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

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

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

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

During his time as an investor and owner of the MAAA Trust, which he established in 1992, Teo filed three false Schedule 13D disclosures and failed to file several required 13Ds. After they made a $154,932,011 gross profit on a stock sale, the SEC filed a civil enforcement action asserting violations of the Securities Exchange Act, 15 U.S.C. 78m (d) and 78j(b) and SEC rules and regulations. The district court granted summary judgment on several rule-violation claims that Teo did not challenge. A jury concluded that Teo violated Section 10(b) and Rule 10b-5, and that Teo and the Trust violated Section 13(d), Rule 12b-20, Rule 13d-1, and Rule 13d-2. The court held that the Trust violated Section 16(a) and Rule 16a-3. 7. The court ordered disgorgement of more than $17 million, plus prejudgment interest of more than $14 million. The Third Circuit affirmed, rejecting claims: of errors relating to admission of Teo’s guilty plea allocution and an exhibit; that there was insufficient evidence to prove a “plans and proposals” theory of liability; that the general verdict slip created ambiguity on the theory of liability grounding the jury’s verdict; and to the disgorgement order. View "Sec. & Exch. Comm'n v. Teo" on Justia Law

Rahman filed a securities class action against KB, an importer of infant furniture and products, and individuals, alleging violation of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 and (2) and Section 20(a) of the Exchange Act. The complaint alleged that defendants misled investors by artificially inflating KB’s stock price by issuing deceptive public financial reports and press releases dealing with compliance with customs laws and overall financial performance. A second amended complaint specified failure to disclose product recalls, safety violations, and illegal staffing practices. The district court dismissed for failure to satisfy the heightened scienter pleading standard required by the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4(b)(2). The Third Circuit affirmed. View "Rahman v. Kid Brands, Inc." on Justia Law

Mortgage-backed securities, known as the MASTR Pass-Through Certificates, Series 2007-3, were offered to the public in 2007. UBS, the sponsor of the Certificates, purchased the underlying loans from originators, including Countrywide Home Loans and IndyMac Bank, then sold the loans to MASTR, which placed the loans into the MASTR Adjustable Rate Mortgages Trust, the issuer of the Certificates. UBS Securities, the underwriter, sold the Certificates to investors. The Certificates were issued pursuant to a Securities and Exchange Commission (SEC) Form S-3 Registration Statement filed in 2005 and an SEC Form 424B5 Prospectus Supplement filed in 2007. Those documents assured investors that the underlying loans were originated pursuant to particular underwriting policies and in compliance with federal and state laws and regulations. The district court dismissed a purported class action by investors, alleging violations of the Securities Act of 1933, 15 U.S.C. 77, for failure to plead compliance with the one-year statute of limitations and dismissed an amended complaint as untimely under an inquiry notice standard. The Third Circuit affirmed, holding that a Securities Act plaintiff need not plead compliance with Section 13 and that Section 13 establishes a discovery standard for evaluating the timeliness of Securities Act claims, but the claims were, nonetheless, untimely. View "Pension Trust Fund for Operating Eng'rs v. Mortg. Asset Securitization Transactions, Inc." on Justia Law

Stinson’s scheme began in 2006 when he founded a fund, Life’s Good, with an alleged purpose to originate mortgage loans. Stinson advertised a “risk free” 16 percent annual return to investors with individual retirement accounts. He hired telemarketers to “cold call” potential investors and later produced a fraudulent prospectus and worked through investment advisors. Stinson did not use investors’ money to make mortgage loans, but diverted it to various personal business ventures that employed his family and friends without requiring them to work. In 2010, the SEC initiated a civil enforcement action. Stinson was charged with wire fraud, 18 U.S.C. 1343; mail fraud, 18 U.S.C. 1341; money laundering, 18 U.S.C. 1957; bank fraud, 18 U.S.C. 1344; filing false tax returns, 26 U.S.C. 7206(1); obstruction of justice, 18 U.S.C. 1505; and making false statements, 18 U.S.C. 1001. The SEC’s analysis showed that Life’s Good solicited $17.6 million from at least 262 investors and returned approximately $1.9 million. Many individuals lost retirement savings. Stinson entered an open guilty plea. The district court sentenced him to 400 months and ordered restitution of $14,051,246. The Third Circuit vacated, finding that the court erroneously applied U.S.S.G. 2B1.1(b)(15)(A), which increases the offense level by two points when “the defendant derived more than $1,000,000 in gross receipts from one or more financial institutions.” The enhancement applies only when financial institutions are the source of a defendant’s gross receipts. View "United States v. Stinson" on Justia Law

