Justia U.S. 3rd Circuit Court of Appeals Opinion Summaries

Articles Posted in Securities Law

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The Goldmans, proceeding before an arbitration panel operating under the auspices of the Financial Industry Regulatory Authority (FINRA), alleged that their financial advisor and Citigroup had violated federal securities law in their management of the Goldmans’ brokerage accounts. The district court dismissed their motion to vacate an adverse award for lack of subject-matter jurisdiction, stating the Goldmans’ motion failed to raise a substantial federal question. The Third Circuit affirmed. Nothing about the Goldmans’ case is likely to affect the securities markets broadly. That the allegedly-misbehaving arbitration panel happened to be affiliated with a self-regulatory organization does not meaningfully distinguish this case from any other suit alleging arbitrator partiality in a securities dispute. The court noted “the flood of cases that would enter federal courts if the involvement of a self-regulatory organization were itself sufficient to support jurisdiction.” View "Goldman v. Citigroup Global Mkts., Inc" on Justia Law

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After a failed merger between Cooper Tire and Apollo Tyres, OFI Asset Management, purporting to act for similarly situated investors, filed a class action against Cooper and its officers. OFI claims that, during merger negotiations, the defendants made material misrepresentations in statements to investors, in violation of federal securities laws, 15 U.S.C. 78j(b), 78n(a), and 78t(a). The Third Circuit affirmed the district court's dismissal of the case, rejecting arguments that that court improperly managed the presentation of arguments. The court upheld a finding that OFI failed to allege sufficient facts to support its claims. The court had ordered OFI to submit a letter “identifying and verbatim quoting” the five most compelling examples it could muster of false or fraudulent statements by Cooper, with three factual allegations demonstrating the falsity of each statement and three factual allegations supporting a finding of scienter as to the making of the statements. The court had subsequently determined that the statements identified as problematic by OFI were either not false or misleading, were “forward-looking” statements protected by the safe harbor established by the Private Securities Litigation Reform Act of 1995, lacked a sufficient showing of scienter, or suffered from some combination of those infirmities. View "OFI Asset Mgmt. v. Cooper Tire & Rubber" on Justia Law

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With little formal education (a high school GED) Miller passed several securities industry examinations and “maintained a public persona of a very successful entrepreneur.” Miller sold investors over $41 million in phony “promissory notes,” which were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, 15 U.S.C. 77b(a)(1), 78c(a)(10), and not exempt from federal or state registration requirements. Miller did not register the notes; he squandered the money, operating a Ponzi scheme. Miller pled guilty to one count of securities fraud, 15 U.S.C. 78j(b), and one count of tax evasion, 26 U.S.C. 7201. He was sentenced to 120 months’ imprisonment. The Third Circuit affirmed, rejecting an argument that the court improperly applied the Sentencing Guidelines investment adviser enhancement, U.S.S.G. 2B1.1(b)(19)(A)(iii). The court interpreted the Investment Advisers Act of 1940, 15 U.S.C. 80b-2(a)(11) to apply broadly, with exceptions that do not apply to Miller. The court also rejected arguments that the government breached Miller’s plea agreement and that his sentence was substantively unreasonable. View "United States v. Miller" on Justia Law

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Athena incurred $1.4 million in losses on investments with Goldman Sachs and believed that Goldman misrepresented the risks, Goldman and Athena participated in arbitration to settle the dispute. Athena asserted misrepresentation, securities fraud, common law fraud and breach of fiduciary duty. After the first panel session, the Financial Industry Regulatory Authority (FINRA) disclosed that a panel member, Timban, had been charged with the unauthorized practice of law based on an appearance in a New Jersey municipal court. Neither party, nor FINRA, objected to Timban’s continued participation; neither party conducted further due diligence. Following a nine-day hearing, the panel ruled in favor of Goldman. Two panel members signed the award, but Timban did not. Under the Subscription Agreement, only two members needed to sign the award for it to have binding effect. After the award, Athena conducted a background investigation on Timban and learned that Timban failed to disclose numerous regulatory complaints against him. The district court ordered a new arbitration hearing, reasoning that Athena’s rights were compromised by an arbitrator who misrepresented his ability to serve and abandoned the panel before its final ruling. The Third Circuit reversed, finding that Athena waived its right to challenge the award. View "Goldman Sachs & Co v. Athena Venture Partners, L.P." on Justia Law

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In 1996, Bocchino, a stockbroker, learned from a superior that Traderz “might go public” and that the endeavor was supported by “some commitment” from a popular fashion model. Based solely on that, and without any independent investigation into the quality of the entity, Bocchino immediately sought investment from clients. Bocchino received over $40,000 in commissions from Traderz sales. The second involved Fargo. The source of Bocchino’s information regarding Fargo is unclear. Bocchino only obtained cursory documentation about the entity before soliciting sales. He did not conduct any independent investigation, despite awareness that Fargo’s principal’s “full-time ‘job’ was law student.” Bocchino received $14,000 in commissions for his clients’ stock purchases in Fargo. Traderz and Fargo turned out to be fraudulent ventures. The principals of each entity were criminally convicted, and the anticipated value of the investments vanished. The Securities and Exchange Commission brought civil law enforcement actions against those who sold investments in the entities. The bankruptcy court held that those civil judgments against Bocchino were nondischargeable, 11 U.S.C. 523(a)(2)(A). The district court and Third Circuit affirmed, finding that collapse of the private placements was neither abnormal nor extraordinary given Bocchino’s lack of due diligence. View "In Re: Bocchino" on Justia Law

