- SEC Enforcement Actions – Federal courts in Texas continue to scrutinize the use of ALJs in agency enforcement actions. The Fifth Circuit denied en banc review of the decision in Jarkesy that (1) respondents in an SEC administrative enforcement proceeding were deprived of their constitutional right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide it with an intelligible principle by which to exercise the delegated power; and (3) statutory removal restrictions on SEC ALJs violate Article II. In Burgess v. FDIC, Judge O’Connor held that FDIC ALJs are likely unconstitutionally insulated from removal, but plaintiff failed to show sufficient harm to warrant an injunction because he couldn’t show that the President had sought to remove the ALJ who handled the case. Following Jarkesy, however, he found that plaintiff had been denied his Seventh Amendment right to a trial by jury. In SEC v. Morris, Judge Boyle approved an award of “legal” disgorgement in a recent enforcement action. And, in SEC v. Offill, with the SEC’s consent, Magistrate Judge Ramirez granted the DOJ’s motion to stay a civil SEC enforcement action pending the conclusion of a criminal case, over the objection of one of the defendants.
- Securities Fraud Class Actions – Applying the Supreme Court’s decision in Goldman Sachs, Judge Eskridge certified a class in the Anadarko securities litigation. He found that Plaintiffs adequately demonstrated the price impact of the alleged misrepresentations and corrective disclosures. He also rejected Defendants’ argument that Plaintiffs were pursuing a “materialization of risk” damages model, which the Fifth Circuit has found is insufficient to demonstrate reliance on a class-wide basis.
- Other Cases – In Mogollon v. Bank of New York Mellon, the Fifth Circuit found that claims arising from the Stanford Ponzi scheme asserted against a bank were not time barred because the applicable New Jersey discovery rule applied. The Court held that New Jersey law allows causes of action to accrue against different defendants at different times.
Newsletters
We publish quarterly newsletters that summarize recent federal and state court decisions of interest to practitioners litigating securities and fiduciary duty claims in Texas.
We cover decisions from the United States Supreme Court, the United States Court of Appeals for the Fifth Circuit, all federal district courts in Texas, the Texas Supreme Court, and all Texas civil appellate courts. We share current issues of the newsletter with our clients and referring lawyers; older issues appear below. You are welcome to download them, but please note the limitations on their content and use in the disclosure at the end of each newsletter.
2022 – 3Q Newsletter
- SEC Enforcement Actions – The Fifth Circuit continues to scrutinize SEC enforcement actions, including (1) the SEC’s authority to seek disgorgement under the Exchange Act and the limitations on that remedy in light of Liu v. SEC, 140 S.Ct. 1936, 1949 (2020) and (2) when defendants in enforcement actions are entitled to a jury a trial under the Seventh Amendment. In SEC v. Hallam, the Fifth Circuit concluded on the facts of the case at hand that the disgorgement remedy was permissible and that the defendant, after stipulating to liability, was not entitled to an evidentiary hearing with respect to the disgorgement and penalties. In SEC v. Novinger, the Fifth Circuit affirmed the district court’s denial of defendants’ motion to void the “no deny” provisions in a five-year old consent decree entered in an SEC enforcement action. In SEC v. World Tree Financial, the Fifth Circuit held, as a matter of first impression in this circuit, that an investment adviser’s failure to disclose cherry-picking —allocating more profitable trades within a block trade to favored client accounts–violates the Securities Exchange Act, Securities Act, and Investment Advisers Act.
- Securities Fraud Class Actions – Texas courts issued rulings on motions to dismiss in three securities class actions. Judge Rosenthal granted in part and denied in part defendants’ motion to dismiss the amended complaint in the Cabot Oil case, finding that Cabot’s statements that it was in “substantial compliance” with environmental consent decrees were not actionable under Omnicare, but that plaintiffs adequately pleaded scienter with respect to their other claims. In McDermott, Magistrate Judge Edison issued his recommendation that Plaintiffs’ additional claims regarding alleged misrepresentations and omissions relating to the risks and costs of McDermott’s merger with Chicago Bridge & Iron (CB&I) set forth in a supplemental complaint be dismissed because (1) the supplemental complaint failed to allege any statements that were factually untrue or misleading at the time they were made and (2) he rejected plaintiffs’ new theory that defendants had a duty to disclose McDermott’s potential bankruptcy. In Apache Corp., Judge Edison recommended that defendants’ motion to dismiss be denied, while conceding it was a “close call” whether plaintiffs adequately pleaded scienter.
- Texas state law securities claims – Courts reviewed and dismissed securities fraud claims under the Texas Securities Act (TSA) and statutory fraud claims under the Texas Business Organizations Code (TBOC). See Burback v. Olson and Setliff v. Zoccam Technologies. Courts also affirmed judgment imposing liability under the TSA. See Christie v. Hahn.
- Other cases – In Weller v. Keyes, the Austin Court of Appeals held that officers and agents of an LLC can be held personally liable for fraud or other tortious conduct performed within the course and scope of their employment notwithstanding the enactment of Section 21.223 of the TBOC, which limits certain veil-piercing liability. In Control & Applications LLC v. Abdallah, the Houston First Court of Appeals affirmed a judgment finding that majority owners of an LLC breached their fiduciary duty when then purchased the minority interests at a low valuation without disclosing that they had already negotiated to sell the company to another buyer at a higher valuation. In Mehta v. Ahmed, the Houston First Court of Appeals overturned a jury’s finding that parties had created a partnership under Section 152.052 of the TBOC.
2022 – 2Q Newsletter
- SEC Enforcement Actions – In Jarkesy v. SEC, the Fifth Circuit held that the SEC’s use of administrative law judges (ALJs) to adjudicate securities fraud enforcement actions seeking monetary relief violated the respondents’ Seventh Amendment right to a jury trial and employed unconstitutionally appointed ALJs.
- Securities Fraud Class Actions – We summarize a discovery proportionality ruling in the McDermott securities fraud litigation requiring defendants to accept plaintiffs’ search terms and review up to 1.3 million documents from 50 custodians.
- Rulings in Arbitration Cases – We summarize recent decisions addressing motions to compel arbitration in securities and fiduciary duty cases.
- Texas Supreme Court Ruling on Fiduciary Duty of Corporate Directors – The Texas Supreme Court reversed a jury finding and held as a matter of law that “a corporation’s director cannot owe an informal duty to operate or manage the corporation in the best interest of or for the benefit of an individual shareholder. A director’s fiduciary duty in the management of a corporation is solely for the benefit of a corporation.”
2022 – 1Q Newsletter
- Securities Fraud Class Actions – District courts denied motions to dismiss in the Exela Technologies and SolarWinds Corporation securities class actions and granted motions to dismiss in the Range Resources and Cabot Oil & Gas Corporation actions.
- Shareholder Derivative Cases – Courts applied Delaware’s recently refined standard for pleading demand futility under United Food & Comm. Workers Union v. Zuckerberg, 262 A.3d 1034, 1058, 1059 (Del. 2021) to grant motions to dismiss in two derivative cases, Cabot Oil & Gas and Transcontinental Realty Investors.
- Cases involving the definition of “securities” – Several courts addressed the definition of a “security,” including Callais Capital Management, LLC (loan agreement was a security) and US v. Sneed (membership in an investment group was not a security).