California Federal Judge Holds That Claims Under Section 10(b) Require “Out-of-Pocket” Loss
On February 28, 2020, Judge M. James Lorenz of the United States District Court for the Southern District of California dismissed a putative securities class action against an investment management company (“Company”) and its clearing bank (“Clearing Bank,” and collectively, “Defendants”) that alleged violations of Section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5. Jiao v. Merrill Lynch, Pierce, Fenner & Smith, 17-cv-409-L (MDD) (S.D. Cal. Feb. 28, 2020). Plaintiffs, who were customers of Defendants, brought the lawsuit after the Securities and Exchange Commission (“SEC”) entered into a consent and cease-and-desist order with Defendants (“SEC Order”) for violations of the Customer Protection Rule of the Exchange Act, 15 U.S.C. § 78aa; 17 C.F.R. § 240.15c3-3 (“CPR”), which required Defendants to maintain physical possession or control over customers’ fully paid and excess margin securities. The Court dismissed the action with prejudice because claims under Section 10(b) require a plaintiff to plead and prove an “out-of-pocket” loss, which Plaintiffs failed to do.
New York Court Of Appeals Dismisses Contractual Claims Against Nomura In Four RMBS Suits
On December 12, 2017, the New York Court of Appeals dismissed certain breach of contract claims brought by HSBC Bank USA, N.A. (“HSBC”) against Nomura Credit & Capital, Inc. (“Nomura”), in four separate actions related to Nomura’s role as a sponsor in residential mortgage-backed securities (“RMBS”) transactions. Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, Nat’l Ass’n, solely in its capacity as Trustee, et al. v. Nomura Credit & Capital, Inc. (And Three Other Actions), No. 39 (N.Y. Dec. 12, 2017). The Court of Appeals dismissed HSBC’s claims for general contract damages—based on alleged breaches of a “no untrue statement” provision contained in the Mortgage Loan Purchase Agreement (“MLPA”)—for each transaction, finding that HSBC’s claims relate to the characteristics of the underlying mortgage loans, and are therefore subject to the contract’s provision mandating cure or loan repurchase as the sole remedy for breaches of mortgage loan-specific representations.
Read moreCATEGORY: Damages
Northern District Of California Dismisses Securities Fraud Class Action, Finding Plaintiffs Had Alleged “Injury In Fact” Sufficient To Confer Standing But Failed To Plead Actual Loss With Particularity
On June 12, 2017, Judge Richard Seeborg of the United States District Court for the Northern District of California dismissed without prejudice a putative securities class action against Charles Schwab & Co. (“Schwab”) under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Crago v. Charles Schwab & Co., Inc., 2017 WL 2540577 (N.D. Cal. June 12, 2017). Plaintiffs, Schwab customers who placed trades through Schwab, alleged that Schwab’s stated commitment to securing best execution for its clients was false and misleading in light of Schwab’s bulk order routing through UBS Securities LLC (“UBS”), as a result of which plaintiffs allegedly suffered harm because they lost the opportunity for price improvement. The Court held that although plaintiffs had standing to pursue their claims, they had insufficiently alleged falsity, scienter, economic loss, loss causation and reliance, and granted leave to replead.
Second Circuit Affirms Dismissal Of Fraud Claims For Hypothetical Lost Profits
On August 5, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of common law fraud and negligent misrepresentation claims against Citigroup, Inc. AHW Investment Partnership v. Citigroup, Inc., No. 13-4488 (2d Cir. Aug. 5, 2016). In a summary order, the Court held that plaintiffs may only recover for actual pecuniary losses sustained as the direct result of fraud, and not for hypothetical value plaintiffs may have realized by selling a stock before its price plummeted. Plaintiffs had alleged that Citigroup and its officers made numerous fraudulent and negligent misrepresentations about the quality of plaintiffs’ investment in Citigroup between May 2007 and March 2009, causing plaintiffs to hold their Citigroup shares and incur losses of $800 million when the company’s stock price subsequently declined.