Justia Corporate Compliance Opinion SummariesArticles Posted in US Court of Appeals for the Seventh Circuit
Xanthopoulos v. United States Department of Labor Administrative Review Board
Xanthopoulos, a Mercer consultant, detected securities fraud; his internal complaints failed. He went to the SEC website, and, in March 2014, Xanthopoulos submitted his first TCR Form. Unlike the Sarbanes-Oxley OSHA Form, which may be used to notify OSHA of a Sarbanes-Oxley complaint, the SEC’s TCR Form does not affirmatively indicate that submission of the form will initiate a formal lawsuit under the federal securities law. Xanthopoulos allegedly submitted seven TCR Forms through June 2018; in his 2018 submissions, he mentioned Mercer’s mistreatment of him as an employee, not just the securities fraud. Every TCR Form Xanthopoulos submitted specifically referenced a whistleblowing award.As Xanthopoulos predicted in those filings, Mercer fired him in October 2017. Xanthopoulos filed an OSHA administrative complaint in September 2018, alleging violations of Sarbanes-Oxley’s anti-retaliation provision, 18 U.S.C. 1514A. OSHA dismissed the complaint as untimely because Xanthopoulos filed 350 days after Mercer discharged him. He responded that “there was no 180-day-period in which [he] could have decided in clear conscience, that [he] had every information needed, to contact OSHA.” Xanthopoulos, then represented by counsel, argued that he filed his claim in the wrong forum, which tolled the statute of limitations: the TCR Forms constituted Sarbanes-Oxley claims mistakenly filed with the SEC. The Seventh Circuit affirmed the dismissal. The reports to the SEC did not toll the 180-day period for his Sarbanes-Oxley complaint. Xanthopoulos has not articulated a sufficient ground to equitably toll his untimely complaint. View "Xanthopoulos v. United States Department of Labor Administrative Review Board" on Justia Law
Sterling National Bank v. Block
Sterling Bank purchased Damian Services. The stock purchase agreement set up a two-million-dollar escrow to resolve disputes arising after the purchase and established comprehensive rights, obligations, remedies, and procedures for resolving disputes. After the purchase, a former Damian employee called some of Damian’s clients to tell them of a billing practice that the sellers had instituted years earlier. When Sterling learned of the situation, it investigated with the help of a forensic accountant. Sterling concluded that under the sellers’ management, Damian had overcharged its clients by over one million dollars. Sterling refunded the overpayments to its current clients, then unsuccessfully demanded indemnification from the escrow, claiming that the sellers had misrepresented Damian’s liabilities and vulnerability to litigation.The district court granted the sellers summary judgment, reasoning that Sterling missed the deadline for claiming indemnification under the stock purchase agreement. The court denied the sellers’ request for statutory interest on the escrow money.The Seventh Circuit reversed. Whether Sterling’s demand for indemnification was late depends on disputed facts. Even if the demand was late, however, the agreement’s elaborate terms provide that any delay could be held against Sterling only “to the extent that [sellers] irrevocably forfeit rights or defenses by reason of such failure.” Undisputed facts show that the sellers have not irrevocably forfeited any claims or defenses. View "Sterling National Bank v. Block" on Justia Law
Prince v. Appleton Auto LLC
Applecars is a member of a network of Wisconsin used-car dealerships. McCormick owned a majority share in each dealership. Each dealership received management services from Capital M, which McCormick also owned. Capital M tracked shared dealership inventory, held employee records, and issued identical employee handbooks for each dealership; Capital M’s operations manager hired and fired each dealership’s general manager. The employees of each dealership gathered as one for events several times per year. The dealerships advertised on a single website, which included some language suggesting a single entity and some indicators that each dealership is a separate entity. Each dealership properly maintained corporate formalities and records. Capital M billed each dealership separately. Each dealership had a distinct general manager, bank accounts, and financial reports. The dealerships separately filed and paid taxes, paid employees, and entered into contracts.Prince worked at Applecars for several months before he was fired. Prince claims his firing was retaliatory and sued Applecars and its affiliates for racial discrimination under Title VII of the 1964 Civil Rights Act. The court granted the defendants summary judgment, noting that Applecars had fewer than 15 employees and was not subject to Title VII. The Seventh Circuit affirmed. There is insufficient evidence to support Prince’s theory that the court should pierce the corporate veil of the network, aggregating the number of employees such that Title VII would apply. View "Prince v. Appleton Auto LLC" on Justia Law
McFadden v. Dorvit
