- Fifth Circuit Rulings – In Alliance for Fair Board Recruitment v. SEC, a 9-8 majority of the Fifth Circuit sitting en banc ruled that the SEC exceeded its statutory authority and acted arbitrarily and capriciously in approving Nasdaq rules requiring Nasdaq-listed companies to disclose information about the diversity of their board members. In U.S. v. Ashley, the Fifth Circuit vacated a financial advisor’s conviction on five of 17 counts after the government conceded there was insufficient evidence to convict him on those charges. The Court declined to apply the cumulative error doctrine with respect to the remaining counts despite concerns about trial errors.
- Federal District Court Rulings – Judge Mazzant issued a nationwide preliminary injunction enjoining enforcement of the Corporate Transparency Act (CTA) which requires companies registered under state law to report detailed personal information about their beneficial owners to the federal government (BOI Reports). The U.S. Supreme Court later stayed the injunction, but the government has stated it will review the benefits and burdens of the statute before attempting to enforce compliance. In the Cassava Sciences securities litigation, the magistrate judge recommended certification of a class of purchasers and rejected arguments that the plaintiff representatives were atypical of the class because they were day traders. The parties settled the long-running securities litigation against Apache Corp. relating to Alpine High, and the Court reduced the plaintiffs’ requested attorney fees to 25% of the common settlement fund.
- State Court Rulings – Among other cases reported below, the First Court of Appeals reversed a bench trial ruling that a stockbroker who failed to disclose hundreds of thousands in customer account losses over a three-year period breached his fiduciary duties. The Court ruled there was no evidence that the failure to disclose caused the loss, that the customer would have terminated the broker’s services if disclosure were made, or that the heavily margined account would have incurred fewer losses.
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.
2024 – 3Q Newsletter
- Fifth Circuit Rulings – The Fifth Circuit issued rulings in three SEC cases this quarter. In SEC v. Stanford Int’l Bank, Ltd., it vacated a settlement bar order that would have prevented Joint Liquidators appointed by an Antiguan court from pursuing claims against a Swiss bank because the district court did not have in personam jurisdiction over the Joint Liquidators and its in rem jurisdiction was not a sufficient basis to enter an injunction. In Barr v. SEC, the Court ruled the SEC did not abuse its discretion in refusing to pay whistleblower awards to two individuals who helped obtain a $38.7 million securities fraud judgment because the company later filed for bankruptcy. In SEC v. Stack, the Court reversed a disgorgement award against an individual for the entire investor loss because it should have been limited to the funds the individual received or benefitted from as required by the Supreme Court’s ruling in Liu v. SEC.
- Federal District Court Rulings – Among seven cases we summarized, three stand out this quarter. In the long-running Alta Mesa securities fraud litigation, Judge Hanks granted substantial portions of defendants’ motions for summary judgment, leaving for trial only control person liability claims against certain private equity and corporate defendants. In Architectural Granite & Marble, LLC v. Pental, Judge Lindsay dismissed a whistleblower claim because the former employee lacked evidence that he suffered a material adverse action and the company presented clear and convincing evidence that it would have taken the same actions regardless of the protected activity. In State Farm Mut. Auto. Ins. Co. v. Complete Pain Solutions, Inc., Judge Hanen denied motions to dismiss RICO and mail fraud claims against a group of doctors who allegedly submitted bills for predetermined, false and/or medically unnecessary treatment to obtain insurance proceeds.
- State Court Rulings – The most notable case this quarter is Texas A&M University 12th Man Foundation v. Hines, filed by Foundation donors who lost their preferred seats when the Foundation solicited new donations to renovate Kyle Field. The Court held the Texas Citizens’ Participation Act barred new claims for breach of fiduciary duty and breach of the duties of good faith and fair dealing, ruling that the Foundation’s stadium renovation activities were “a matter of public concern.” However, the Court also held that claims for breach of contract and promissory estoppel were not barred because the defendants missed the 60-day deadline to raise the TCPA to bar such claims.
2024 – 2Q Newsletter
- Supreme Court Decisions – The Supreme Court issued two important securities decisions this quarter.
- In SEC v. Jarkesy, the Court upheld the Seventh Amendment right to a jury trial when the SEC seeks to impose civil penalties for fraud. Since the SEC has filed nearly all contested enforcement actions in federal court (as opposed to ALJ proceedings) since 2018, the ruling is not likely to have a significant impact on SEC enforcement actions. However, it may have a significant impact on other agencies that rely heavily on inhouse administrative proceedings to impose civil money penalties.
- In Macquarie Infrastructure Corp. v. Moab Partners, L.P., the Court resolved the question whether the failure to disclose information required by Item 303 of Regulation S-K (such as known trends that could materially impact net sales, revenues, or income), standing alone, is actionable under Rule 10b-5. In a unanimous opinion, the Court answered no, holding that “[p]ure omissions are not actionable under Rule 10b–5(b).” The Court confirmed “that the failure to disclose information required by Item 303 can support a Rule 10b–5(b) claim only if the omission renders affirmative statements made misleading.”
