Eighth Circuit Upholds Dismissal Of Securities Fraud Claim Against Accounting Firm
On October 20, 2009, the United States Court of Appeals for the Eighth Circuit upheld a lower court's dismissal of a securities fraud suit against Moore Stephens Frost PLC ("MSF"), also known as Frost PLLC, in McAdams et al. v.McCord et al.. MSF was sued in 2004 by shareholders of the now-defunct mortgage lender UCAP Inc. for allegedly deliberately falsifying audit reports. The lower court dismissed the case due to the plaintiffs' failure to adequately plead MSF's alleged fraud as well as its scienter. In affirming the dismissal on other grounds, the Eighth Circuit concluded that the plaintiffs failed to adequately allege that MSF's statements caused their losses. Specifically, the plaintiffs failed to "specify how two statements by MSF [in UCAP's 2001 and 2002 Form 10-K filings], as compared to the complaint's long list of alleged misrepresentations and omissions by the executives [of UCAP], proximately caused the investors' losses." The plaintiffs' allegation that they bought UCAP shares at an artificially inflated price was likewise deemed insufficient to plead loss causation, under the United States Supreme Court's decision in Dura Pharm., Inc. v. Broudo, 554 U.S. 336 (2005). Order. Law 360 Article. Securities Law Daily.
Parmalat Appeals Dismissal Of Claims Against Grant Thornton
On October 21, 2009, Dr. Enrico Bondi, Extraordinary Commissioner for Parmalat S.p.A., filed a notice of appeal to the United States Court of Appeals for the Second Circuit seeking review of the dismissal of its claims against auditor Grant Thornton International ("GTI") and Grant Thornton LLP ("GT-US") related to the Italian dairy company’s collapse in 2003. GTI was alleged to have assisted Parmalat insiders in stealing from the company. The suit, Bondi v. Grant Thornton International et al., was dismissed by the United States District Court for the Southern District of New York on the grounds that in committing the fraud the Parmalat insiders were acting, at least in part, in furtherance of the company’s interest and Parmalat should not be permitted to recover for its own fraud. Notice of Appeal. Law 360 Article.
Madoff Investors Sue KPMG and Major Banks
On October 20, 2009, KPMG LLP, KPMG UK, JP Morgan Chase and the Bank of New York Mellon, among others, were named in an amended complaint filed in an action brought by former Madoff investors in New York State Supreme Court. The amended complaint in Wexler et al. v. Tremont Partner et al. asserts fraud and negligence by the defendants in connection with Madoff's London based operation, Madoff Securities International Ltd. ("MSIL"), which was audited by KPMG UK. The complaint was purportedly amended based on information obtained by plaintiffs’ counsel during recent interviews with Madoff in prison. The plaintiffs assert that KPMG UK should have spotted the fraud being perpetrated by Madoff in the United States based on the transfer of funds into MSIL London accounts from New York. Madoff indicated in his guilty plea that such transfers were used as part of a scheme to make it appear as though his business was involved in genuine trading. Complaint. Reuters Article. Law 360 Article.
Investor Brings $12M Tax Shelter Suit Against Deutsche Bank, KPMG
On October 19, 2009, investor Louis Kreisberg filed suit in New York State Supreme Court against Deutsche Bank AG, Deutsche Bank Securities Inc. and KPMG LLP seeking at least $12 million in damages related to trades made on his behalf in connection with an illegal tax shelter scheme. According to the complaint, Kreisberg and his currency trading company Bodega Investments LLC made investments in several derivative positions tied to the exchange rate between the dollar and the yen in late 2001, based on false representations by the defendants regarding the money-making potential of the trades, the associated risks and the business backgrounds of others involved in the transactions. Kreisberg alleges that, as a result of these representations, he is now threatened with millions of dollars in tax and associated liabilities. Complaint. Law 360 Article.
Sixth Circuit Affirms Dismissal Of Section 10(b) Claims In Omnicare Securities Suit
On October 21, 2009, the United States Court of Appeals for the Sixth Circuit affirmed, in large part, the dismissal of a securities class action brought by investors in Omnicare Inc., a pharmaceutical distribution company. The plaintiffs' allegations against the company and certain officers and board members in Alaska Elec. Pension Fund et al. v. Omnicare Inc. et al. included that the defendants made misleading statements related to Medicare Part D preparedness, a contract dispute with United Health Group, certain GAAP violations and an improper drug recycling and substitution program. The Sixth Circuit concluded that the plaintiffs' claims brought under Section 10(b) of the Securities and Exchange Act of 1934 were properly dismissed due to, among other things, failure to plead material misstatements or omissions and failure to plead loss causation. However, the court disagreed with the dismissal of the plaintiffs' GAAP-related claims brought under Section 11 of the Securities Act of 1933. The court reasoned that loss causation is not an element of a Section 11 claim, but an affirmative defense, and that the district court's failure to account for this difference in its opinion required reversal and remand for further proceedings. Order. Law 360 Article.
