What is Securities Litigation and Securities Arbitration

September 4, 2011 By Jay Eng

Securities attorneys and lawyers can practice is a wide variety of areas.

Transactional Securities Attorneys

Certain securities attorneys focus on transactional securities work which includes counseling issuers, underwriters and placement agents in private and public offerings under the Securities Act of 1933; advising on mergers and acquisitions or going private transactions; and preparing regulatory filings required under state and federal securities laws under the Securities Exchange Act of 1934, Sarbanes Oxley and the Dodd-Frank Act.

Securities Litigation and Arbitration Attorneys

Other securities laws may focus on securities litigation and arbitration. Securities litigation and arbitration cases are prosecuted and defended by securities attorneys on behalf of various parties including shareholders, private and publicly-traded companies, officers, directors, and senior management,  individuals and institutional investors, stock brokers, brokerage firms, broker-dealers, underwriters, investment banks, pension funds, and hedge funds.

In addition to recouping lost assets, private securities litigation also augments the efforts of federal regulators to pursue wrongdoers and to provide a deterrent to future violations.

Derivative Actions

Derivative actions are lawsuits brought by shareholders on behalf of the company against senior managers and officers.  Generally, the claim is brought where the shareholders believe that the senior managers are breaching their fiduciary duties to the company through malfeasance.  Plaintiffs may seek both injunctive relief (directing the end of the wrongful acts) and may seek compensatory damages to be paid  by the rogue managers directly to the company.

State & Federal Lawsuits

In lawsuits and arbitration, securities lawyers may allege violations of state or federal securities laws and may also allege common law claims including breaches of fiduciary duty or fraud depending on the factual scenarios.  Retaining a securities attorney to initiate a securities lawsuit may be the only means for for a shareholder to recover asset or investment losses caused by corporate fraud or malfeasance.  Such actions may be filed in state or federal court depending upon the type of claims asserted.

Class Actions

In addition to individual lawsuits, securities class actions may be filed on behalf of classes of shareholders who have similar interests and similar claims.  Because of the significant expense in engaging in securities litigation against large, publicly-traded companies, class actions provide means for recovery for shareholders with a small financial stake in the litigation.

Securities class actions are filed by securities attorneys who represent individuals who seek to serve as class representatives.  Class representatives must have claims similar to the other members of the class and must be approved by the court.  If a settlement is achieved between the class representative and the defendants, class members generally have three options:  (1) participate in the settlement for their pro-rata share; (2) opt-out of the settlement (and pursue their claims in separate litigation); (3) participate in the settlement, but object to certain parts of the settlement – such as the allocation of the settlement or object to the amount of attorney’s fees sought by the class attorneys.

Arbitration

Some securities disputes arise in the context of a stock broker/client relationship.  In most circumstances, a customer will enter into an agreement to arbitrate any disputes that arise between him and his broker in connection with his brokerage account.  For example, a dispute may arise when a broker is involved with the solicitation or sale of an unregistered security which leads to a loss of the customer’s investment.  Often the brokerage agreements specify that such disputes will be resolved before FINRA dispute resolution.  Arbitration can differ drastically than litigation in state and federal courts for securities attorney.  For example, there is no jury in FINRA arbitration, there are very limited rules of procedure and discovery and there are very limited grounds to appeal a FINRA arbitration award.

 

JUDGE RAKOFF DISMISSES CASE AGAINST FINRA OVER MERGER OF NASD AND NYSE

March 3, 2010 By Jay Eng

On March 1, 2010, District Judge Rakoff issued an opinion in two federal cases concerning alleged misrepresentations in the solicitation of NASD shareholder votes necessary for the consolidation of the NASD and NYSE and formation of FINRA. In both cases, the defendants filed motions to dismiss arguing, among other things, that they were entitled to absolute immunity. In his opinion, Judge Rakoff agreed with the defendants stating:

Pursuant to the Securities Exchange Act of 1934 , 15 U. S .C. §§ 78a-7800 , the United States Securities and Exchange Commission is authorized to delegate certain regulatory functions to SROs, which are therefore considered ‘quasi-governmental’ bodies…. As a result , SROs and their offi cers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions.

