Justia Corporate Compliance Opinion SummariesArticles Posted in US Court of Appeals for the Seventh Circuit
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
Estate of Pedersen v. Gecker
Emerald had an Illinois gaming license to operate in East Dubuque. Emerald operated profitably in 1993 but then struggled to compete with an Iowa casino. By 1996, Emerald had closed the casino and was lobbying for an act that would allow it to relocate. The Board denied Emerald’s license renewal application. While an appeal was pending, 230 ILCS 10/11.2 was enacted, permitting relocation. In 1998, before the enactment, defendants met with Rosemont’s mayor and representatives of Rosemont corporations about moving to Rosemont. After the enactment, the parties memorialized the terms of Emerald’s relocation. Emerald did not disclose the agreements as required by Illinois Gaming Board rules. By October 1999, Emerald had contracts with construction companies and architecture firms but had not disclosed them. Emerald altered its ownership structure; several new “investors” had connections to Rosemont’s mayor and state representative. stock transfers occurred without required Board approval. In 2001, the Board voted to revoke Emerald’s license. Its 15-month investigation was apparently based on a belief that Emerald had associated with organized crime but the denial notice focused on inadequate disclosures. The Board listed five counts but did not list who was responsible for which violation. Illinois courts affirmed the revocation but held that the Board had not proven an association with organized crime. Emerald was forced into bankruptcy. The trustee sued the defendants, asserting breach of contract and breach of fiduciary duty. The district court dismissed the breach‐of‐fiduciary‐duty claim as time-barred. The Shareholder’s Agreement required that shareholders comply with IGB rules; the court held that each defendant had violated at least one rule, calculated damages by valuing Emerald’s license, and held all but one defendant severally liable for the loss. The Seventh Circuit concluded that the defendants should be held jointly and severally liable, but otherwise affirmed. View "Estate of Pedersen v. Gecker" on Justia Law