Second Circuit Affirms Dismissal Of Aiding and Abetting Fraud Suit Against Bank
On October 21, 2009, the United States Court of Appeals for the Second Circuit, affirmed, by summary order, dismissal of aiding and abetting fraud and commercial bad faith claims brought against the Bank of China ("BOC") by the receiver for International Financial Services, Inc. ("IFS") in Rosner v. Bank of China. The plaintiff alleged that BOC's processing of certain transactions constituted aiding and abetting a fraudulent scheme perpetrated by IFS, which scheme was the subject of a prior action by the Commodity Futures Trading Commission ("CFTC"). The Second Circuit concluded that the complaint was properly dismissed due to the plaintiff's failure to plead BOC's actual knowledge of IFS's fraudulent scheme. It reasoned that at best, the plaintiff's allegations indicated that BOC should have known about the fraudulent scheme, which is insufficient to support liability for aiding and abetting fraud under New York law and also supported dismissal of the plaintiff's commercial bad faith claim. Summary Order.
S.D.Fla. Rejects Due Process Challenge To SEC Subpoena
On October 14, 2009, the United States District Court for the Southern District of Florida ruled that the due process rights of two defendants in an alleged financial fraud and misappropriation scheme will not be violated by enforcement of an administrative subpoena issued by the SEC and declined to quash the subpoena. Relying on the Supreme Court's decision in Reisman v. Caplin, 375 U.S. 440 (1963), Magistrate Judge Rosenbaum concluded that such subpoenas are constitutional because individuals subject thereto, like the defendants in SEC v. Huff, need not prevail at a subpoena enforcement proceeding to avoid being criminally charged for non-compliance, but rather need only demonstrate that they had "just cause" for failing to comply. The court further held that "just cause" must be based on at least one of certain enumerated factors related to (i) whether the investigation will be conducted for a legitimate purpose; (ii) whether the SEC's inquiry is relevant to that purpose; (iii) whether the SEC already has the information sought; or (iv) whether the SEC has followed all required administrative steps. Order. Securities Law Daily.
Six Charged In Massive Hedge Fund Insider Trading Scam
On October 16, 2009, six individuals, including billionaire hedge fund manager Raj Rajaratnam, were charged in the United States District Court for the Southern District of New York for conspiracy and securities fraud in what federal prosecutors characterize as the largest hedge fund insider trading case in history. Rajaratnam is the managing member of hedge fund advisory firm Galleon Management and a portfolio manager for Galleon Technology Offshore, Ltd. In addition to Rajaratnam, the defendants charged in United States v. Rajaratnam and United States v. Chiesi include Danielle Chiesi, a portfolio manager at New Castle Funds LLC (formerly the equity hedge fund group of Bear Stearns Asset Management), Mark Kurland, senior managing director and general partner at New Castle, Rajiv Goel, a managing director at Intel Capital (a subsidiary of Intel Corp.), Anil Kumar, a director at McKinsey & Co., and Robert Moffat, a senior vice president and group executive at IBM. The SEC has brought civil insider trading charges against the same defendants, as well as Galleon and New Castle. DOJ Complaint. Second DOJ Complaint. SEC Complaint. Law 360 Article. SEC Litigation Release.
SEC Official Says New Type of Reserve Accounting Case Emerging From Crisis
Speaking at an American Bar Association panel, on October 15, 2009, SEC Assistant Enforcement Director Gregory Faragasso stated that the economic crisis has caused a new type of reserve accounting case to emerge, where executives allegedly either failed to establish reserves or established reserves that were not adequate for the risks faced by the company. Fargasso cited the recent SEC enforcement actions against senior executives from American Home Mortgage Investment Corp. (SEC v. Strauss) and Countrywide Financial Corp. (SEC v. Mozilo) as examples of this trend. Faragasso also indicated that more traditional reserve accounting cases involving the release of reserves to manipulate earnings are "still out there." Securities Law Daily.
Former Goldman Sachs VP Named to Key Enforcement Role at SEC
On October 16, 2009, the SEC named Adam Storch as managing executive of the agency's Enforcement Division. Storch joins the SEC from Goldman Sachs & Co., where he was vice president in the business intelligence group, a unit that reviews transactions for signs of fraud. Prior to joining Goldman in 2004, Storch was a senior consultant at Deloitte & Touche LLP, where he focused on enterprise risk. Storch is a certified public accountant, a certified internal auditor and a certified fraud examiner. Law 360 Article.
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