Appellate Law & Practice

CA1: punitive damages and defamatory U-5s

Galarneau v. Merrill Lynch, No. 06-2410.  The plaintiff was fairly sophisticated stock broker at Merrill that handled accounts of the moderately wealthy, and developed somewhat (though not extremely) sophisticated tax strategies for them.  They vetted the strategies with Merrill’s in-house counsel who seemed to approve.  Her strategies were initially successful, but a client complained and sued and settled.  Merrill thought she was “churning,” (see, lawyers are not the only ones that do it) Merrill fired her and told the NASD that she had engaged in “inappropriate bond trading.”

There were a number of communications between counsel for the plaintiff and defendant that were excluded under FRE 403, but the First basically says that this wasn’t an abuse of discretion.

Merrill had conducted an internal and external investigation.  It also notified the Maine Securities division and NASD via a form U-5.

The First notes that under Maine law, a statement in a U-5 is conditionally privileged under Maine law, and “While a conditional (or qualified) privilege does not change the actionable quality of words published, it rebuts the inference of malice that is imputed in the absence of the privilege...[and] A conditional privilege may be abused if the defamatory statement is made with reckless disregard as to its falsity. 

Buy low, sell high and keep reading.

CA1: claim preclusion in derivative actions

In Re: Sonus Networks, Inc, No. 06-1937.  This is a really big piece of derivative litigation.  The plaintiff’s claims were dismissed when the district court held that their claims were precluded by an earlier state-court lawsuit, in which the plaintiffs did not plead that they demanded that the company sue its employees (or allege futility under the law of the state of incorporation).  The state court had held that futility wasn’t apparent from the face of the complaint, which named several officers, because it wasn’t really alleging wrongdoing by them, but rather a failure of supervision and there wasn’t enough particularity to show that the other directors were so disinterested that they couldn’t consider the demand.   

CA1: not enough to allege scienter for purposes of the PSLRA

Rodriguez-Ortiz v. Margo Caribe, Inc., No. 06-1765 (6/19/07). This case deals with the ever-present question of “how much particularity is enough” to meet the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b). The underlying claim involves an alleged failure of a former employer to allow a former employee to exercise his stock options after failed negotiations with an executive as to the terms of his resignation (which the company called a dismissal.) The First looks at the complaint and determines that for the securities claims, there just isn’t any specifics regarding the defendant’s scienter or an “intent to deceive” when the underlying contract was signed.

Apparently the other claims (i.e. contract) were not dismissed.

CA1: negligently misrepresenting stock option terms

First Marblehead v. House, No. 06-1114 (12/22/06). An employer had a incentive stock option plan. The employees were told that the options had a ten-year exercise period. But, it later emerged that if the employee left, the options expired three months after the employee left. The company's lawyers knew this, and the company's lawyers told management that this little detail was pretty big. The record does not indicate whether this information was distributed.

CA1: little misappropriation theory of insider trading

SEC v. Rocklage, No. 06-1571 (11/14/06).  Although many women are advised by their parents to “marry rich,” few are advised of the pitfalls of telling their brothers inside information about their husband’s company.  Their parents probably tell them that they can avoid liability by telling their husbands that they intend to disclose the information to their brothers, who will, in turn disclose the information to the “downstream tipees.”

Tell everyone a Santorum joke, and keep reading.

CA1: Corporate In Pari Delicto

Nisselson v. Lernout, No. 05-1774. Selya is strangely entertaining. 

In the underlying series of events, a corporate shark, using fraudulent means, induced an allegedly innocent target corporation to enter into an ill-advised merger. After both the shark and the merged entity drowned in red ink, plaintiff-appellant Alan Nisselson (the trustee), appointed by the bankruptcy court to prosecute any causes of action that the merged entity might possess, attempted to mount various claims arising out of the innocent target's legal rights.

Applying the In Pari Delicto Doctrine, The First sides against the trustee, because it concludes that it is a successor to the shark, and these claims really belong to the first corporations shareholders. 

Obviously, if you have been involved in the KPMG litigation, this decision, and the First’s allocation of moral condemnation will be of interest to you.

CA1: Duress and indemnification of directors in SEC enforcement proceedings

SEC v. Happ, No. 06-1324 *10/20/06. Due to technical difficulties, there was some delay. While this case involves an interesting tale of securities law, it really comes down to a question of “what is duress.” Duress, as we might guess is something usually suffered by poor people. Mr. Happ was the former director of a subsidiary of Corning, and sought indemnification that he was contractually entitled to as a director. However, when Happ was allegedly informed that the company was having some problems, he allegedly sold all his stock. The SEC civilly went after Happ for insider trading, and Corning reluctantly agreed to fund his defense provided unless it was “’finally determined" that he ‘wrongfully used material non-public information.’” Happ claims that Corning not only breached the indemnification provisions, but refused to cooperate with him in providing him the needed documents to mount his defense. A jury decided against Happ. Happ sued Corning , arguing that the agreement was secured by duress. Corning counterclaimed. On summary judgment, corning won!

CA1: White hat PSLRA dismissal

In Re: Tyco Intl Ltd, No. 05-2762, holds that for purposes of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b), the plaintiffs did not adequately allege scienter.  The plaintiffs alleged that in the wake of the scandal at Tyco, a “clean up” “fell well short of sanitizing Tyco's books, and that new management [with PWC] perpetuated a fraud in the accounting for ADT, one of Tyco's largest subsidiaries.  The court notes that Tyco’s statements were cautious about the progress of the clean-up and ongoing government investigations, which seems to be enough, and there is nothing in the complaint that indicates that defendants knew of GAAP violations.  This will amuse securities law types for days.

CA2 (1.5.06): Letting an option expire is not a "insider" transaction

Allaire Corp. v. Okumus, No. 04-2149 (Kearse, Sack, Sotomayor): In a brief and technical securities law opinion, the Court holds that the expiration of an option contract is not a transaction under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), which governs transactions by “insiders”.

CA1: Sarbanes-Oxley has no extraterritorial whistleblower protection

Carnero v. Boston Scientific Corporation, Nos. 04-1801, 04-2291, affirms the dismissal of a claim against an employer under Section 806, of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (2005) (civil action to protect against retaliation in fraud cases)  brought by a Argentinian citizen resident in Brazil who worked for the two BSC subsidiaries and whose whistleblowing pertained to their alleged improprieties in Latin America.  Applying  E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) and analyzing the text, history, and structure of the act, the court holds that Congress is presumed not to give Sarbanes-Oxley extraterritorial effect.  These subsidiaries were not listed, themselves, as foreign companies on the stock exchange.   The court also notes that the Department of Labor has had some misgivings about extraterritorial enforcement of the act.  See the Department of Labor’s Ruling here:  Sarbanes-Oxley Regulations, 69 Fed. Reg. 52104-01, 52105, 2004 WL 1876043 (Aug. 24, 2004)  The court also affirms the dismissal of his state law claims, because a necessary party to the suit would have destroyed diversify jurisdiction.