Justia Securities Law Opinion Summaries

Institutional Shareholder Services, Inc. (ISS), a proxy advisory firm, challenged the Securities and Exchange Commission’s (SEC) interpretation of the term “solicit” under section 14(a) of the Exchange Act of 1934. The SEC had begun regulating proxy advisory firms by treating their voting recommendations as “solicitations” of proxy votes. ISS argued that its recommendations did not constitute “solicitation” under the Act.The United States District Court for the District of Columbia agreed with ISS and granted summary judgment in its favor. The court found that the SEC’s interpretation of “solicit” was overly broad and not supported by the statutory text. The National Association of Manufacturers (NAM), an intervenor supporting the SEC’s position, appealed the decision.The United States Court of Appeals for the District of Columbia Circuit reviewed the case. The court affirmed the district court’s decision, holding that the ordinary meaning of “solicit” does not include providing proxy voting recommendations upon request. The court concluded that “solicit” refers to actively seeking to obtain proxy authority or votes, not merely influencing them through advice. The SEC’s definition, which included proxy advisory firms’ recommendations as solicitations, was found to be contrary to the statutory text of section 14(a) of the Exchange Act. View "Institutional Shareholder Services, Inc. v. SEC" on Justia Law

The defendants, Richard Maike, Doyce Barnes, and Faraday Hosseinipour, were involved in a company called Infinity 2 Global (I2G), which the FBI determined to be a pyramid scheme. The company collected approximately $34 million from investors, most of whom lost money. After a 25-day trial, a jury convicted the defendants of conspiracy to commit mail fraud and conspiracy to commit securities fraud. The defendants appealed their convictions, presenting numerous arguments for reversal.The United States District Court for the Western District of Kentucky initially handled the case, where the jury found the defendants guilty on both counts. The defendants were sentenced to varying prison terms: Maike received 120 months, Barnes 48 months, and Hosseinipour 30 months. The defendants then appealed to the United States Court of Appeals for the Sixth Circuit, challenging the sufficiency of the evidence and the jury instructions, among other issues.The United States Court of Appeals for the Sixth Circuit reviewed the case and rejected all the defendants' arguments. The court found that there was sufficient evidence to support the jury's verdicts on both counts. The court also determined that the jury instructions were appropriate and did not mislead the jury. The court affirmed the criminal judgments of Maike and Barnes. For Hosseinipour, the court affirmed her criminal judgment but vacated the district court's denial of her Rule 33 motion for a new trial, remanding her case for reconsideration of that motion. View "United States v. Maike" on Justia Law

In 2021, Xeriant, Inc., an aerospace company, sought financing for a joint venture and connected with Auctus Fund LLC, a hedge fund. Auctus agreed to lend approximately $5 million through a convertible promissory note, allowing Auctus to convert the debt into shares of Xeriant's common stock if the loan was not repaid in cash. When Xeriant failed to repay the loan, Auctus attempted to convert the debt into stock, but Xeriant rejected the request and filed a lawsuit seeking to void the contract under the Securities Exchange Act of 1934, claiming Auctus was not a registered securities dealer.The United States District Court for the Southern District of New York dismissed Xeriant's complaint, holding that the contract did not obligate Auctus to act as a dealer, and thus, the agreement was not void under Section 29(b) of the Exchange Act. The court found that the Securities and Exchange Commission (SEC), not private parties, enforces the registration requirement under Section 15(a) of the Exchange Act.The United States Court of Appeals for the Second Circuit reviewed the case and affirmed the district court's decision. The appellate court agreed that Xeriant failed to allege a sufficient claim for rescission under Section 29(b) because the contract did not require Auctus to engage in unlawful dealer activity. The court concluded that the contract could be performed lawfully and was not inherently illegal. Therefore, the contract could not be rescinded under Section 29(b) of the Exchange Act. The court also held that Xeriant's claim was timely filed, as the facts underlying Auctus's alleged status as an unregistered dealer were not appreciable until the SEC filed its complaint in June 2023. View "Xeriant, Inc. v. Auctus Fund LLC" on Justia Law

In 2008, Kelly James Schnorenberg formed KJS Marketing, Inc. to secure funding and recruit agents for insurance companies. Between 2009 and 2015, KJS solicited over $15 million from approximately 250 investors, promising a 12% annual return. Schnorenberg failed to disclose to investors his past legal and financial troubles, including a lawsuit by the Colorado Division of Securities, a permanent injunction from selling securities in Colorado, a bankruptcy filing, and unpaid civil judgments.Schnorenberg was charged with twenty-five counts of securities fraud under section 11-51-501, with twenty-four counts based on materially false statements or omissions and one count based on a fraudulent course of business. He planned to defend himself by arguing that he acted in good faith reliance on the advice of his securities lawyer, Hank Schlueter. However, the trial court denied his motions for a continuance to secure Schlueter's testimony and excluded Schnorenberg's testimony about the specific advice he received, ruling it as hearsay.The Colorado Court of Appeals vacated seven of Schnorenberg's convictions as time-barred, reversed the remaining convictions, and remanded the case for further proceedings. The court concluded that the trial court erred in excluding Schnorenberg's testimony about his lawyer's advice and in not instructing the jury that good faith reliance on the advice of counsel could negate the mens rea element of the securities fraud charges.The Supreme Court of Colorado reviewed the case and held that the mens rea of "willfully," synonymous with "knowingly," applies to each element of securities fraud under subsections 11-51-501(1)(b) and (c). The court concluded that Schnorenberg's testimony about his lawyer's advice was relevant to whether he had the requisite mens rea and that the trial court erred in excluding this testimony. The court affirmed the judgment of the Court of Appeals and remanded the case for a new trial. View "People v. Schnorenberg" on Justia Law