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Trinity, a New York Episcopal parish, owns Wal-Mart stock and requested that Wal-Mart include its shareholder proposal in Wal-Mart’s proxy materials. Trinity’s proposal, linked to Wal-Mart’s sale of high-capacity firearms at about one-third of its 3,000 stores, asked Board of Directors to develop and implement standards for use in deciding whether to sell a product that “especially endangers public safety,” “has the substantial potential to impair the reputation of Wal-Mart,” and/or “would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.” The Securities and Exchange Commission’s “ordinary business” exclusion lets a company omit a shareholder proposal from proxy materials if the proposal relates to ordinary business operations. Wal-Mart obtained a “no-action letter” from the SEC, indicating that there would be no recommendation of an enforcement action against Wal-Mart if it omitted the proposal from its proxy materials. Trinity filed suit. The district court held that, because the proposal concerned the company’s Board (rather than management) and focused principally on governance (rather than how Wal-Mart decides what to sell), it was outside ordinary business operations. The Third Circuit reversed. “Stripped to its essence, Trinity’s proposal goes to the heart of Wal-Mart’s business: what it sells on its shelves.” View "Trinity Wall Street v. Wal-Mart Stores, Inc" on Justia Law

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When Khazin began working for TD, he signed an employment agreement and agreed to arbitrate all disputes. Khazin was responsible for due diligence on financial products offered by TD . When he discovered that one product was priced in a manner noncompliant with securities regulations, he reported to his supervisor, Demmissie, and recommended changing the price. Demmissie instructed Khazin to analyze the “revenue impact,” which revealed that remedying the violation would save customers $2,000,000, but would cost TD $1,150,000 and negatively impact Demmissie’s divisions. Demmissie allegedly told Khazin not to correct the problem. Demmissie and TD’s human resources department later confronted Khazin about a purported billing irregularity that, he claims, was unrelated to his duties and nonexistent. His employment was terminated. Khazin sued, asserting violation of the Dodd-Frank Act, premised on the allegation that he had been terminated in retaliation for “whistleblowing.” Khazin contended that the Act prevented TD from compelling the arbitration of his whistleblower retaliation claim, 18 U.S.C. 1514A(e)(2). The district court held that the provision did not prohibit enforcement of arbitration agreements executed before Dodd-Frank was passed. The Third Circuit concluded that Khazin’s whistleblower claim is subject to arbitration because it is not covered by the restrictions. View "Khazin v. TD Ameritrade Holding Corp" on Justia Law

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Escala shareholders sued financial institutions that engage in equity trading, alleging that the defendants participated in “naked” short selling of Escala stock, which “increased the pool of tradable shares by electronically manufacturing fictitious and unauthorized phantom shares.” Plaintiffs claim dilution of voting rights and decline in value. All claims were under New Jersey law: the New Jersey Racketeer Influenced and Corrupt Organizations Act, based on predicate acts of state securities fraud and theft, and common law claims for unjust enrichment, interference with economic advantage and contractual relations, breach of contract, breach of the covenant of good faith and fair dealing, and negligence. The district court denied Plaintiffs’ motion to remand to state court. The Third Circuit reversed, holding that there is no federal-question jurisdiction. Short sales are subject to detailed federal regulation. New Jersey does not have an analogous provision, but whether the naked short selling at issue violated state law requires no reference to federal regulation SHO. The success of those claims does not “necessarily” depend upon federal law, so the case does not “arise under” the laws of the United States. Regulation SHO’s exclusive jurisdiction provision does not change the analysis; such provisions cannot independently generate jurisdiction. View "Manning v. Merrill Lynch Pierce Fenner & Smith, Inc." on Justia Law

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Institutional investors brought a private securities fraud class action under the Private Securities Litigation Reform Act of 1995 (PSLRA), claiming that Wyeth, a pharmaceutical company and its executives made materially false and misleading statements in violation of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Securities and Exchange Commission (SEC) Rule 10b-5, regarding interim clinical trial data related to the development of an experimental Alzheimer’s drug. The district court dismissed for failure to state a claim. The Third Circuit affirmed, concluding that, in context, the defendants’ statements were not false or misleading. The court noted that this is not the first case in which the federal courts have adjudicated securities fraud allegations arising out the development of the drug bapineuzumab and concluding that the plaintiffs failed to adequately allege defendants did not honestly believe their interpretation of the interim results or that it lacked a reasonable basis. View "City of Edinburgh Council v. Pfizer Inc." on Justia Law

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A financial advisor with more than 20 years of experience, McGee met Maguire between 1999 and 2001 while attending Alcoholics Anonymous meetings. McGee assured Maguire that their conversations were going to remain private. Maguire never repeated information that McGee entrusted to him. In 2008, Maguire was closely involved in negotiations to sell PHLY, a publicly-traded company. During this time, Maguire experienced sporadic alcohol relapses. McGee saw Maguire after a meeting and inquired about his frequent absences. In response, Maguire “blurted out” inside information about PHLY’s imminent sale. He later testified that he expected McGee to keep this information confidential. Before the information became public, McGee borrowed $226,000 to finance the purchase of 10,750 PHLY shares. Shortly after the public announcement of PHLY’s sale, McGee sold his shares, resulting in a $292,128 profit. After an SEC investigation, McGee was convicted of securities fraud under the misappropriation theory of insider trading (15 U.S.C. 78j(b) and 78ff), and SEC Rules 10b-5 and 10b5-2(b)(2), and of perjury (18 U.S.C. 1621). The Third Circuit affirmed, rejecting arguments that Rule 10b5-2(b)(2) is invalid because it allows for misappropriation liability absent a fiduciary relationship between a misappropriator of inside information and its source; that there was insufficient evidence to sustain his convictions; and that the court erred in denying his motion for a new trial based on newly discovered evidence. View "United States v. McGee" on Justia Law