Posts categorized as "Securities Fraud"

Extraterritorial Application of US Law: Liu Meng-Lin v. Siemens AG

As a general rule, US law does not apply outside the territorial jurisdiction of the United States.  A recent decision by the Second Circuit Court of Appeals (Liu Meng-Lin v. Siemens AG) provides a helpful illustration.   As a reminder, the Second Circuit Court of Appeals is a federal appellate court that decides appeals from  Connecticut, New York, and Vermont district courts.   The Second Circuit is particularly influential with respect to securities laws because it hears cases on appeal from New York, including the federal court in Manhattan.

After the 2008 financial crisis Congress passed a law called the Dodd-Frank Act.  Among many other things, the Dodd-Frank Act provides protection for whistleblowers - - persons who report securities law violations by their companies.    The Dodd-Frank Act prohibits companies from retaliating against employees who report certain types of violations of US law.  

The plaintiff in this case sued his former employer, arguing that the company illegally fired him after he internally reported corrupt practices by the company.  He complained that by firing him, the company violated the Dodd-Frank Act's protection for whistleblowers.

But the district court dismissed his case and the Second Circuit affirmed the district court's decision.  Why? The plaintiff was a foreigner (non-US citizen) working for a foreign company and all of the conduct at issue in the case occurred overseas.  Specifically:

  1. The foreign company's allegedly corrupt activity occurred outside the United States (in North Korea and China).
  2. The plaintiff reported the activity overseas.
  3. The allegedly illegal retaliation occurred overseas.

According to the Second Circuit, the only connection to the United States was that the foreign company was listed on the New York Stock Exchange.  The Second Circuit, citing recent Supreme Court decisions, explained that because Congress did not clearly intend whistleblower protection laws to apply extraterritorially, the plaintiff's case must be dismissed.

Here is a video discussing the case:




What does it mean when the SEC brings a Section 17(a) enforcement action?

By way of background, the Securities and Exchange Commission has the power to bring civil lawsuits against defendants who allegedly violate US securities laws.  
Section 17(a) is part of the Securities Act of 1933.  You can find it codified at 15 USC Section 77q.  The SEC has brought a number of high-profile Section 17 cases in the past few years.  For example, the SEC sued Citigroup, Inc. pursuant to Section 17(a) following the 2008 financial crisis.
The relevant part of the statute states that it is illegal, in connection with any offer or sale of a security:
"(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
 Here are two key points about Section 17(a):
1. Only the SEC  - - (usually) not private investors - -  can bring a Section 17 action.  Courts (but there is some contrary case law) hold that private investors do not have a "private right of action" - - meaning they are not allowed to sue - - based on violations of Section17.
2. The SEC only has to prove negligence in a Section 17 case.   Keep in mind that Section 10(b) and Rule 10b-5 of the US securities laws require proof that the defendant knowingly or recklessly made a false statement in connection with the offer, sale or purchase of a security.  The SEC does not have to prove that a speaker knew or was reckless in not knowing that a statement was false in a case brought under Section 17(a)(2).  The SEC need only prove that the defendant was negligent in making money from a false statement in connection with the offer or sale of securities.  

City of Providence v. BATS: Section 6 Liability for Stock Exchanges

Another interesting aspect about the City of Providence v. BATS lawsuit is that the complaint alleges that stock exchanges are liable to the putative class of plaintiffs under Section 6 of the Securities Exchange Act of 1934. Section 6 requires stock exchanges to have rules against fraudulent and manipulative practices and to be able to enforce those rules.  According to the complaint, the stock exchanges not only failed to enforce their rules against fraud but the exchanges, together with brokerage firms and high frequency traders, defrauded slower traders.

Lawsuits against stock exchanges for violations of Section 6 are rare.  In one case from 1976, Carr v. New York Stock Exchange, a California federal court held  "that a failure in the exercise of reasonable diligence may be found only if the Exchange knew or had reasonable cause to know of a violation or suspected violation of a securities law, regulation or rule, or Exchange rule, and failed to proceed with requisite due care in view of the seriousness of the violation, pertinent SEC policies, the rules and practices of the Exchange, and the interests of the member firms, their security holders and the public customers of the Exchange." (italics added)  The Court held that whether the stock exchange was liable in that case was a question for a jury.

The Carr decision is not binding on the City of Providence court and we're a long way from any decision but it's something to consider.  



Interesting Case: HFT Securities Fraud Lawsuit

I started a new playlist on YouTube with interesting recent cases. I will try to update the playlist at least once a month.  

This month's case is a a securities fraud putative class action lawsuit alleging that high frequency traders (HFT), together with brokers and stock exchanges defrauded slower investors and traders in the stock market.  For now, I only have a video discussing in a very simple form the underlying premise of the some of the factual allegations.

The lawsuit is primarily based on a recent book by Michael Lewis called Flash Boys in which the author describes practices by  HFT to make money risk-free on stock exchanges at the expense of others. 

The case has just started and provides a great window to learn about civil procedure and securities fraud class action lawsuits in the United States.  Among other things, a court will have to determine whether the plaintiffs and the defendants may be certified for class action status.  Many people are  familiar with plaintiff class action lawsuits in which a plaintiff represent a class of unnamed plaintiffs.  In the United States, defendant class actions are also possible, in which one or more defendants represent a class of other defendants.  The court must approve a class action before the case can proceed.

What does it mean when Congress 'imposes stricter pleading requirements'?

Generally speaking, it is easy to commence a litigation in the United States because pleading requirements are not strict.  That is, a plaintiff can usually file a lawsuit without including too much detail and without including evidence.  The additional details and evidence can come later.  These same lax rules also apply to counterclaims and defenses. 

Rule 8 of the Federal Rules of Civil Procedure imposes three requirements on a complaint: a short and plain statement of subject matter jurisdiction, a short and plain statement showing that the plaintiff is entitled to relief, and a demand.  Rule 9 requires some additional detail if a complaint or counterclaim alleges fraud (or a defense relates to a mistake).  

Some people criticize lax pleading requirements on grounds that it harms defendants who must pay money to defend or to settle meritless claims. Congress enacted the Private Securities Litigation Reform Act (the PSLRA) in 1995 to curb purportedly meritless securities fraud litigation. The PSLRA makes it more difficult for plaintiffs to commence the lawsuit by requiring additional details in the complaint Recently, interest groups in the United States and members of Congress have worked to enact stricter pleading requirements and other reforms related to patent troll litigation.  

You might want to look at some videos I uploaded regarding pleading requirements in the federal courts.