Securities Snapshot April 25, 2017

Third Circuit Upholds Insider Trading Verdict Against Ex-Capital One Analyst

Summary

Third Circuit upholds insider trading verdict involving use of nonpublic credit card data; New York court declines to reopen final judgment in RMBS repurchase action based on change of law; New York court dismisses several unconsolidated RMBS suits for lack of standing; Delaware Chancery Court dismisses quasi-appraisal claim finding plaintiffs did not suffer any harm subject to equitable relief; Delaware Chancery Court dismisses shareholder claims challenging $146 million stock-for-stock merger; California federal court allows indirect investors’ suit against Theranos to move forward; and former energy executive pleads guilty in connection with stock manipulation scheme.

THIRD CIRCUIT UPHOLDS INSIDER TRADING VERDICT AGAINST EX-CAPITAL ONE ANALYST

In SEC v. Huang, the Third Circuit Court of Appeals upheld an insider trading verdict finding an ex-Capital One Financial Corporation analyst liable for $13 million in disgorgement and penalties.  Huang secretly downloaded credit card data from over 200 retail companies, used that nonpublic data to predict those retailers’ quarterly revenues before they were announced, and then traded in the retail companies’ securities on the basis of that information.  Huang argued that the Capital One credit card data in question was not material as a matter of law and therefore could not be the basis of insider trading liability.  The appeals court disagreed and said that “a company’s revenue information will often satisfy the materiality requirement.”  The Third Circuit found that this “nonpublic Capital One data altered the total mix of information an investor would have had to make investment decisions” and that it gave Huang “early and nonpublic insight” into the companies’ financial performance.  Under this reasoning, the appeals court concluded that the information was material and upheld the jury verdict finding Huang liable for insider trading.

NEW YORK COURT REFUSES TO REOPEN $1 BILLION RMBS REPURCHASE ACTION AGAINST CREDIT SUISSE

In an order from the bench, a New York judge recently refused to reopen a repurchase action brought by U.S. Bank National Association as trustee for three Credit Suisse-issued RMBS that U.S. Bank claimed cost investors $1 billion.  The consolidated action had previously been dismissed by Judge Eileen Bransten of the New York Supreme Court on timeliness grounds, and that dismissal had already been upheld by the First Department of the Appellate Division on grounds of standing and failure to comply with the contractual pre-suit duty to notify provision.  In seeking to reopen the matter, U.S. Bank argued that a subsequent case, Nomura Home Equity Loan v. Nomura Credit & Capital, which held that the duty to notify is a separate and independently enforceable obligation, meant that its claims against Credit Suisse should be revived.  Judge Bransten disagreed.  Ruling from the bench, she found that “the First Department has upheld this court’s decision,” and therefore “this court declines to undo that final judgment.”  Judge Bransten noted that U.S. Bank had made a “litigation decision” not to bring claims for failure to notify in its case against Credit Suisse and observed that it had asserted such claims in other actions.  She went on to say that a change in law cannot be used to reopen a final judgment  and that the new law would not have changed her original dismissal. 

NEW YORK COURT DISMISSES $3.7 BILLION RMBS SUITS FOR LACK OF STANDING

A New York judge recently dismissed several unconsolidated suits filed by Royal Park Investments SA/NA against several issuers of RMBS, which together sought more than $3.7 billion in damages.  Royal Park, which acquired the RMBS from Fortis Bank, claimed that the offering documents pursuant to which Fortis Bank purchased the RMBS were false and misleading because they misrepresented the nature and credit quality of the RMBS and the underlying loans.  Judge Charles Ramos of the New York Supreme Court found that Royal Park did not have standing to assert these claims because, although the portfolio transfer agreement (PTA) by which Royal Park had acquired the securities from Fortis Bank had conveyed “all right, title and interest in and to” the RMBS at issue, the PTA had not expressly assigned to Royal Park the tort claims at issue.  Judge Ramos held:  “[A]bsent an express written assignment of fraud claims, the Court finds that RPI lacks standing to sue . . . as the PTA did not assign the right to assert fraud claims.”  In an effort to avoid this result, Royal Park had asked the court to consider extrinsic evidence, including a 2013 letter from the seller of the RMBS portfolio, stating that it had assigned “all litigation rights” to Royal Park, but Judge Ramos refused, stating that “extrinsic evidence cannot be offered to alter or add to the plain terms of the PTA.”

