Appellate Law & Practice

CA1: large law firm loses case on behalf of client

 US Securities & Exch v. Tambone, No. 07-1384. This is a close case. On the one hand, the government is bringing an enforcement action regarding misleading prospectuses to sell mutual funds. On the other hand, the defendants are represented by a large firm. The government wins. I wonder what mistakes the large firm made in representing their clients. I have been told that large firms are very detail-oriented and win all the time.

But, because these are rich defendants, the First pours a lot of type into it. However, I am just going to copy and paste from the SEC’s public domain press release, so you can get the gist of what happened.

The Commission announced that on December 3, the United States Court of Appeals for the First Circuit issued a ruling that allowed the SEC to proceed with its fraud action against James Tambone and Robert Hussey, former executives of Columbia Funds Distributor, Inc. (Columbia Distributor), the principal underwriter and distributor for a group of approximately 140 mutual funds in the Columbia mutual fund complex (Columbia Funds). The SEC had alleged in a civil injunctive action that from 1998 through 2003, Tambone and Hussey participated in a fraudulent scheme with Columbia Distributor and Columbia Management Advisors, Inc. (Columbia Advisors), the investment adviser to the funds, by secretly entering into or approving arrangements with at least eight preferred customers allowing them to engage in frequent short-term trading in certain Columbia Funds in contravention of the prospectuses that represented that the funds did not permit or were otherwise hostile to market timing or other short-term or excessive trading.

The First Circuit ruling reversed a decision by the District of Massachusetts that had dismissed the case in December 2006 on the ground that Tambone and Hussey could not be held primarily liable for false statements in the prospectuses because they did not make those statements. The First Circuit held that Tambone and Hussey could be held liable. In its decision, the First Circuit emphasized the unique role that underwriters play in the sale and distribution of mutual funds to the investing public and the reliance that the investing public places on them as a result. The First Circuit explained that Tambone and Hussey, as executives of Columbia Distributor, had a legal duty to confirm the accuracy and completeness of the prospectuses and other fund material that they distributed. By distributing the misleading prospectuses, the First Circuit reasoned, Tambone and Hussey made implied statements to potential investors that they had a reasonable basis for believing that the key statements in the prospectuses regarding market timing were accurate and complete.

The SEC first bought action against Tambone and Hussey on Feb. 9, 2005. The District Court dismissed that action without prejudice on Jan. 27, 2006. Thereafter, on May 19, 2006, the SEC filed a new complaint concerning the same conduct. The SEC's complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided and abetted Columbia Distributor's violations of Section 15(c)(1) of the Exchange Act, Columbia Advisors' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and the Columbia entities' violations of Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC is seeking an order permanently enjoining Tambone and Hussey from violating the antifraud and other provisions of the federal securities laws, requiring them to disgorge funds received through their violations of the securities laws, and imposing civil monetary penalties. Although the District Court dismissed this complaint on Dec. 29, 2006, the First Circuit, in its decision, remanded the case to the District Court for further proceedings.

In related proceedings, the SEC filed a civil injunctive action against Columbia Management Advisors, Inc. and Columbia Funds Distributor, Inc., in federal court in Massachusetts on Feb. 24, 2004. That action was later dismissed when the two Columbia entities agreed to settle charges through administrative proceedings that resulted in an Order issued by the SEC on Feb. 9, 2005 requiring, among other things, $140 million in disgorgement and penalties to be distributed to investors harmed by market timing activity at Columbia. The SEC is in the process of distributing those funds to investors. [SEC v. James Tambone and Robert Hussey (United States Court of Appeals (1st Cir.), No. 07-1384)] (LR-20822)

Here is the SEC’s complaint

CA1: pleading the Fifth in one proceeding prevents use in later MSJ

SEC v. Ficken, No. 07-2532 affirms a grant of summary judgment to the SEC and against a broker for Prudential in a case brought under 15 U.S.C. § 77q(a), 15 U.S.C. § 78j(b), and 17 C.F.R. § 240.10b-5, in which the SEC argued that “Ficken intentionally concealed his identity and the identities of his clients while trading shares of mutual funds, in order to mislead mutual fund companies into processing trades that they otherwise would not have allowed.”  There is the usual discussion of Scienter.   Ficken was trying game the lag-time between prices of shares and funds that hold them.  This isn’t illegal, but mutual funds don’t like it.  To get around this, Ficken used different ID numbers. 