The case involves a putative class action filed by Christine Pino on behalf of herself and others against Grant Cardone and his associated entities, alleging violations of the Securities Act of 1933. Pino claims that Cardone made misleading statements and omissions on social media about the internal rate of return (IRR) and distribution projections for real estate investment funds, and misstated material facts regarding the funds' debt obligations.The United States District Court for the Central District of California initially dismissed the case under Federal Rule of Civil Procedure 12(b)(6), concluding that Cardone and his entities were not "sellers" under § 12(a)(2) of the Securities Act and that the statements in question were not actionable. Pino appealed, and the Ninth Circuit Court of Appeals reversed in part, holding that Cardone and his entities could be considered statutory sellers and that some of the statements were actionable. The case was remanded for further proceedings.Upon remand, Pino filed a second amended complaint, and the district court again dismissed the claims without leave to amend, holding that Pino had waived subjective falsity by disclaiming fraud and failed to plausibly allege subjective and objective falsity. The court also found that the omission of the SEC letter did not support a claim and that the debt obligation statement was not material.The United States Court of Appeals for the Ninth Circuit reviewed the case and reversed the district court's dismissal. The Ninth Circuit held that Pino did not waive subjective falsity by disclaiming fraud and sufficiently alleged that Cardone subjectively disbelieved his IRR and distribution projections, which were also objectively untrue. The court also held that Pino stated a material omission claim under § 12(a)(2) by alleging that Cardone failed to disclose the SEC letter. Additionally, the court found that Pino sufficiently alleged that Cardone misstated material facts regarding the funds' debt obligations, which could be considered material to a reasonable investor. The Ninth Circuit reversed the district court's dismissal and allowed the claims to proceed. View "PINO V. CARDONE CAPITAL, LLC" on Justia Law

In early 2020, Erste Asset Management GmbH filed a derivative action against Kraft Heinz Company’s fiduciaries, arising from an August 2018 stock sale by 3G Capital, Inc., a significant minority stockholder. The Court of Chancery dismissed the complaint under Rule 23.1, concluding that the plaintiffs failed to plead particularized facts creating a reasonable doubt that six of Kraft Heinz’s eleven directors were disinterested or lacked independence. One of those directors, John Cahill, was alleged to have ended his consulting relationship with Kraft Heinz before the derivative action was filed. However, it was later revealed that Cahill continued to serve as a consultant after July 2019, contrary to Kraft Heinz’s public disclosures.The Court of Chancery dismissed the derivative action, relying on the false representation that Cahill’s consulting agreement had terminated. Erste later discovered the ongoing consultancy and filed a new action seeking relief from the judgment under Rule 60(b) for fraud and newly discovered evidence. The Court of Chancery dismissed this new action, holding that the fraud must be extrinsic and that the new information was not newly discovered evidence because Erste could have learned it with reasonable diligence.The Supreme Court of Delaware reversed the Court of Chancery’s decision, holding that Rule 60(b)(3) applies to both intrinsic and extrinsic fraud and that Erste had pleaded a claim that Kraft Heinz’s misrepresentations prevented it from fairly presenting its case. The court remanded the case for further proceedings, including Rule 23.1 motion practice to reassess demand futility in light of the new evidence. The court also remanded Erste’s breach of fiduciary duty claim for further consideration. View "Erste Asset Management GmbH v. Hees" on Justia Law

Raymond Vuoncino, a corporate-finance professional, worked for U.S. Pipe Fabrication, LLC (Fabrication). After Fabrication implemented new accounting practices for inter-company sales, Vuoncino objected to these practices as potentially fraudulent. Subsequently, he was fired by an executive of Fabrication’s parent company, Forterra, Inc. Vuoncino sued Fabrication, Forterra, and two Forterra executives, alleging violations of the Sarbanes-Oxley Act’s anti-retaliation provision.The United States District Court for the Northern District of Texas dismissed Vuoncino’s first amended complaint for failure to state a claim, denied his motion for leave to amend his complaint, and denied reconsideration of those orders. Vuoncino appealed these decisions.The United States Court of Appeals for the Fifth Circuit reviewed the case. The court affirmed the district court’s denial of Vuoncino’s motion for leave to file a second amended complaint, finding the proposed amendments were time-barred and did not relate back to the original complaint. The court also affirmed the district court’s denial of reconsideration, noting that Vuoncino’s motion rehashed previously rejected arguments and did not present newly discovered evidence.However, the Fifth Circuit reversed the district court’s dismissal of the Sarbanes-Oxley Act claim against Fabrication, concluding that Vuoncino’s first amended complaint plausibly alleged that Fabrication employed him. The court found that Vuoncino’s allegations, taken as true, were sufficient to raise a plausible inference that he was a Fabrication employee. The court affirmed the dismissal of the Sarbanes-Oxley Act claims against Forterra, Bradley, and Kerfin, as Vuoncino failed to sufficiently plead that these defendants were his employer’s alter ego or that he could sue Forterra directly without establishing an employment relationship.The Fifth Circuit affirmed in part, reversed in part, and remanded the case for further proceedings. View "Vuoncino v. Forterra" on Justia Law

