Articles Posted in Securities Law

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Greyfield Capital was a defunct Canadian company. Two "con-men" found a signature stamp belonging to the company's former president, and used it as an officially-sanctioned "seal" to appoint themselves corporate officers, issue millions of unregistered shares in their names. The men then took the unregistered, issued shares to create a penny stock "pump-and-dump" scheme. Regulators began looking for those who had helped facilitate the sale of Greyfield's unregistered shares. Regulators were led to petitioners ACAP and Gary Hume. ACAP was a penny stock brokerage firm in Salt Lake City, and Gary Hume was its head trader and compliance manager. Petitioners did not dispute their liability stemming from the Greyfield scheme, rather, they disputed the sanctions they received. FINRA decided to fine ACAP $100,000 and Mr. Hume $25,000, and to suspend Hume from the securities industry for six months. The Securities and Exchange Commission (SEC) reviewed and sustained these sanctions. ACAP and Hume then petitioned the Tenth Circuit to appeal the SEC's decision. After review, the Tenth Circuit could not "see how [it] might overturn the agency's decision." Accordingly, the Court affirmed the SEC's decision. View "ACAP Financial v. Securities & Exchange Comm'n" on Justia Law

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Plaintiff-appellant National Credit Union Administration Board ("NCUA") appealed the district court's order dismissing as untimely its complaint against defendants-appellees Barclays Capital Inc., BCAP LLC, and Securitized Asset Backed Receivables LLC. This case arose from the failure of two of the nation's largest federally insured credit unions: U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. The NCUA was appointed conservator and later as their liquidating agent. The NCUA determined that the Credit Unions had failed because they had invested in residential mortgage-backed securities ("RMBS") sold with offering documents that misrepresented the quality of their underlying mortgage loans. The NCUA set out to pursue recoveries on behalf of the Credit Unions from the issuers and underwriters of the suspect RMBS, including Barclays, and began settlement negotiations with Barclays and other potential defendants. As these negotiations dragged on through 2011 and 2012, the NCUA and Barclays entered into a series of tolling agreements that purported to exclude all time that passed during the settlement negotiations when "calculating any statute of limitations, period of repose or any defense related to those periods or dates that might be applicable to any Potential Claim that the NCUA may have against Barclays." Significantly, Barclays also expressly made a separate promise in the tolling agreements that it would not "argue or assert" in any future litigation a statute of limitations defense that included the time passed in the settlement negotiations. After negotiations with Barclays broke down, the NCUA filed suit, more than five years after the RMBS were sold, and more than three years after the NCUA was appointed conservator of the Credit Unions. Barclays moved to dismiss for failure to state a claim on several grounds, including untimeliness. Barclays initially honored the tolling agreements but argued that the NCUA's federal claims were nevertheless untimely under the Securities Act's three-year statute of repose, which was not waivable. While Barclays's motion to dismiss was pending, the district court in a separate case involving different defendant Credit Suisse, granted Credit Suisse's motion to dismiss a similar NCUA complaint on the grounds that contractual tolling was not authorized under the Extender Statute. Barclays amended its motion to dismiss asserting a similar Extender Statute argument. The district court dismissed the NCUA's complaint, incorporating by reference its opinion in Credit Suisse. The NCUA appealed, arguing that its suit was timely under the Extender Statute. The Tenth Circuit reversed and remanded: "while it is true that the NCUA's claims are outside the statutory period and therefore untimely, that argument is unavailable to Barclays because the NCUA reasonably relied on Barclays's express promise not to assert that defense." View "National Credit Union v. Barclays Capital" on Justia Law

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This appeal stemmed from a putative securities fraud class action brought by lead plaintiff Nitesh Banker on behalf of all persons who purchased common stock in Gold Resource Corporation (GRC) during the class period between January 30, 2012, and November 8, 2012. GRC, a Colorado corporation, was a publicly traded mining company engaged in Mexico in the exploration and production of precious metals, including gold and silver. GRC’s aggressive business plan called for a dramatic increase in mining production during its initial years. Plaintiff alleged the "El Aguila" project experienced severe production problems during the class period, and that defendants knew about these problems but concealed them from investors. Plaintiff alleged GRC and four of its officers and directors committed securities fraud in violation of federal securities laws. He also asserted claims against individual defendants as "control persons." The district court dismissed the complaint with prejudice pursuant to Fed. R. Civ. P. 12(b)(6), holding that plaintiff failed to meet the heightened pleading standard for scienter required by the Private Securities Litigation Reform Act of 1995. Plaintiff appealed. But finding no reversible error, the Tenth Circuit affirmed. View "In re: Gold Resource Corp." on Justia Law

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In 2009, Bancorp sought to conduct a secondary stock offering to raise about $90 million. In its securities filings the company alerted potential investors that it had significant investments in mortgage backed securities, and that these investments had suffered badly during the financial crisis of 2008. The company stated that it had conducted internal analyses and consulted independent experts and now expected the level of delinquencies and defaults to level off and the market for its securities to rebound soon. But the company also stressed that if adverse market conditions persisted longer than the company expected it would have to recognize further losses. Bancorp’s opinion about the immediate future didn’t bear out. In the fifteen months after the offering, the company had to recognize about $69 million more in losses. Plaintiffs alleged in their lawsuit against Bancorp that the statements rendered in the offering statement about the prospects for its securities portfolio was false and should have given rise to liability under section 11 of the Securities Act of 1933. The district court disagreed, holding that Bancorp’s failed market predictions, without more, weren’t enough to trigger liability. "To establish liability for an opinion about the future more is required. But what?" Agreeing with the district court, the Tenth Circuit affirmed.View "MHC Mutual Conversion Fund, et al v. Sandler O'Neill & Partners, et al" on Justia Law