- Fifth Circuit Rulings – In National Assoc. of Private Fund Mgrs. v. SEC, the Fifth Circuit vacated new SEC rules that would have significantly expanded compliance requirements for advisers of private equity funds and real estate funds. The Court ruled that the SEC exceeded its statutory authority under the Investment Advisers Act and rejected the SEC’s argument that Dodd-Frank expanded that authority. In Cory v. Stewart, the Fifth Circuit addressed for the first time the issue of loss causation in a private market context and ruled that plaintiffs must show that a misstatement was a substantial factor in causing at least some portion of the plaintiff’s actual economic loss by producing evidence that (a) certain misstated risks were responsible for the loss and (b) reasonably distinguishes the impact of those risks from other economic factors. The Fifth Circuit reversed district court orders in two securities fraud actions. In Anadarko, the Court vacated class certification on procedural grounds, ruling that the district court abused its discretion by (a) denying defendant leave to respond to a rebuttal report that injected new evidence and (b) failing to perform the required Daubert analysis with respect to that rebuttal report. In Six Flags, the Court reversed the district court’s judgment on the pleadings, clarifying that its prior ruling had not ruled that all fraud allegations were fully disclosed by October 2019 but only that certain fraudulent statements after that date were not actionable. Thus, the lead plaintiff retained standing to proceed, and another putative shareholder who purchased shares before the October 2019 disclosure was entitled to intervene.
- District Court Rulings – In one of the Stanford Ponzi-scheme cases against a clearing broker, Judge Godbey denied summary judgment for the defendant, ruling that genuine issues of material fact existed on limitations, as well as fraud and breach of fiduciary duty claims. In a Texas Securities Act case, Judge Rosenthal granted a Norwegian defendant’s motion to dismiss for lack of personal jurisdiction but denied its U.S. affiliate’s motion to dismiss claims on limitations grounds because the factual allegations were sufficient to state a claim and the factual record on limitations was not sufficiently developed. Reviewing the settlement of a securities class action against Fluor Corporation, Judge Starr awarded attorneys’ fees based on a lodestar approach and questioned why lawyers for class members in a common-fund settlement should ever be awarded a multiplier that would reduce the recovery by their clients. In an SEC enforcement action against a cryptocurrency seller and influencer based overseas, Judge Ezra ruled as a matter of law that the SEC had jurisdiction under Sections 5 and 17 of the Securities Act because U.S. residents were targeted online and “offers” were made in the United States.
2024 – 1Q Newsletter
- Supreme Court Whistleblower Decision – In Murray v. UBS Securities, LLC, the Supreme Court resolved a circuit split and ruled that under the whistleblower-protection provisions of the Sarbanes-Oxley Act a claimant does not have to show that his employer acted with retaliatory intent to state a claim for an unfavorable personnel action. Instead, a claimant need only show that his protected activity was a contributing factor in the employer’s unfavorable personnel decision.
- Securities Fraud Cases – In the ongoing Cabot Oil & Gas securities fraud class action, Judge Rosenthal granted plaintiffs leave to amend their complaint to add allegations about the Company’s 2019 production guidance as well as consent orders and felony charges the company faced. However, the Court denied plaintiffs leave to assert any claims based on the Company’s 2018 production guidance because it was barred by the 5-year statute of repose. In other cases dealing with class certification issues, (a) Judge Rosenthal ruled in Vertex that a motion for appointment of lead counsel can be filed in a later-filed action provided (i) the motion is timely and (ii) the original court is notified of the filing; (b) Magistrate Judge Edison recommended narrowing the proposed class period in the soon-to-be-settled Apache litigation; and (c) Magistrate Judge Edison recommended separate subclasses for McDermott shareholders who acquired their shares directly and those who acquired shares through the merger with Chicago Bridge & Iron.
- Shareholder Derivative Cases – Two district court rulings this quarter showcase different approaches to dealing with shareholder derivative actions when a parallel securities fraud action has survived motions to dismiss. In a case against the board of Six Flags, Judge Pitman dismissed a derivative action after the board refused demand or the grounds that pursuing claims against the company’s officers and directors would force the company to take inconsistent positions in parallel securities litigation and plaintiffs did not allege sufficient facts to challenge that business judgment. In the Cabot Oil & Gas derivative litigation, Judge Rosenthal dismissed the case for failure to plead demand futility because plaintiffs failed to allege particularized facts showing that at least half of the ten-member board could not impartially consider the shareholders’ demand. The Cabot ruling highlights the potential evidentiary benefit for defendants when exculpatory documents are produced in response to a books and records demand.
- Enforcement Cases – In SEC v. Novinger, the Fifth Circuit declined on procedural grounds to consider a constitutional challenge to the SEC’s policy prohibiting defendants from making public denials when they settle on a “neither admits nor denies” basis. The arguments that the SEC policy violates the First Amendment, Due Process Clause, and the Administrative Procedure Act are likely to be presented in future cases. In other cases, federal district courts denied a motion to dismiss claims arising from a pump-and-dump scheme (Verges), dismissed an indictment premised on the now-rejected “right to control” theory because it did not sufficient allege a scheme to defraud was intended to deprive victims of their property rights (Constantinescu), granted partial summary judgment for the SEC in an options trading scheme (Jaitley), and partially granted and partially denied summary judgment in an enforcement action relating to investments in life insurance policies (Mueller).