Justia Corporate Compliance Opinion Summaries

Articles Posted in US Court of Appeals for the Third Circuit
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Attorneys Blume, Cozen, and Madonia were involved in the sale to The Institutes of LLCs owned by the Shareholders. Blume also served on the board of directors and as General Counsel for one of the LLCs, assisting the Shareholders in making business decisions. Unbeknownst to the Shareholders, Cozen represented The Institutes in several matters, including negotiating the price for their transaction. After the deal closed, the Shareholders allegedly determined that they had sold the LLCs at a price substantially below their fair market value and that the attorneys had wrongfully secured a favorable outcome for The Institutes by using confidential client information.Shareholder Potter sued in the Shareholders' names, claiming breach of fiduciary duty and professional malpractice, although he identified the harm as “the difference in the true value of the [LLCs] and the purchase price” that was to be paid to the LLCs themselves. The lawyers argued that under the “shareholder standing rule,” the individuals did not have the legal right to bring the entities' claims in their own names. The district court dismissed the complaint for lack of jurisdiction, stating that the Shareholders “lack[ed] Article III standing." The Third Circuit vacated. The third-party standing rule is merely prudential, not constitutional and jurisdictional, and is properly considered under Rule 12(b)(6), not Rule 12(b)(1). There are different considerations in deciding a motion to dismiss under Rule 12(b)(6) that could produce a different outcome in this case. View "Potter v. Cozen & O'Connor" on Justia Law

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Four defendants, who have multiple ties to organized crime, were convicted for their roles in the unlawful takeover and looting of FirstPlus Financial, a publicly traded mortgage loan company. Their scheme began with the defendants’ and their co-conspirators’ extortion of FirstPlus’s board of directors and its chairman, using lies and threats to gain control of the company. Once they forced the old leadership out, the defendants drained the company of its value by causing it to enter into expensive consulting and legal-services agreements with themselves, causing it to acquire (at vastly inflated prices) shell companies they personally owned, and using bogus trusts to funnel FirstPlus’s assets into their own accounts. They ultimately bankrupted FirstPlus, leaving its shareholders with worthless stock.Each defendant was convicted of more than 20 counts of criminal behavior and given a substantial prison sentence. In a consolidated appeal, the Third Circuit affirmed, rejecting challenges to the investigation, the charges and evidence against them, the pretrial process, the government’s compliance with its disclosure obligations, the trial, the forfeiture proceedings, and their sentences. The government conceded that the district court’s assessment of one defendant’s forfeiture obligations was improper under a Supreme Court decision handed down during the pendency of this appeal and remanded that assessment. View "United States v. Scarfo" on Justia Law

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Under Pennsylvania law, a court may appoint a custodian to take control of a corporation if the corporation’s board of directors is deadlocked or if the directors’ acts are illegal, oppressive, fraudulent, or wasteful. The eight-person FRBK Board of Directors became evenly split into two factions until one of the Hill Directors died. The Madonna Directors immediately used their new numerical advantage to start rearranging the bank’s leadership and took steps to fill the Board vacancy with an ally.The Hill Directors sued. Within hours, the district court ordered the Madonna Directors to cease their actions. Nine days later, without an evidentiary hearing or fact-finding, the court appointed a custodian to take control of FRBK and to hold a special shareholders’ meeting to fill the vacant Board seat. The following month, the court – without prompting from any shareholder or Board member – directed the custodian to add a Board seat and to fill that seat at the special shareholders’ meeting.The Third Circuit reversed. The decision to displace the corporate governance structure of a publicly-traded company did not reflect the required caution, circumspection, or justification for such a drastic step. FRBK’s bylaws describe how the Board should proceed after the death of a director. The Madonna Directors followed those instructions. The court abused its discretion by hastily supplanting the Bylaws with its own process. There was no deadlock, illegality, oppression, or any other ground for appointing a custodian. View "Hill v. Cohen" on Justia Law

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In 2005, revelations surfaced that Body Armor—a publicly-traded company—was manufacturing its body armor, which it sold to law enforcement agencies and the U.S. military, using substandard materials. Its stock price plummeted, prompting shareholders to bring numerous actions that were consolidated into a shareholders’ class action and a derivative action on behalf of Body Armor against specified officers and directors. Since then, the matter has traveled, through bankruptcy, trial, and appellate courts throughout three U.S. jurisdictions. In its second review of the case, the Third Circuit affirmed a 2015 Bankruptcy Court for the District of Delaware order, approving a settlement entered in the Chapter 11 bankruptcy case of S.S. Body Armor I. The court reversed in part the Bankruptcy Court’s order that granted the objector fees on a contingent basis and remanded for a determination of the appropriate amount of the fee award. The court affirmed the part of that order that denied the objector’s claim to attorneys’ fees and expenses under the Bankruptcy Code and an order awarding fees to counsel in one of the underlying lawsuits. View "In re: SS Body Armor I Inc." on Justia Law