DELAWARE CHANCERY COURT DISMISSES QUASI-APPRAISAL CLAIMS

The Delaware Chancery Court recently dismissed the claims in Quadre Investments LP v. JPS Industries Inc., which sought a quasi-appraisal of the 2015 buyout of JPS Industries Inc. by Handy & Harman Ltd.  A quasi-appraisal action is an equitable putative class claim that may be brought in Chancery Court if an investor believes it did not have enough information about a merger to make a decision about whether to file a petition for judicial appraisal of its shares.  Ruling from the bench, Vice Chancellor Tamika Montgomery-Reeves found that Quadre did not suffer any harm that could be remedied by an equitable claim and that the company therefore had no standing to seek quasi-appraisal of the $11-per-share merger.  Because Quadre had already sought a judicial review of the value of its JPS shares (the case is currently in the discovery stage), the Vice Chancellor found that Quadre did not suffer harm that justifies relief in a quasi-appraisal action.  Vice Chancellor Montgomery-Reeves cited two cases that rejected an appraisal petitioner’s standing to later bring disclosure claims and said that the court should continue its practice of carefully considering standing in these cases.

DELAWARE CHANCERY COURT THROWS OUT CHALLENGE TO PARAMOUNT GOLD’S $146 MILLION MERGER WITH COEUR MINING 

In In re Paramount Gold and Silver Corp. Stockholders Litigation, Chancellor Andre G. Bouchard of the Delaware Chancery Court dismissed shareholder claims for breach of fiduciary duty connected to the $146 million stock-for-stock merger between Paramount Gold and Silver Corp. and Coeur Mining Inc.  The court rejected plaintiffs’ allegations that certain consent rights in a royalty agreement between the parties and a $5 million termination fee in the merger agreement constituted an unreasonable deal protection device, finding that it was “apparent from the face of the Complaint and documents incorporated therein” that the challenged provisions do not constitute an unreasonable deal protection device.  The court also found that the plaintiffs failed to show any material deficiencies in the company’s disclosures in advance of a shareholder vote on the merger.   Plaintiffs argued that enhanced scrutiny should be applied to the deal under Unocal Corp. v. Mesa Petroleum Co., because the merger agreement’s termination fee provision together with the royalty agreement constituted an unreasonable deal protection device.  Chancellor Bouchard disagreed and applied the business judgment rule to the director’s decisions, relying on the doctrine outlined in Corwin v. KKR Financial Holdings LLC.  In dismissing the complaint, Chancellor Bouchard said:  “Because the [m]erger was approved by a majority of Paramount’s disinterested stockholders in a fully informed, uncoerced vote, the business judgment rule applies to the Paramount board’s decision to approve the [m]erger, and the transaction may only be attacked on the ground of waste.” 

INDIRECT INVESTORS’ SUIT AGAINST THERANOS MOVES FORWARD 

In Colman v. Theranos, Inc., a California federal court partially denied Theranos’ motion to dismiss a securities class action brought by investors who purchased Theranos shares through third-party investment funds.  Magistrate Judge Cousins allowed plaintiffs’ complaint alleging common law fraud and violation of a California statute regarding misrepresentations to move forward, but dismissed other statutory claims allowing  rescission of shares sold fraudulently.  Theranos argued that plaintiffs cannot hold the company and its officers liable for securities fraud because they did not buy Theranos shares directly from Theranos, but instead purchased shares through third-party venture funds.  Magistrate Judge Cousins found that Section 25400(d) of the California Corporations Code is designed to “prevent the manipulation of the market by fraud, and it focuses on the actions of the seller of the securities, not the relationship between seller and buyer,” and therefore allowed plaintiffs’ claims under that section move forward.  On the other hand, Magistrate Judge Cousins dismissed claims under California Corporations Code Sections 25401 and 25501, finding that those sections “focus on the relationship between the parties” and that “Plaintiffs have not alleged privity.”  The court also found that the plaintiffs’ claims were specific enough to meet the heightened pleading standard for fraud claims in federal court.

FORMER CHIMERA ENERGY EXECUTIVE PLEADS GUILTY IN STOCK MANIPULATION SCHEME

Thomas Galen Massey, an ex-Chimera Energy Corp. executive, recently pleaded guilty and agreed to cooperate with the government and pay up to $1 million in restitution for the role he played in a scheme to manipulate the price of the company’s stock.  Massey pleaded guilty to conspiracy to commit wire fraud and acknowledged that from May 2011 to December 2012, he conspired “to perpetrate a securities fraud scheme to defraud investors of a substantial amount of money by publishing false statements about [Chimera] in order to fraudulently inflate the price of its stock.”  Specifically, “Massey’s role in the conspiracy was to obtain documentary support for the false press releases being published about Chimera, and to provide the false press releases to the Chimera CEO for his approval prior to their release.”  Between June and November 2012, the company sold about 9.8 million shares of Chimera stock for $6.8 million in proceeds.