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

This was a consolidated appeal from, inter alia, an order of the district court lifting an asset freeze for the purpose of authorizing the interlocutory sale of a vacation home owned by relief-defendant Lynn A. Smith. The magistrate judge held in relevant part that the sale was necessary to preserve the value of the asset pending resolution of the merits of the action. The court held that there was no error in this finding and held that it was not an abuse of discretion to lift the asset freeze in order to authorize the sale. Accordingly, the court affirmed the judgment of the district court.

Petitioner, a former stockbroker, sought review of an order of the Securities and Exchange Commission (SEC), which found that he willfully violated the antifraud provisions of the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78j(b), 17 C.F.R. 240.10b-5, by orchestrating a scheme that allowed certain customers to engage in late trading of mutual funds, and that he aided and abetted and caused the failure of his firm to keep accurate books and records, in violation of the Exchange Act's recordkeeping requirements. At issue was whether the SEC's order, which barred petitioner from working in the securities industry, issued a cease and desist order against him, ordered him to disgorge his unjust enrichment amount plus interest, and imposed a civil penalty, should be vacated. The court denied the petition and affirmed the SEC's order because petitioner's conduct clearly violated the Exchange Act's antifraud and recordkeeping provisions and because the penalties imposed by the SEC were not unreasonable.

Plaintiff, the SEC, appealed from a judgment dismissing its complaint against Marc J. Gabelli, the portfolio manager of the mutual fund Gabelli Global Growth Fund (GGGF or the Fund), and Bruce Alpert, the chief operating officer for the Fund's adviser, Gabelli Funds, LLC (Adviser). The SEC's complaint charged defendants with failing to disclose favorable treatment accorded one GGGF investor in preference to other investors. As a preliminary matter, the court limited its jurisdiction to the SEC's appeal. The court held that the complaint adequately stated claims against Alpert for violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a), and Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b). The court also held that the SEC's prayer for civil penalties survived defendants' motions to dismiss and must be reinstated where the court found that at this stage in the litigation, defendants have not met their burden of demonstrating that a reasonably diligent plaintiff would have discovered this fraud prior to September 2003. The court further held that the complaint sufficiently plead a reasonable likelihood of future violations and thus reversed the district court's dismissal of the SEC's prayer for injunctive relief. Accordingly, the court granted the SEC's appeal in all respects, dismissed the cross-appeals for want of appellate jurisdiction, and remanded for further proceedings.

This criminal appeal arose from a "finite reinsurance" transaction between American International Group, Inc. (AIG) and General Reinsurance Corporation (Gen Re). Defendants, four executives of Gen Re and one of AIG, appealed from judgments convicting them of conspiracy, mail fraud, securities fraud, and making false statements to the Securities and Exchange Commission. Defendants appealed on a variety of grounds, some in common and others specific to each defendant, ranging from evidentiary challenges to serious allegations of widespread prosecutorial misconduct. Most of the arguments were without merit, but defendants' convictions must be vacated because the district court abused its discretion by admitting the stock-price data and issued a jury instruction that directed the verdict on causation.

Appellants appealed from the dismissal of their first amended complaint, which asserted claims against Morgan Stanley under Section 10(b) of the Securities and Exchange Act of 1934 (Act), 15 U.S.C. 78a et seq., and New York common law. Appellants contended that Morgan Stanley, in oral and email communications with appellants' treasurer, materially misrepresented the liquidity of certain auction rate securities (ARS) and thereby fraudulently induced appellants to purchase and hold these securities at a time when Morgan Stanley knew that the market for ARS was collapsing. The court affirmed the district court's dismissal on the ground that sophisticated investors like appellants could not plead reasonable reliance on Morgan Stanley's alleged misrepresentations in light of Morgan Stanley's publicly-filed statement explicitly disclosing the very liquidity risks about which appellants claimed to have been misled.