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Jaludi began working for Citigroup in 1985 and rose steadily through the ranks. Jaludi was laid off and terminated in 2013 after reporting certain improprieties in Citigroup’s internal complaint monitoring system. Jaludi, believing Citigroup had fired him in retaliation for his reporting, sued under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1962 (RICO), and the Sarbanes–Oxley Act of 2002, 18 U.S.C. 1514A. Citigroup moved to compel arbitration, relying on two Employee Handbooks. The 2009 Employee Handbook, contained an arbitration agreement requiring arbitration of all claims arising out of employment—including Sarbanes–Oxley claims. In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which amended Sarbanes–Oxley to prohibit pre-dispute agreements to arbitrate whistleblower claims, 18 U.S.C. 1514A(e)). In 2011, Citigroup and Jaludi agreed to the 2011 Employee Handbook; the arbitration agreement appended to that Handbook excluded “disputes which by statute are not arbitrable” and deleted Sarbanes–Oxley from the list of arbitrable claims. Nonetheless, the district court held that arbitration was required for all of Jaludi’s claims. The Third Circuit reversed in part. Although Jaludi’s RICO claim falls within the scope of either Handbook’s arbitration provision, the operative 2011 arbitration agreement supersedes the 2009 arbitration agreement and prohibits the arbitration of Sarbanes–Oxley claims. View "Jaludi v. Citigroup" on Justia Law

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Tibet, a holding company, “effectively control[led]” Yunnan, a manufacturer. Tibet attempted to raise capital for Yunnan's operations through an initial public offering (IPO). Zou was an investor in Tibet and the sole director of CT, a wholly-owned subsidiary of Tibet. Tibet’s control of Yunnan flowed through CT. Zou told Downs, a managing director at the investment bank A&S, about the IPO. A&S agreed to serve as Tibet’s placement agent. Zou and downs were neither signatories to Tibet’s IPO registration statement nor named as directors of Tibet but were listed as non-voting board observers chosen by A&S without formal powers or duties. The registration statement explained, “they may nevertheless significantly influence the outcome of matters submitted to the Board.” The registration statement omitted information that Yunnan had defaulted on a loan from the Chinese government months earlier. Before Tibet filed its amended final prospectus, the Chinese government froze Yunnan’s assets. Tibet did not disclose that. The IPO closed, offering three million public shares at $5.50 per share. The Agricultural Bank of China auctioned off Yunnan’s assets, which prompted the NASDAQ to halt trading in Tibet’s stock. Plaintiffs sued Zou, Downs, Tibet, A&S, and others on behalf of a class of stock purchasers under the Securities Act of 1933, 15 U.S.C. 77k(a). The Third Circuit directed the entry of summary judgment in favor of Zou and Downs, holding that a nonvoting board observer affiliated with an issuer’s placement agent is not a “person who, with his consent, is named in the registration statement as being or about to become a director[ ] [or] person performing similar functions,” under section 77k(a). The court noted the registration statement’s description of the defendants, whose functions are not “similar” to those of board directors. View "Obasi Investment Ltd v. Tibet Pharmaceuticals Inc" on Justia Law

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Brooks, Debtor's CEO, was charged with financial crimes. In class action and derivative lawsuits, Debtor proposed a global settlement that indemnified Brooks for liability under the Sarbanes Oxley Act (SOX), 15 U.S.C. 7243. Cohen, Debtor’s former General Counsel and a shareholder, claimed that the indemnification was unlawful. The district court approved the settlement, Cohen, represented by CLM, appealed. The Second Circuit vacated, noting that the EDNY would determine CLM’s attorneys’ fees award. Debtor initiated Chapter 11 bankruptcy proceedings. The Bankruptcy Court confirmed Debtor’s liquidation plan, with a trustee to pursue Debtor’s interest in recouping its losses from the ongoing actions.Brooks died in prison. Because his appeal had not concluded, some of his convictions and restitution obligations were abated. Stakeholders negotiated a second global settlement agreement, under which $142 million of Brooks’ restrained assets were to be distributed to his victims; $70 million has been remitted to Debtor. The Bankruptcy Court awarded CLM fees for the SOX 304 claim; the amount would be determined if Debtor received any funds on account of the claim. CLM’s Fee Appeal remains pending at the district court.CLM requested a $25 million reserve for payment of its fees. The Bankruptcy Court ordered Debtor to set aside $5 million. CLM’s Fee Reserve Appeal remains pending. CLM then moved, unsuccessfully, for a stay of Second Settlement Agreement distributions. In its Stay Denial Appeal, CLM’s motion requesting a stay of distributions was denied. The Third Circuit affirmed. The $5 million reserve is sufficient. A $5 million attorneys’ fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. In common fund cases where attorneys’ fees are calculated using the lodestar method, multiples from one to four are the norm. View "SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP" on Justia Law