There is a paper trial and transcripts of NASD proceedings where he plead the Fifth. The First says “Ficken’s refusal to answer pertinent questions in the NASD proceeding bars his reliance on that testimony in opposing summary judgment” and therefore, “Ficken’s testimony would not be admissible because his assertion of his Fifth Amendment privilege or his refusal to answer questions prevented development of his testimony on closely related issues.”   It then discussed how he became unavailable.

CA1: Stock option expert okay

First Marblehead v. House, No. 07-2789 affirms a jury verdict in an employee stock option case.  The First time the case was at the First was here: First Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006) (our coverage here) The plaintiff resigned.  According to the jury, the company negligently told him that he could exercise his stock options up to ten years after the resignation (as opposed to three months).  But the jury found that if had been aware of that three month time limit, he wouldn’t have exercised them.

The First turns back a Daubert challenge. It points out a couple of things: 1) Voir dire of expert witnesses need not be outside the presence of the jury; and 2) an expert can explain to the jury how stock options work (I think this is a dubious proposition, since stock options are just about as legal an issue as they get). 

CA1: who determines whether a termination is for cause (and defamation)

Noonan v. Staples, Inc., No. 07-2159 (8/21/08) affirms a grant of summary judgment to Staples.  Noonan was fired.  Staples says he was fired “for cause” and therefore it doesn’t have to treat him like a man: he can’t exercise his stock options, and he doesn’t get severance benefits.  It also told 1,500 via email people that he was fired for padding his expense reports.  It normally didn’t humiliate people like this.  Strangely, the amount he “stole” was only about $1,500, which is less than most firms spend on a summer associate outing.  So, I don’t see what Staples is so upset about.

On the stock option agreement breach issue, the First sides with Staples.  This is particularly disgusting. The First say that the question of “cause” is for Staples alone to determine, and that courts must determine whether such a determination was “ arbitrary, capricious, or made in bad faith.”  The First doesn’t really go into why a Massachusetts court would rule this way but seems to just count noses of other jurisdictions. 

On the libel claim, Staples claims that its email was true. Noonan says it isn’t really true, but he admits that he disregarded the letter, not the spirit, of the policy.  The First rejects Noonan’s argument that the whole email painted a very nasty portrait of him, as arrogantly disregarding Staples policy based on a whim.  You have to be an equity partner to do that.  But, for this reason it also rejects the breach of the severance agreement claims: because he didn’t comply with the letter of the contract, Staples gets to not honor its part.

The actual malice theory fails as well.  But, you get a good discussion of the law of libel in Massachusetts, so, if this floats your boat, you can read it.

More on scienter

Kevin LaCroix has an interesting (albeit late) account of New Jersey Carpenters Pension & Annuity Fund v. Biogen Idec which we covered here. 

CA1: what is enough of a risk under the PSLRA to show scienter

New Jersey Carpenter v. Biogen Idec Inc., No. 07-2626 affirms the dismissal of a Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 case.  The underlying issue involves a drug company with a drug that did some bad things, and when voluntarily withdrawn the price of the stock went down.  The plaintiffs allege that the various insiders traded stock based on their knowledge of the drug and made false statements about the drug and the company.  So, the question comes down to one of whether the plaintiffs were plea scienter with enough particularity. 

The first says that knowledge of five adverse events doesn’t create the kind of knowledge necessary to know the drug is bad.  Essentially, the plaintiffs didn’t claim that the defendants knew enough of a significant risk.  The Court also dismisses a similar theory regarding a different period of time that insiders knew about these problems.

CA1: forfeiture in employee stock plan okay

Weems v. Citigroup. No. 06-2565 (7/24/08).  This is a pretty large MDL case, in which the plaintiffs claim that it is wrong for their employer to give them the option of receiving part of their salary as stock (at a discount rate), but requiring them to forfeit said stock if they “voluntarily” leave the company before they “vest” (usually after two or three years). 

