Securities Snapshot
August 1, 2017

Second Circuit Overturns LIBOR Convictions Based On Compelled Foreign Testimony

Second Circuit overturns LIBOR manipulation convictions based on compelled foreign testimony; Second Circuit resuscitates stock repurchase suit by Booz Allen retirees; Fifth Circuit finds no appellate jurisdiction over untimely objection to class settlement; and Wisconsin federal court puts an end to Kohl’s securities fraud suit.

In United States v. Allen, the Second Circuit recently overturned the convictions of two former Rabobank employees accused of illegally manipulating the London Interbank Offered Rate, or LIBOR, on grounds that their convictions were based on compelled testimony in violation of the Fifth Amendment. Appellants Anthony Allen and Anthony Conti, the former global head of liquidity and a derivatives trader at Rabobank, respectively, are citizens and residents of the United Kingdom. They had previously testified in an investigation by the U.K. Financial Conduct Authority, where they were compelled to testify or face imprisonment under British law.  Appellants challenged the use at their trial in New York of the testimony of another Rabobank employee and cooperating witness, Paul Robson, who had reviewed the compelled testimony of the appellants in the UK investigation prior to testifying here. The Second Circuit found that the Fifth Amendment squarely prohibits the use of compelled testimony in criminal proceedings in the United States, even if the testimony would be valid in the foreign jurisdiction where it took place. Where it uses a trial witness who had substantial exposure to compelled testimony, the government must show that the compelled testimony did not shape the evidence used by the government. A generalized denial of taint—such as Robson’s “bare, self‐serving denials” here—is not sufficient. In the wake of the ruling, “the risk of error in coordination falls on the U.S. Government (should it seek to prosecute foreign individuals), rather than on the subjects and targets of cross‐border investigations,” and the government’s concern that foreign powers can “inadvertently or negligently obstruct federal prosecutions” remains an open issue.


In Pasternack v. Shrader, the Second Circuit revived a suit against Booz Allen Hamilton arising out the company’s repurchase of stock from retirees prior to its sale of a corporate division. Retired officers of the company claimed they were harmed when the company’s contracting business was sold in 2008 for more than Booz Allen had paid for the retirees’ shares. Retirees alleged that the circumstances in which they resold their shares “violated the duties of due care, loyalty, and good faith, in violation of [the Employee Retirement Income Security Act],” and one argued that he was fraudulently induced to sell his shares back at a price below fair market value, “in violation of federal securities regulations and other laws.” In a unanimous decision, the court affirmed the dismissal of the plaintiffs’ claims under ERISA, holding that the plan through which Booz Allen distributed its stock to employees was not an employee pension benefit plan under ERISA. The Second Circuit, however, vacated the judgment of the district court to the extent that it denied the motion by one plaintiff for leave to amend to add securities fraud claims.  The district court had denied the plaintiff permission to amend his complaint because he released any securities fraud claims in the documentation transferring his shares. The Second Circuit found the release language is “voided by § 29(a) [of the Securities Exchange Act of 1934] to the extent it purports to release [plaintiff’s] securities fraud claims.”  It also held that the district court’s denial of leave to amend on other grounds was an abuse of discretion, because “essentially no discovery ha[d] been undertaken in the case,” the proposed amended complaint would be the first to be considered after resolution of the motion to dismiss, and there was no allegation of untimeliness based on a scheduling order.  


In Farber v. Crestwood Midstream Partners L.P., the Fifth Circuit recently held that it lacked jurisdiction over an appeal by David Duggan, a class member who filed an untimely objection to a class action settlement of a merger dispute under which class members are to receive additional disclosures, confirmatory discovery, and attorney fees. Duggan had objected on the ground that the district court should not approve the settlement under the Delaware Chancery Court’s 2016 decision in In re Trulia, Inc. Stockholder Litigation, because neither the notice nor the supplemental disclosures asserted a plainly material misrepresentation or omission in the proxy statements. The district court approved the settlement over Duggan’s objection, and Duggan timely appealed. On review, the Fifth Circuit noted that generally only parties to a lawsuit can appeal an adverse judgment, although the Supreme Court’s 2002 decision in Devlin v. Scardelletti makes an exception for unnamed class members who object in a timely manner.    The Fifth Circuit declined to extend Devlin to these circumstances, finding that the court had no jurisdiction over Duggan’s appeal because he did not intervene and waived his rights by filing an untimely objection. The Court also noted: “Duggan’s reasons for his several failures are lame.  Duggan opted to go on vacation, which may well have seemed like a good idea at the time.  He submitted his procedurally deficient objection, however, after he returned from vacation and ten days after the actual deadline. Such choices have consequences.” 


In Pension Trust Fund for Operating Engineers v. Kohl’s Corporation, the Eastern District of Wisconsin recently dismissed with prejudice a securities fraud class action because the alleged accounting violations did not adequately plead scienter. Kohl’s shareholders had filed a securities lawsuit asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that Kohl’s and two of its officers were responsible for the devaluation of Kohl’s shares after the company disclosed that its accounting for lease agreements had not complied with GAAP. The defendants argued that plaintiffs failed to meet the heightened pleading standard required for securities fraud cases, because they failed to plead that the defendants possessed the requisite scienter. In granting defendants’ motion to dismiss, the court held that the plaintiffs failed to allege that the defendants had “access to information demonstrating the falsity of the financial statements” and that the defendants had a motive to provide false information.  In so ruling, Judge J.P. Stadtmueller stated: “The accounting rules the plaintiffs allege were violated are complex and technical, and the plaintiffs have not alleged with sufficient particularity why or how senior executives at Kohl’s would have been so familiar with those rules so as to see a problem in the company’s accounting before their auditors did.” The court made its ruling with prejudice, finally putting an end to the long battle, while highlighting the importance of adequately pleading scienter as to alleged accounting irregularities.