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Consumer banks Hudson and M&T merged. Hudson’s shareholders claimed they violated the Exchange Act, 15 U.S.C. 78n(a), and SEC Rule 14a-9, by omitting facts concerning M&T’s regulatory compliance from their joint proxy materials: M&T’s having advertised no-fee checking accounts but later switching those accounts to fee-based accounts (consumer violations) and deficiencies in M&T’s Bank Secrecy Act/anti-money laundering compliance program. They argued that because the proxy materials did not discuss M&T’s noncompliant practices, M&T failed to disclose significant risk factors facing the merger, rendering M&T’s opinion statements regarding its adherence to regulatory requirements and the prospects of prompt approval of the merger misleading under Supreme Court precedent (Omnicare). The Third Circuit reversed, in part, the dismissal of the suit. The shareholders pleaded actionable omissions under the SEC Rule but failed to do so under Omnicare. The joint proxy had to comply with a provision that requires issuers to “provide under the caption ‘Risk Factors’ a discussion of the most significant factors that make the offering speculative or risky.” It would be reasonable to infer the consumer violations posed a risk to regulatory approval of the merger, despite cessation of the practice by the time the proxy issued. The disclosures were inadequate as a matter of law. View "Jaroslawicz v. M&T Bank Corp" on Justia Law

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Former shareholders alleged that Altisource and several of its officers (collectively AAMC) inflated the price of its stock through false and misleading statements. When these mistruths were revealed to the market, they claimed, the price of AAMC’s stock plummeted, costing shareholders billions of dollars. The district court dismissed the complaint, concluding that Plaintiffs failed to satisfy the requirements of the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. 78u– 4. The Third Circuit affirmed. Plaintiffs failed to adequately plead three elements of a Rule 10b-5 claim: a material misrepresentation (or omission), scienter, and loss causation, with “particularity” as required by PSLRA. The economic harm suffered by AAMC’s investors is "regrettable," but plaintiffs failed to plausibly allege that this harm arose from fraud. When a stock experiences the rapid rise and fall that occurred here, it will not usually prove difficult to mine from the economic wreckage a few discrepancies in the now-deflated company’s records. View "City of Cambridge Retirement System v. Altisource Asset Management Corp." on Justia Law

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Devon, a Pennsylvania corporation, sells computer products; Bennett and DiRocco, a married couple, jointly own 100 percent of Devon’s shares as tenants by the entirety. In 2010, Devon obtained a contract from Dell. Devon contracted with Clientron, a Taiwanese company, to manufacture Dell's computers. Clientron shipped them directly to Dell; Dell paid Devon. Devon stopped paying Clientron entirely in 2012, owing over $6 million. Dell terminated its relationship with Devon, paying Devon $2 million, none of which reached Clientron. Pursuant to their contract, Clientron requested arbitration in Taiwan; arbitrators awarded Clientron $6.5 million. Clientron then sued Devon, Bennett, and DiRocco in Pennsylvania to enforce the award and seeking $14.3 million in damages for fraud and breach of contract. Clientron alleged that Devon was the alter ego of the couple. During discovery, the defendants continually failed to meet their obligations under the Federal Rules. The court entered sanctions, and instructed the jury that it was permitted, but not required, to make an adverse inference due to Devon' discovery conduct; the instruction did not reference Bennett or DiRocco. The jury found Devon liable for breach of contract and awarded Clientron an additional $737,018 in damages but rejected Clientron’s fraud claim and declined to pierce Devon’s corporate veil. Post-trial, the court pierced the veil to reach Bennett but not DiRocco, holding Bennett personally liable for the $737,018 damages award and the $44,320 monetary sanction earlier imposed on Devon; it did not make Bennett personally liable for the Taiwanese arbitration award. Devon is insolvent The Third Circuit vacated; the court committed legal error in piercing Devon’s veil to reach only Bennett and in holding Bennett personally liable for only part of the judgment. View "Clientron Corp. v. Devon IT Inc" on Justia Law