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  • District Of Connecticut Certifies Class In Cryptocurrency Mining Suit, Holding That Proposed Class Could Establish Reliance Based On Common Proof
     
    07/02/2019

    On June 21, 2019, Judge Michael P. Shea of the United States District Court for the District of Connecticut granted plaintiffs’ motion to certify a class of investors in an action alleging that two cryptocurrency companies falsely represented that they were using investors’ money to mine for cryptocurrency when, in fact, they were engaged in a Ponzi scheme.  Plaintiffs asserted claims against the companies and their owners under Section 10(b) of the Securities Exchange Act of 1934, Connecticut securities law, and for common law fraud.  Audet v. Fraser, No. 3:16-CV-0940 (MPS), 2019 WL 2562628 (D. Conn. June 21, 2019).  The Court held that each of the requirements for class certification was satisfied and, in particular, that even though no presumption of reliance was available, reliance on misrepresentations could be established on a class-wide basis based on common proof. 
  • Southern District Of Florida Dismisses Claims Against Individual Defendants Related To Initial Coin Offering For Failure To Adequately Allege “Seller” Status Or Reliance
     
    05/23/2019

    On May 13, 2019, Judge Robert N. Scola, Jr., of the United States District Court for the Southern District of Florida dismissed all claims asserted against four individual defendants under Sections 12(a)(1) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) in an action against the cryptocurrency company Centra Tech, Inc. and certain of its officers and celebrity promoters.  Rensel v. Centra Tech, Inc., et al., No. 17-24500-Civ-Scola (S.D. Fla. May 13, 2019).  Plaintiffs alleged that the company made a series of misrepresentations while marketing an initial coin offering, and that the individual defendants were responsible as “sellers,” because they encouraged the purchase of unregistered securities.  Addressing the individual defendants’ motions to dismiss, the Court dismissed plaintiffs’ Securities Act claims for failure to adequately allege that the individual defendants were “sellers” within the meaning of the Securities Act and dismissed plaintiffs’ Exchange Act claims for failure to adequately allege reliance.
    CATEGORY: Reliance
  • Second Circuit Affirms Dismissal Of Securities Fraud Claims With Prejudice For Failure To Plead Reliance
     
    11/06/2018

    On October 26, 2018, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative securities class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against a financial services company, its broker-dealer (the “Company”), and one current and one former officer of the financial services company. Schwab v. E*TRADE Fin. Corp. et al, 1:18-cv-461 (2d Cir. Oct. 26, 2018). Plaintiff alleged that the Company failed to disclose that it was purportedly violating the duty of “best execution,” which requires broker-dealers to use “reasonable diligence” to obtain the most favorable price for a customer under “prevailing market conditions.” Earlier this year, the United States District Court for the Southern District of New York dismissed plaintiff’s third amended complaint with prejudice after finding that plaintiff had failed to adequately allege reliance, among other elements. The Second Circuit affirmed the judgment, reiterating that the Affiliated Ute presumption of reliance does not apply where the claim is primarily based on misrepresentations rather than on omissions.
    CATEGORY: Reliance
  • Northern District Of California Finds Scienter And Individual Reliance Adequately Pleaded, But Stresses That Issues Respecting Class-Wide Reliance Remain To Be Considered
     
    09/17/2018

    On September 7, 2018, Judge Charles Breyer of the United States District Court for the Northern District of California denied a motion to dismiss a second amended putative class action complaint on behalf of Volkswagen bondholders asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Volkswagen and certain of its former executives alleging that defendants failed to disclose Volkswagen’s use of “defeat device” software to mask emissions in the company’s diesel engines.  In re Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, MDL No. 2672 CRB (JSC) (N.D. Cal. Sept. 7, 2018).  In its previous July 19, 2017 and March 2, 2018 orders, as discussed in our prior posts, the Court had first dismissed certain claims for failure to adequately plead scienter and then, reconsidering its prior holding that plaintiff was entitled to a presumption of reliance under Affiliated Ute, dismissed plaintiff’s first amended complaint in its entirety for failure to plead reliance.  In considering the second amended complaint, the Court held that scienter and individual, direct reliance were adequately alleged, but raised questions about plaintiff’s ability to prove class-wide reliance.
    CATEGORIES: Control PersonRelianceScienter
  • Northern District Of California Applies Second Circuit’s Waggoner Decision, Dismissing “Defeat Device” Claims Against Volkswagen For Failure To Plead Reliance Or A Plausible Basis For A Presumption Of Reliance
     
    03/13/2018

    On March 2, 2018, Judge Charles R. Breyer of the United States District Court for the Northern District of California granted defendants’ request for reconsideration of a motion to dismiss a putative class action brought against Volkswagen Aktiengesellschaf (“VW AG”), Volkswagen Group of America, Inc. (“VWGoA”), Volkswagen Group of America Finance, LLC (“VWGoAF”), and former executives of VW AG and VWGoA.  In re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, MDL No. 2672 CRB (JSC) (N.D. Cal. Mar. 2, 2018).  Plaintiff had alleged that defendants failed to disclose Volkswagen’s use of “defeat device” software to mask emissions in the company’s diesel engines, in violation of Section 10(b) of the Securities Exchange Act of 1934.  In its previous July 19, 2017 order, the Court dismissed certain claims but found that plaintiff could rely on a presumption of reliance under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), because plaintiff primarily alleged omissions as opposed to misstatements.  Defendants asked the Court to reconsider that ruling in light of the Second Circuit’s November 2017 decision in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. Nov. 6, 2017)—which held that the Affiliated Ute presumption does not apply when the only omission alleged is the omission of the truth that an affirmative misstatement misrepresented.  The Court did so, agreed with Waggoner, and dismissed plaintiff’s remaining claims for failure to adequately plead reliance.