Sheet Metal Workers Local 33 et al. appealed from a judgment of the district court dismissing their putative securities class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. At issue was whether the securities issuer made false statements and omissions of material facts in the registration documents accompanying its initial public offering, in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq. The court held that the alleged misstatements were not material because the value of the transactions composed an immaterial portion of the issuer's total assets. Accordingly, the court affirmed the district court's motion to dismiss on the ground of immateriality.

This case stemmed from continuing disputes between Argentina and its various private creditors. Argentina and its Brady bondholders entered into a Continuation of Collateral Pledge Agreement that extended the security interest in the tendered bonds' collateral during its transfer and liquidation. Capital Ventures International (CVI) held certain non-Brady bonds on which Argentina also defaulted and chose to sue Argentina to collect on the defaulted bonds it held, seeking to attach Argentina's reversionary interest in the Brady collateral. At issue was whether the attachments blocked the proposed exchange and whether the district court properly modified the attachments to allow the exchange. The court held that CVI was entitled to maintain its attachments even though a quirk of the bonds' Collateral Pledge Agreement meant that the attachments would effectively block the proposed exchange between Argentina and the Brady bondholders. Therefore, the court reversed the district court's orders that modified the attachments to permit the exchange.

This case stemmed from a contractual arrangement known as a "cash-settled total return equity swap agreement" between the parties. The parties appealed the judgment of the district court finding defendants in violation of section 13(d) of the Williams Act, 15 U.S.C. 78m(d), and permanently enjoining them from future violations. The court considered only whether a section 13(d) violation occurred with respect to CSX shares owned outright by defendants acting as a group. Because the district court did not make findings sufficient to permit appellate review of a group violation of section 13(d) with respect to outright ownership of CSX shares, the court remanded for further consideration. An earlier order affirmed the denial of an injunction against the voting of shares acquired by defendants while they were not in compliance with section 13(d). The court explained that ruling on the ground that injunctive "sterilization" of shares was not available when shareholders had adequate time to consider the belated Williams Act disclosures before the relevant shareholder's vote. Accordingly, the court affirmed in part, vacated in part, and remanded in part.

This insurance coverage dispute raised issues arising out of financial regulators' investigations in alleged accounting misstatements by MBIA, Inc. (MBIA) and related litigation. Based on these events, MBIA made claims under two $15 million director and officer (D&O) insurance policies it had purchased from Federal Insurance Co. (Federal) and ACE American Insurance Co. (ACE), seeking coverage for costs associated with these claims as losses under the policies. The district court granted summary judgment in favor of MBIA on two of its three coverage claims but granted summary judgment in favor of Federal and ACE on one of MBIA's coverage claims. The parties subsequently appealed the district court's judgments. The court affirmed the district court with respect to coverage for all costs except those related to the independent consultant where the independent consultant's investigation was a covered cost under the policies. Therefore, the judgment of the district court was affirmed in part and reversed in part. The court remanded the case to the district court for entry of judgment in favor of MBIA on its claim for coverage of the independent consultant's costs.

Enron Creditors Recovery Corp. (Enron) sought to avoid and recover payments it made to redeem its commercial paper prior to maturity from appellees, whose notes were redeemed by Enron. On appeal, Enron challenged the district court's conclusion that 11 U.S.C. 546(e)'s safe harbor, which shielded "settlement payments" from avoidance actions in bankruptcy, protected Enron's redemption payments whether or not they were made to retire debt or were unusual. The court affirmed the district court's decision and order, holding that Enron's proposed exclusions from the reach of section 546(e) have no basis in the Bankruptcy Code where the payments at issue were made to redeem commercial paper, which the Bankruptcy Code defined as security. Therefore, the payments at issue constituted the "transfer of cash ... made to complete [a] securities transaction" and were settlement payments within the meaning of 11 U.S.C. 741(8). The court declined to address Enron's arguments regarding legislative history because the court reached its conclusion based on the statute's plain language.