Winemaster founded PSI in 1985 and served as Chairman, President, and CEO. In 2011, PSI became a publicly-traded company. Winemaster and his brother were PSI’s majority shareholders. The company’s early SEC filings noted that PSI’s “internal controls over financial reporting” suffered from “material weakness.” In 2013, PSI’s per-share price rocketed from $16.18 to $75.10. In 2015, PSI began making disclosures; its auditor resigned, its share price plummeted, and the government began investigating. PSI had improperly recognized millions of dollars in revenue. Winemaster resigned. As a result of a purchase agreement and resignations, six of PSI’s seven current directors were unaffiliated with the company during the period of alleged misconduct. Winemaster was charged with criminal fraud.Lawsuits followed, including this derivative complaint on behalf of PSI, alleging fiduciary breach and unjust enrichment against certain officers and directors. The parties executed a settlement, with a monetary award of $1.875 million from PSI’s insurers; plaintiffs' counsel would get half. The balance was earmarked for expenses related to the government’s investigations. The settlement required the formal enactment of 17 corporate governance reforms. The plaintiffs agreed to a release against the individual defendants, including Winemaster. The court granted preliminary approval. In the meantime, state derivative actions were dismissed as duplicative. In federal court, the state plaintiff unsuccessfully objected to Winemaster's release, argued that the monetary component was insufficient, and claimed that the proposed governance reforms lacked substance. The Seventh Circuit affirmed final approval. The district court adequately considered the propriety of the settlement’s terms. View "McFadden v. Dorvit" on Justia Law
Goulding v. Weiss
Nutmeg LLC, formerly managed by Goulding, served as an investment advisor and sole general partner of more than a dozen investment funds, each a limited partnership under Illinois or Minnesota law. Goulding’s management of the Funds ended in 2009, when the SEC brought an enforcement action against him, Nutmeg, and others under the Investment Advisors Act of 1940, alleging that Nutmeg misappropriated client assets and failed to maintain proper records. The district court found that the SEC made the showing necessary to warrant the issuance of a restraining order prohibiting Goulding from managing the Funds and granted the SEC’s unopposed motion to appoint attorney Weiss as receiver for Nutmeg. Unsatisfied with Weiss’s performance, Goulding and limited partners from certain funds managed by Nutmeg filed an individual and derivative action on behalf of the Funds, alleging breach of fiduciary duty and legal malpractice. The court dismissed the federal securities law claim, claims against Nutmeg, all legal malpractice claims against Weiss and her firm, and two breach of fiduciary duty claims. The Seventh Circuit Affirmed, holding that even when viewed in the light most favorable to the plaintiffs, no reasonable jury could find that either Weiss or her firm willfully and deliberately violated any fiduciary duties. View "Goulding v. Weiss" on Justia Law
Lowinger v. Oberhelman
In 2011 Caterpillar made serious inquiries about the possible acquisition of a Chinese mining company and its wholly‐owned subsidiary (Siwei). Caterpillar completed that acquisition in June 2012. Only after the closing did Caterpillar gain access to Siwei’s physical inventory and find that Siwei had overstated its profits and improperly recognized revenue. Caterpillar took a $580 million goodwill impairment charge just months after the acquisition. Plaintiffs, Caterpillar shareholders, filed a shareholder derivative suit alleging that several former Caterpillar officers breached their fiduciary duties by failing to conduct an adequate investigation of the Siwei acquisition, which caused Caterpillar’s loss. They made an unsuccessful demand that the Caterpillar Board bring the litigation. The district court dismissed the complaint for failure adequately to allege that the Board wrongfully refused to pursue the Plaintiffs’ claim. The Seventh Circuit affirmed. The Board’s decision not to litigate was protected by the “wide bounds of the business judgment rule.” The plaintiffs might come to a different conclusion about the strategic importance of the acquisition, the risk that litigation might cause disruption and excessive cost for Caterpillar, or the need to interview Siwei’s former CEO, but those types of business and investigative choices are exactly what the business judgment rule protects. View "Lowinger v. Oberhelman" on Justia Law
William R. Lee Irrevocable Trust v. Lee
Lester and William Lee created LIA in 1974 as a public company. William’s sons (Lester's nephews) later joined the business. LIA subsequently bought out the public shareholders, leaving Lester owning 516 shares; William owned 484. William created the Trust to hold his shares. The nephews served as trustees. Lester encountered difficulties with another company he owned, Maxim. He proposed that Maxim merge with LIA; William rejected this idea. Lester told the nephews, “I will screw you at every opportunity,” and made other threats, then, as majority shareholder, approved a merger of LIA and another company. The Trust asserted its rights under Indiana’s Dissenters’ Rights Statute. Lester gutted LIA to prevent the Trust from collecting the value of its LIA shares. He bought property from LIA on terms favorable to him and realized substantial profits. LIA subsidiaries were transferred for little or no consideration to Lester’s immediate family. Lester also perpetrated a collusive lawsuit, resulting in an agreed judgment that all LIA assets should be transferred to him and his companies. Lester did not disclose these actions to the nephews. In 2008, the Jennings Circuit Court conducted an appraisal in the dissenters’ rights action. Between the trial and the judgment, Lester dissolved LIA. The court entered a $7,522,879.73 judgment for the Trust. In 2012, Lester petitioned for Chapter 7 bankruptcy. The Trust initiated a successful adversary proceeding to pierce LIA’s corporate veil and hold Lester personally liable for the judgment. The Seventh Circuit affirmed, noting the facts were undisputed. View "William R. Lee Irrevocable Trust v. Lee" on Justia Law
Pension Trust Fund for Operating Engineers v. Kohl’s Corp.