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  • Fifth Circuit Affirms Dismissal With Prejudice Of Putative Class Action, Holding That General Allegations Against A Broad Group Of Related But Distinct Corporate Entities Does Not Permit Aggregating Alleged Knowledge When Evaluating The Sufficiency Of Scienter Allegations
     
    03/06/2018

    On February 26, 2018, the United States Court of Appeals for the Fifth Circuit affirmed in a per curiam unpublished decision the dismissal of a putative securities class action against UBS AG and certain affiliated entities.  Giancarlo, et al. v. UBS Financial Services Inc., et al., No. 16-20663 (5th Cir. Feb. 26, 2018).  Plaintiffs—former clients of a defendant UBS affiliate who invested in former energy giant Enron using the UBS affiliate as their broker—alleged that defendants violated Section 10(b) of the Securities Exchange Act by failing to disclose information purportedly revealing problems with Enron’s accounting, leading to alleged losses when Enron’s precarious financial position was uncovered in November 2001.  The United States District Court for the Southern District of Texas dismissed plaintiffs’ claims, finding that plaintiffs failed to plead facts demonstrating that defendants’ separate corporate status should be disregarded, and thus had failed to adequately plead their “single, fully integrated entity” theory of liability.  The District Court further found that plaintiffs had failed to identify specific brokers or allege facts demonstrating that each broker had an intent to deceive, manipulate, or defraud.  The Fifth Circuit agreed, holding that plaintiffs had failed to meet the heightened specificity requirements for pleading securities fraud under Federal Rule of Civil Procedure 9(b), noting that plaintiffs had not adequately alleged that defendants had knowledge of Enron’s practices, nor a duty to disclose such information to plaintiffs.   

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  • Southern District Of New York Dismisses With Prejudice Securities Fraud Action Against Chinese Technology Company, Finding Statement That Company Was “Worth Billions” Nonactionable Puffery
     
    03/06/2018

    On February 27, 2018, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York dismissed with prejudice a putative securities fraud action brought against Chinese mobile internet service provider NQ Mobile, Inc. (“NQ”) and its CEO and Vice President.  Finocchiaro, et al v. NQ Mobile Inc., et al., No. 1:15-cv-06385 (S.D.N.Y. Feb. 27, 2018).  Plaintiffs—shareholders of NQ—alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act by making affirmative misstatements about NQ’s value and failing to disclose to investors certain material facts relating to NQ’s corporate acquisition strategy, allegedly causing plaintiffs to suffer losses when the truth was revealed and NQ’s stock dropped.  The Court held that the alleged affirmative misrepresentation was mere puffery which plaintiffs could not have reasonably relied upon and that the alleged material omissions were in fact properly disclosed.  Accordingly, the Court dismissed the complaint with prejudice. 

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  • District Of Minnesota Certifies Securities Fraud Class Action But Narrows The End Of Putative Class Period To The Date Of The Initial Corrective Disclosure
     
    02/13/2018

    On January 30, 2018, Judge John R. Tunheim of the United States District Court for the District of Minnesota granted class certification in a consolidated securities fraud class action against Medtronic and certain of its officers and employees.  West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, Inc., et al., No. 13-cv-01686-JRT-FLN (D. Minn. Jan. 30, 2018).  Plaintiffs—institutional investors who purchased Medtronic stock during the proposed class period—allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by manipulating early clinical studies of INFUSE, an alternative to replacement bone-tissue graft, by knowingly concealing adverse side effects observed in clinical trials, and by failing to sufficiently disclose that it paid physician authors a total of $210 million to publish positive articles about INFUSE in medical journals.  Plaintiffs allege that Medtronic’s deception artificially inflated the company’s stock price, causing a large stock drop in August 2011, when the truth was revealed through a corrective disclosure.  Plaintiffs sought to certify a class of all purchasers of Medtronic stock between September 8, 2010 and August 3, 2011.  The Court certified the class, but shortened the class period end date to June 3, 2011, which is the date of the initial corrective disclosure.