Despite the fact that most of the people involved in litigating this issue probably tell everyone they meet that they work in “securities” this comes down to a fairly straight-forward contract claim.  Not really that glamorous.  The First says that there was no breach of a contract. 

Someone found a memo which says that the purpose of this thing is to punish people that go work for competitors, and therefore it is an unlawful restrictive covenant.  (There are far, far, worse things companies do to their employees.)  But the First says this is fine, because forfeiture occurs whether or not they work for a competitor.  This doesn't really ring true, and it seems they are not taking this part of the argument too seriously.

Similarly, the First treats the rest of the common-law contract claims (under Florida law) with almost no degree of seriousness. 

CA1: PSLRA dismissal reversed

Mississippi Public Employees' Retirement System v. Boston Scientific  Corp. et al., 07-1794 reverses the dismissal of a Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 case.  If you practice securities law you should know about this case by now, because your clients expect you to.  If practice securities law and you have not read this case, you are not detail-oriented, and are malpracticing.  That said, I will briefly touch on the issues for those of you that don’t care about your clients but falsely claim to know something about “Securities.” 

Sorry, where was I?  Oh yeah... This case includes both regular FRCP pleading-with-particularity issues as well as PSLRA pleading-with-particularity issues.  The plaintiffs claimed that the executives were not up front about Boston Scientific’s ongoing litigation and problems with some of its medical equipment.  The theory the plaintiffs assert is thus:

Plaintiff's theory is that the investing world was aware of reports of patient death and injury involving TAXUS. However, defendants said that the problems with the TAXUS stents were caused by doctor unfamiliarity with the new product. It was natural for investors to conclude the problems would disappear over time as doctors became more familiar with the product, and there would be no recalls. Having given that explanation, the defendants, plaintiff argues, were required to disclose as soon as they could the connection between the patient problems, the manufacturing defect, and the manufacturing change remedying this problem.

The First concludes that there was enough in the complaint to show that the managers knew what they knew at a certain time, and acted with scienter.

The defendants had argued that the plaintiffs were really seeking liability under a “fraud by hindsight” theory, but the First says that this Circuit caselaw forecloses it, and besides this isn’t a case where “...plaintiff alleges that the fact that something turned out badly must mean defendant knew earlier that it would turn out badly.”

As well, the insider trading dismissals are also reversed.

The D&O Diary Comments here.

CA1: stock option period strictly enforced

Mariasch v. Gillette Company, 07-1549.  An employee got some stock options from his employer.  He says he gets to exercise them late.  There is a choice of law issue, but the First says that this is really a matter of internal corporate governance, and therefore the state of incorporation of the corporation (Delaware) provides the rule of decision.  Applying First Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006) (our coverage here), the First says that the option exercise period must be strictly enforced.  An equitable estoppel argument fails, because at a deposition he said some things that foreclosed it.

CA1: PSLRA case goes to defendant (as does denial of motion to amend), but not all news is good for defendants

ACA Financial v. Advest , 07-1367.  The First proudly announces that this its first post-Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) PSLRA case.  PSLRA, in case you are a moron, stands for Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.  And, of course, it affirms the dismissal of the claims of bond-holders that were defaulted on by Bradford College (the bonds were issued by the Massachusetts Industrial Finance Agency ("MIFA")).   

The First acknowledges that its prior PSLRA precedent was, in part overruleed (as to determining the sufficiency of pleadings of scienter in securities fraud cases under FRCP 12(b)(6)).  So In re Credit Suisse First Boston Corp., 431 F.3d 36 (1st Cir. 2005) (our coverage here) ("Scienter allegations do not pass the 'strong inference' test when, viewed in light of the complaint as a whole, there are legitimate explanations for the behavior that are equally convincing.") is now bad law, and “In other words, where there are equally strong inferences for and against scienter, Tellabs now awards the draw to the plaintiff.” 

And you are never going back to your old bankrupt school... so read on.