Kluger and Bauer were charged as conspirators in an insider-trading scheme in which Robinson was the third participant. The conspiracy spanned 17 years and was likely the longest such scheme in U.S. history. Kluger entered a guilty plea to conspiracy to commit securities fraud; securities fraud; conspiracy to commit money laundering; and obstruction of justice, 18 U.S.C. 371, 15 U.S.C. 78j(b) and 78ff(a); 18 U.S.C. 1956(h), 18 U.S.C. 1512(c)(2), and 18 U.S.C. 2. The plea agreement did not include a stipulation as to the guidelines sentencing range. The district court imposed a 60-month term on Count I and 144-month custodial terms on each other count, all to be served concurrently, thought to be the longest insider-trading sentence ever imposed. After a separate hearing on the same day, the court sentenced Bauer to a 60-month term on Count I and 108-month terms on each other count to be served concurrently. Robinson, who was the “middleman,” in the scheme, pled guilty to three counts and was sentenced to concurrent 27-month terms. Robinson’s sentence was far below his guidelines range of 70 to 87 months but the prosecution sought a downwards departure because Robinson was cooperating in its investigation and prosecution. The Third Circuit upheld Kluger’s sentence. View "United States v. Kluger" on Justia Law

The Securities and Exchange Commission (SEC) Office of Investigations (OIG) found that the SEC had received numerous substantive complaints since 1992 that raised significant concerns about Madoff’s hedge fund operations that should have led to a thorough investigation of the possibility that Madoff was operating a Ponzi scheme. The SEC conducted five examinations and investigations, but never took the steps necessary to determine whether Madoff was misrepresenting his trading. The OIG found that had these efforts been made, the SEC could have uncovered the Ponzi scheme. Madoff’s clients filed suit under the Federal Tort Claims Act, 28 U.S.C. 1346(b), 2671, to recover damages resulting from the SEC’s failure to uncover and terminate the scheme in a timely manner. The district court dismissed for lack of subject matter jurisdiction, finding that the claims were barred by the discretionary function exception to the FTCA. The Third Circuit affirmed, reasoning that SEC regulations afford examiners discretion regarding the timing, manner, and scope of investigations and that there is a strong presumption that the SEC’s conduct is susceptible to policy analysis. View "Baer v. United States" on Justia Law

Defendants are MB, a registered investment adviser, and people affiliated with MB. A fraudulent scheme was perpetrated by Bloom while he was an employee and officer of MB, through a hedge fund called North Hills that Bloom controlled and managed outside the scope of his responsibilities at MB. Bloom was arrested and indicted in New York in 2009 on charges relating to the Ponzi scheme, by which time most of the money invested in North Hills was gone. Investors filed suit, alleging: controlling person liability under Section 20(a) of the Securities and Exchange Act; negligent supervision; violations of Securities and Exchange Commission Rule 10b-5; violations of the Pennsylvania Unfair Trade Practice and Consumer Protection Law; and breach of fiduciary duty. The district court rejected all claims. The Third Circuit vacated and remanded with respect to MB on the claims for violations of Rule 10b-5 and the state UTPCPL, and otherwise affirmed. View "Belmont v. MB Inv. Partners, Inc." on Justia Law