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  • Southern District Of New York Again Dismisses—This Time With Prejudice—Securities Fraud Claims For Failure To Plead Reliance And Scienter
     
    01/30/2018

    On January 20, 2018, Judge John Koeltl of the United States District Court for the Southern District of New York dismissed a putative class action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder filed against E*TRADE Securities LLC (“E*TRADE”), E*TRADE Financial Corporation (“E*TRADE Financial”), and one current and one former officer of E*TRADE Financial.  Schwab v. E*TRADE Fin. Corp., --F. Supp. 3d --, 2018 WL 502787 (S.D.N.Y. 2018).  Plaintiff alleged that E*TRADE falsely represented that it would execute clients’ orders consistent with its duty of “best execution”—which requires it to use “reasonable diligence” to obtain the most favorable price for a customer under “prevailing market conditions”—because E*TRADE allegedly executed orders in consideration of only two factors—its order-handling agreements with venues and the maximization of payments for order flow.  In prior decisions, the Court dismissed common law claims as precluded by the Securities Litigation Uniform Standards Act (“SLUSA”), and dismissed without prejudice the second amended complaint for failure to adequately allege reliance or scienter.  Addressing plaintiff’s third amended complaint, the Court again determined that plaintiff had failed to adequately plead reliance or scienter, and dismissed the action with prejudice.

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    CATEGORIES: RelianceScienter
  • Southern District Of New York Dismisses Securities Fraud Claims For Failure To Plead Reliance And Scienter 
     
    07/25/2017

    On July 10, 2017, Judge John G. Koeltl of the United States District Court for the Southern District of New York dismissed a putative securities fraud class action against E*TRADE Securities LLC (“E*TRADE”), E*TRADE Financial Corporation (“E*TRADE Financial), and one current and one former officer of E*TRADE Financial.  Schwab v. E*TRADE Fin. Corp., No. 16-cv-05891 (S.D.N.Y. July 10, 2017).  Plaintiff alleged that E*TRADE misled its clients by falsely representing that it would execute orders consistent with its duty of “best execution,” which requires it to use “reasonable diligence” to obtain the most favorable price for a customer under “prevailing market conditions.”  Plaintiff brought claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, as well as control person claims under Section 20(a) of the Exchange Act.  The Court granted defendants’ motion to dismiss, holding that plaintiff failed to adequately plead reliance or scienter, and also failed to plead culpable participation sufficient to state a control person claim.

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    CATEGORIES: Control PersonRelianceScienter
  • Southern District Of Ohio Holds Defendants Cannot Challenge The Manner In Which Shares Were Purchased At The Class Certification Stage And Endorses Price Maintenance
     
    03/28/2017

    On March 17, 2017, Judge Michael Watson of the United States District Court for the Southern District of Ohio certified a securities class action brought against Big Lots, Inc. (“Big Lots”) and various current and former officers for alleged misrepresentations in SEC filings in violation of the antifraud provisions of the Securities Exchange Act of 1934 (the “Exchange Act”).  Willis v. Big Lots, Inc., No. 2:12-cv-00604 (S.D. Ohio Mar. 17, 2017).  Plaintiffs alleged misleading statements concerning the company’s performance and ability to meet various sales targets.  In holding that the requirements for class certification were satisfied, the court held notably that (i) being a value investor—including using investment advisors that made their own assessments of Big Lots’ intrinsic value—is insufficient, particularly at the class certification stage, to show that the lead plaintiffs were not typical representatives of the class; and (ii) where the stock price did not rise as the result of alleged misrepresentations, defendants still bore the burden of establishing a lack of price impact under the price maintenance theory.

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  • Second Circuit Affirms Judgment Rejecting Securities Fraud Claims Because Plaintiffs Would Have Bought Securities Even Knowing Of Alleged Fraud
     
    10/03/2016

    On September 27, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the judgment of the Southern District of New York, after a bench trial, finding that Vivendi Universal, S.A. (“Vivendi”) rebutted the fraud-on-the-market presumption of reliance, thereby defeating a non-class, individual group of plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934.  GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., —F.3d—, 2016 WL 5389281 (2d Cir. Sept. 27, 2016).  The Court affirmed the district court’s determination that plaintiffs—a number of “value funds” controlled by GAMCO Investors, Inc. (“GAMCO”)—did not rely on Vivendi’s market price, and would have purchased the securities even had they known of Vivendi’s alleged misstatements respecting its liquidity risk.  While acknowledging that it would seem unlikely that an investor, “aware of fraud,” would purchase a security, the Court repeatedly emphasized that sufficient evidence in the trial record supported the district court’s findings.

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  • New York Appellate Division Sustains Fraud Claims Against RMBS Issuers and Underwriters
     
    08/22/2016

    On August 11, 2016, the New York Appellate Division, First Department, affirmed the New York Supreme Court’s denial of a motion to dismiss fraud claims asserted against sponsors and underwriters of twenty-three residential mortgage backed securities (“RMBS”).  IKB International, S.A. v. Morgan Stanley, 2016 WL 4217814 (1st Dep’t Aug. 11, 2016).  Defendants argued that the plaintiff had not adequately alleged its justifiable reliance on any alleged misrepresentation and that, when acting solely as underwriters of certain of the challenged transactions, they made no actionable misrepresentations.  The Court held that the plaintiff had adequately pleaded justifiable reliance on the purported misstatements and that the underwriters’ participation in the RMBS at issue, as pleaded, was sufficient to withstand a motion to dismiss.

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    CATEGORIES: RelianceScienter