The case involves an enforcement action by the U.S. Securities and Exchange Commission (SEC) against Gregory Lemelson and Lemelson Capital Management, LLC. The SEC alleged that Lemelson made false statements of material fact, engaged in a fraudulent scheme, and violated securities laws, resulting in approximately $1.3 million in illegal profits. The SEC sought disgorgement of these profits, a permanent injunction, and civil monetary penalties. Lemelson moved to dismiss the complaint, and the district court dismissed one of the challenged statements. The SEC filed an amended complaint, and the jury ultimately found Lemelson liable for three statements but rejected other claims.The District Court for the District of Massachusetts held Lemelson in contempt for violating a protective order and threatening a priest who provided information to the SEC. After the jury verdict, the district court issued a final judgment, including a five-year injunction against Lemelson and a $160,000 civil penalty. Lemelson appealed, and the United States Court of Appeals for the First Circuit affirmed the district court's judgment. Lemelson then moved for attorneys' fees and costs under the Equal Access to Justice Act (EAJA), arguing that the SEC's demands were excessive compared to the final judgment.The United States Court of Appeals for the First Circuit reviewed the district court's denial of Lemelson's motion for fees and costs. The appellate court found that the district court incorrectly compared the SEC's demand to the scope of the initial claims rather than the final judgment obtained. The appellate court vacated the denial of fees and costs and remanded the case for further proceedings to determine whether the SEC's demands were excessive and unreasonable compared to the final judgment. The appellate court also noted that the district court should consider whether Lemelson acted in bad faith or if special circumstances make an award unjust. View "Securities and Exchange Commission v. Lemelson" on Justia Law

Plaintiff Andrew Roth, a shareholder of Estée Lauder Companies Inc. and Altice USA, Inc., filed suits alleging that controlling shareholders of these companies engaged in transactions that violated Section 16(b) of the Exchange Act. Roth claimed that the controlling shareholders sold shares of the companies while the companies repurchased their own shares, and sought to pair these transactions to impose liability for short-swing profits.In the Southern District of New York, Roth's complaint against LAL Family Corporation and LAL Family Partners L.P. was dismissed. The court held that issuer repurchases cannot be paired with insiders' sales of outstanding shares to create Section 16(b) liability. Similarly, in the Eastern District of New York, Roth's complaint against Patrick Drahi and other defendants was dismissed. The court relied in part on the analysis from the Southern District of New York, concluding that Roth's legal theory was invalid.The United States Court of Appeals for the Second Circuit reviewed the cases and affirmed the judgments of dismissal. The court held that Section 16(b) does not impose liability for pairing sales by controlling shareholders with share repurchases by corporations they control. The court reasoned that under applicable state law, repurchased shares are transformed into treasury shares, which are different in kind from outstanding shares and cannot be paired. Therefore, Roth's theory of liability was rejected, and the judgments dismissing his complaints were affirmed. View "Roth v. LAL Family Corp." on Justia Law

The case involves codefendant brothers Joshua and Jamie Yafa, who were convicted of securities fraud and conspiracy to commit securities fraud for their involvement in a "pump-and-dump" stock manipulation scheme. They promoted the stock of Global Wholehealth Products Corporation (GWHP) through various means, including a "phone room" and social media, to inflate its price. Once the stock price rose significantly, they sold their shares, earning over $1 million. Following the sale, the stock price plummeted, causing significant losses to individual investors. A grand jury indicted the Yafas, along with their associates Charles Strongo and Brian Volmer, who pled guilty and testified against the Yafas at trial.The United States District Court for the Southern District of California sentenced the Yafas, applying the United States Sentencing Guidelines (U.S.S.G.) § 2B1.1. The court used Application Note 3(B) from the commentary to § 2B1.1, which allows courts to use the gain from the offense as an alternative measure for calculating loss when the actual loss cannot be reasonably determined. The district court found it difficult to calculate the full amount of investor losses and thus relied on the gain as a proxy. This resulted in a fourteen-level increase in the offense level for both brothers, leading to sentences of thirty-two months for Joshua and seventeen months for Jamie.The United States Court of Appeals for the Ninth Circuit reviewed the case. The court held that the term "loss" in § 2B1.1 is genuinely ambiguous and that Application Note 3(B)'s instruction to use gain as an alternative measure is a reasonable interpretation. The court concluded that the district court did not err in using the gain from the Yafas's offenses to calculate the loss and affirmed the district court's decision. View "USA V. YAFA" on Justia Law