their claim in tort. The Second Circuit reversed. Plaintiffs plausibly alleged that the parties intended the contract to benefit investors in the CDO directly and create obligations running from Aladdin to the investors; that the relationship between Aladdin and plaintiffs was sufficiently close to create a duty in tort; and that Aladdin acted with gross negligence in managing the investment portfolio, leading to the failure of the investment vehicle and plaintiffs’ losses. View "Bayerische Landesbank, NY v. Aladdin Capital Mgmt., LLC" on Justia Law

Traders employed by brokerage firms were indicted for conspiring with employees of Watley, a day trading firm, to commit securities fraud by providing their employers’ confidential information to Watley. After a mistrial on conspiracy to commit securities fraud, 18 U.S.C. 1348, 1349, the government retried the conspiracy count with honest services fraud and property fraud as the charged objects of conspiracy. The jury convicted under each theory. The Supreme Court subsequently decided Skilling, limiting honest services fraud to schemes effectuated through bribes or kickbacks. After sentencing, the SEC initiated administrative proceedings and disclosed transcripts of investigative depositions taken as early as 2004. With access to those transcripts, defendants moved for a new trial, contending that the transcripts included material required to be disclosed under Brady because it contradicted or undermined testimony of key government witnesses on a central question: whether allegedly misappropriated information was confidential under Carpenter v. U. S. The district court concluded that the jury would not have reached a different result had the transcripts been disclosed. The Second Circuit vacated. Failure to disclose portions of the transcripts violated Brady and undermined confidence in the verdict. The court also did not adequately instruct the jury on the scope of honest services fraud. View "United States v. Mahaffy" on Justia Law

Acticon is the lead plaintiff in a consolidated putative class action suit against China North East Petroleum Holdings Limited (NEP) brought under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) & 78t(a), and under SEC Rule 10b-5. Acticon alleges that NEP misled investors about its reported earnings, oil reserves, and internal controls. It further alleges that NEP revealed this information through a series of corrective disclosures and that in the trading days after each disclosure was made, NEP’s stock price dropped. NEP argues that these allegations are not sufficient to allege economic loss because its share price rebounded on certain days after the final disclosure to the point that Acticon could have sold its holdings and avoided a loss. The district court held that because Acticon had foregone multiple opportunities to sell its shares at a profit, it had not suffered an economic loss and dismissed. The Second Circuit vacated. Price recovery does not defeat an inference of economic loss. View "Rosado AG v. China North East Petroleum Holdings, Ltd." on Justia Law

Based on GT’s audit of the financial statements of its client, Winstar, plaintiffs (Winstar stockholders) claimed that GT committed securities fraud under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and made false and misleading statements in an audit opinion letter, 15 U.S.C. 78r. The district court dismissed. The Second Circuit remanded, finding that triable questions of fact exist as to whether GT acted with scienter in making alleged misrepresentations in its audit opinion letter, whether plaintiffs purchased Winstar’s stock in actual reliance on those representations, and whether plaintiffs suffered losses as a result. View "Gould v. Winstar Commc'n, Inc." on Justia Law

Defendants held ASI notes that could be converted into shares of stock at either a pre-set price-per-share or a floating price that depended on share price over a defined period prior to conversion. A note was converted into shares, all of which were sold in the week following conversion. ASI, seeking to recoup the profits earned on the sale, sued under the Securities Exchange Act, 15 U.S.C. 78p(b), which prohibits statutory insiders such as defendant from profiting on the trade of securities on a short-swing basis. The district court found defendants liable for profits of $4,965,898.95 earned in short-swing insider trading. The Second Circuit affirmed. Rejecting an argument that the relevant transactions were not “purchases” of securities for purposes of the act, but were within the scope of the “debt” and “borderline transaction” exceptions to liability, and that the scope of any liability found should be limited to defendant Cannell’s pecuniary interest in the profits at issue. View "Analytical Surveys, Inc. v. Tonga Partners, L.P.," on Justia Law

Plaintiff, an attorney admitted to practice in New York, appealed from an order of the district court dismissing his complaint for lack of subject matter jurisdiction because Section 25(a) of the Securities and Exchange Act of 1934, 15 U.S.C. 78y(a)(1), provided a comprehensive remedial scheme that required plaintiff to appeal an SEC debarment order to a court of appeals. The court affirmed the district court's conclusion that Section 25(a) did, under this Circuit's precedent, supply the jurisdictional route that plaintiff must follow to challenge the SEC action in this case. View "Altman v. SEC, et al." on Justia Law

Defendants appealed from the district court's holding that defendants were liable to plaintiff in the total amount of $4,965,898.95 for profits earned in short-swing insider trading and from an order denying defendants' motion for reconsideration. At issue, inter alia, was the rarely-construed "debt exception" to liability under Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. 78p(b), and the treatment of "hybrid" derivative securities under Section 16(b). The court agreed with the district court that the acquisition of the 2004 Note was a purchase of a security for purposes of Section 16(b), that the conversion of the 2004 Note was also a Section 16(b) purchase, and that neither of these purchases came within the debt and borderline transaction exceptions to section 16(b) liability. The court further concurred that Tonga and Cannell Capital, in addition to Cannell, were subject to disgorgement of profits, and the court concluded that the district court did not abuse its discretion in denying defendants' motion for reconsideration. Accordingly, the court affirmed the judgment. View "Analytical Surveys, Inc. v. Tonga Partners, L.P., et al." on Justia Law

Plaintiff appealed an order of the district court denying leave to amend its complaint alleging violations of section 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. The proposed complaint alleged that defendant was required to disclose, and failed adequately to disclose, in connection with a March 2006 secondary offering of its securities, known defects in the company's semiconductor chips. The court held that the proposed complaint stated a claim because it plausibly alleged that the defects constituted a known trend or uncertainty that the company reasonably expected would have a material unfavorable impact on revenues. Accordingly, the court vacated the judgment and remanded with instructions to permit the filing of the complaint. View "Panther Partners Inc. v. Ikanos Communications, Inc." on Justia Law