Kohl’s operates more than 1000 stores, 65 percent of which are leased. In 2011, Kohl’s announced that it was correcting several years of its financial filings because of multiple lease accounting errors. Plaintiffs, led by the Pension Fund, filed suit under the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), SEC Rule 10b-5, and the “controlling person” provisions of 15 U.S.C. 78t(a), alleging that Kohl’s and two executives defrauded investors by publishing false and misleading information prior to the corrections. The Fund argued that one can infer that the defendants knew that these statements were false or recklessly disregarded that possibility because Kohl’s recently had made similar lease accounting errors. Despite those earlier errors, it was pursuing aggressive investments in leased properties, and at the same time, company insiders sold considerable amounts of stock. The district court dismissed the complaint with prejudice for failure to meet the enhanced pleading requirements for scienter imposed by the Private Securities Litigation Reform Act. The Seventh Circuit affirmed, reasoning that the complaint fell short and the Fund did not suggest how an amendment might help. The Fund made a strong case that many of Kohl’s disclosures regarding its lease accounting practices were false but that is not enough. The Fund provided very few facts that would point either toward or away from scienter. View "Pension Trust Fund for Operating Engineers v. Kohl's Corp." on Justia Law
Martensen v. Chicago Stock Exchange, Inc.
Martensen was a supervisor in the Chicago Stock Exchange’s unit responsible for examining compliance with trading regulations. He was fired in 2016. He claimed his firing violated 15 U.S.C. 78u–6(h), a part of the Dodd-Frank Act that protects whistleblowers. Martensen’s complaint did not allege that he reported any unlawful activity to the Securities and Exchange Commission. The Seventh Circuit affirmed the dismissal of his suit. Only a person who has reported “a violation of the securities laws to the Commission” is covered by 78u–6(h). The judge was wrong to reject Martensen’s proposal to file an amended complaint alleging that he had reported fraud to the SEC, but remand would be pointless. The report was unrelated to his discharge. A report to the SEC does not prevent employers from responding adversely to later reports that do not concern fraud or any other violation of the securities laws and never reach the SEC. Martensen acknowledged that the Exchange did not retaliate against him for the act that made him a whistleblower and did not argue that an internal complaint, which resulted in his firing, was “required or protected” by any particular rule of the Chicago Stock Exchange. View "Martensen v. Chicago Stock Exchange, Inc." on Justia Law
Verfuerth v. Orion Energy Systems, Inc.
Verfuerth, the founder and former CEO of Orion, had disputes with Orion’s board of directors, involving outside counsel's billing practices, potential patent infringement, potential conflicts of interests involving a board member, violations of internal company policy, such as consumption of alcohol at an informal meeting, the board’s handling of a defamation suit by a former employee, and the fact that the chairman of Orion’s audit committee allowed his CPA license to expire. The board ignored his advice to disclose those matters to stockholders. Orion removed Verfuerth as CEO, citing high rates of management turnover. The board conditionally offered Verfuerth emeritus status. Verfeurth declined. The parties were unable to negotiate his severance package. The board fired him for cause, citing misappropriation of company funds in connection with his divorce, disparagement of the new CEO, and attempts to form a dissident shareholder group. Verfuerth filed suit, claiming that his complaints to the board were “whistleblowing” and that, by firing him, Orion violated the Sarbanes‐Oxley Act, 18 U.S.C. 1514A(a), and the Dodd‐Frank Act, 15 U.S.C. 78u‐6.e. The Seventh Circuit affirmed summary judgment for Orion. An executive who advises board members to disclose a fact that the board already knows about has not “provide[d] information” about fraud.. Nothing in any federal statute prevents a company from firing its executives over differences of opinion. View "Verfuerth v. Orion Energy Systems, Inc." on Justia Law