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Plaintiffs filed this complaint on behalf of a class of all persons and entities who purchased or otherwise acquired Chesapeake common stock from 2009 to 2012, and who were damaged from those purchases/acquisitions. The complaint alleged that Defendants materially misled the public through false statements and omissions regarding two different types of financial obligations: (1) Volumetric Production Payment transactions (under which Chesapeake received immediate cash in exchange for the promise to produce and deliver gas over time); and (2) the Founder Well Participation Program (under which Chesapeake CEO Aubrey McClendon was allowed to purchase up to a 2.5% interest in the new gas wells drilled in a given year). With respect to the "VPP program," Plaintiffs alleged Defendants touted the more than $6.3 billion raised through these transactions but failed to disclose that the VPPs would require Chesapeake to incur future production costs totaling approximately $1.4 billion. Plaintiffs contended the failure to disclose these future production costs was a material omission that misled investors into believing there would be no substantial costs associated with Chesapeake’s obligations to produce and deliver gas over time. The district court granted Defendants’ motion to dismiss the complaint, holding that Plaintiffs had failed to plead with particularity facts giving rise to a strong inference of scienter as required by the Private Securities Litigation Reform Act of 1995. Viewing all of the allegations in the complaint collectively, the Tenth Circuit was not persuaded they gave rise to a cogent and compelling inference of scienter. Accordingly, the Court affirmed the district court's dismissal of the case. View "Weinstein, et al v. McClendon, et al" on Justia Law

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In 2008 Chesapeake Energy Corporation was one of the largest producers of natural gas in the United States, with thousands of wells in several states. By early July of that year the price of natural gas had risen and Chesapeake's stock price had risen about 50% in the prior six months. On July 9, 2008, Chesapeake sold 25 million shares of common stock in a public offering. Soon thereafter, a financial crisis rocked the global economy. The New York Stock Exchange Composite Index fell more than 30% in the three months after the Chesapeake offering. Chesapeake was hit even harder, with sharp drops in the prices of natural gas and Chesapeake's stock. Plaintiff United Food and Commercial Workers Union Local 880 Pension Fund represented the class of all persons who purchased securities in the offering, argued that Chesapeake and named individual defendants violated sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. sections 77k, 77l(a)(2), and 77o, because the Registration Statement for the offering was materially false and misleading. According to Plaintiff, Chesapeake should have disclosed: (1) that it had expanded a risky gas-price hedging strategy that made it vulnerable to a fall in natural-gas prices; and (2) that CEO Aubrey McClendon had pledged substantially all his company stock as security for margin loans and lacked the resources to meet margin calls. The district court granted summary judgment for Chesapeake. Plaintiff appealed. But finding that Chesapeake's alleged omissions were not material or misleading, the Tenth Circuit affirmed. View "United Food & Comm. Workers v. Chesapeake Energy, et al" on Justia Law

Posted in: Securities Law

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The Securities and Exchange Commission (SEC) brought a civil enforcement action against Defendant-Appellees GeoDynamics, Inc., its managing director Jeffory Shields, and several other business entities affiliated with Shields, alleging securities fraud in connection with four oil and gas exploration and drilling ventures Shields marketed to thousands of investors as Joint Venture Agreements (JVAs). The district court granted defendants' 12(b)(6) motion to dismiss. The SEC appealed, contending that despite their labels as JVAs, the investment agreements were actually "investment contracts" and thus "securities" subject to federal securities regulations. Because it could not be said as a matter of law that the investments at issue were not "investment contracts," the Tenth Circuit reversed. View "SEC v. Shields, et al" on Justia Law

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The issue before the Tenth Circuit in this case stemmed from a civil-enforcement action brought by the Securities and Exchange Commission ("SEC") against Defendant-Appellant Ralph Thompson, Jr., in connection with an alleged Ponzi scheme Thompson ran through his company, Novus Technologies, L.L.C. ("Novus"). The district court granted summary judgment in favor of the SEC on several issues, including the issue of whether the instruments Novus sold investors were "securities." Thompson's single issue on appeal was that the district court ignored genuine disputes of material fact on the issue of whether the Novus instruments were securities, and that he was entitled to have a jury make that determination. After careful consideration, the Tenth Circuit concluded that under the test articulated by the U.S. Supreme Court in "Reves v. Ernst & Young" (494 U.S. 56 (1990)), the district court correctly found that the instruments Thompson sold were securities as a matter of law. View "SEC v. Thompson" on Justia Law

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The National Credit Union Administration (NCUA) placed two credit unions, U.S. Central Federal Credit Union and Western Corporate Federal Credit Union (WesCorp), into conservatorship. Then, as liquidating agent, NCUA sued 11 defendants on behalf of U.S. Central, alleging federal and state securities violations.In a separate matter, NCUA sued one defendant on behalf of U.S. Central and WesCorp, alleging similar federal and state securities violations. The United States District Court for the District of Kansas consolidated the cases. All defendants moved for dismissal, arguing that NCUA’s claims were time-barred. The district court denied the motion, concluding that the "Extender Statute" applied to NCUA’s claims. Defendants moved for an interlocutory appeal for the Tenth Circuit to determine whether the Extender Statute applied to NCUA's claims. Finding that it did, the Tenth Circuit affirmed. View "National Credit Union Admin. v. Nomura Home Equity Loan, et al" on Justia Law

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Defendant-Appellant Brian McKye was charged with eight counts of securities fraud and one count of conspiracy to commit money laundering. The district court refused to give the jury his tendered instruction that would have permitted the jury to decide whether the investment notes at issue were securities under federal securities law. He was convicted and received a 262-month sentence. Upon review, the Tenth Circuit concluded the district court erred by not giving the tendered instruction, and reversed the convictions. View "United States v. McKye" on Justia Law