Judge Rakoff concluded that “[i]t is patent that the consolidation that transferred NASD’s and NYSE’s regulatory powers to the resulting FINRA is, on its face, an exercise of the SROs’ delegated regulatory functions and thus entitled to absolute immunity.”

Standard Investment Chartered v. NASD, No. 07 Civ. 2014 (JSR) and Benchmark Financial Services, No. 08 Civ. 11193 (JSR) (S.D.N.Y. Mar. 1, 2010).

JUDGE RAKOFF APPROVES SEC SETTLEMENT WITH BOA OVER MERRILL MERGER

February 24, 2010 By Jay Eng

On February 22, 2010, Judge Rakoff entered an Order approving the Bank of America’s settlement with the Securities and Exchange Commission over the Meriil merger. This litigation began with a proposed settlement in August 2009 which was rejected by Judge Rakoff.

In its Order, the Court commented:

Given the somewhat tortured background of these cases and the difficulties the motion presents, the Court is tempted to quote the great American philosopher Yogi Berra: “I wish I had an answer to that because I’m getting tired of answering that question.” However, after full consideration, the Court reluctantly grants the motion, on the terms specified below.

(Emphasis added).

NEW YORK ATTORNEY GENERAL SUES BANK OF AMERICA OVER MERRILL LYNCH MERGER

February 5, 2010 By Jay Eng

On February 4, 2010, the New York Attorney General filed a complaint in New York State Suprme Court. The lawsuit alleges that Bank of America (“BOA”) and certain executives violated New York’s Martin Act, the state’s Blue Sky law. The complaint alleges that BOA “intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger.” The Securities and Exchange Commission has filed a similar action alleging the violation of federal securities laws.

SEC FILES NEW COMPLAINT AGAINST BANK OF AMERICA OVER MERRILL LYNCH MERGER

January 14, 2010 By Jay Eng

On January 11, 2010, District Judge Jed Rakoff rejected the Securities and Exchange Commission’s request to file a amended complaint. The SEC stated that the proposed amended complaint alleged that “that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.”

On January 12, 2010, the SEC filed a separate lawsuit concernig these new allegations made in connection with its merger with Merrill Lynch. The new complaint was filed in the Southern District of New York, Case No. 10 Civ 0215.

On September 14, 2009, the District Court rejected a proposed settlement between Bank of America and the SEC. SEC v. Bank of America, Case No. 09 Civ. 6829 (S.D.N.Y.)

BANK OF AMERICA TO PAY $33 MILLION FINE TO SEC IN CONNECTION WITH MERRILL MERGER

August 3, 2009 By Jay Eng

On August 3, 2009, the Securities and Exchange Commission (“SEC”) announced that it was entering into a Consent Judgement with Bank of America Corporation (“BoA” or the “Company”) in connection with the Company’s issuance of a joint proxy statement filed with the SEC as to BoA’s acquisition on Merrill Lynch & Co., Inc. (“Merrill”) on January 1, 2009.

According to the SEC’s Complaint, on November 3, 2008, in a joint proxy statement soliciting votes from BoA and Merrill shareholders for the merger of the two companies. In the proxy statement, BoA represented that Merrill had agreed to refrain from paying year-end performances bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger under BoA gave its consent. However, the SEC alleges that this representation was false insofar as it was contrary to the merger agreement which allowed Merrill to pay up to $5.8 billion, or approximately 12% of the total consideration of the $50 billion deal. Although the merger agreement was included as an exhibit to the joint proxy agreement distributed to 283,000 shareholders of both companies, the provision to allow Merrill to pay the discretionary bonuses was in a separate schedule of the merger agreement which was “omitted from the proxy statement and whose contents were never disclosed before the shareholders’ voted on the merger on December 5, 2008.” As a result, the SEC contends that BoA violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) and Rule 14a-9, 17 C.F.R. §240.14a-9, promulgated thereunder.

In settling the SEC’s charges, BoA neither admitted nor denied the allegations and consented to the entry of a judgment that permanently enjoins BoA from violating the proxy solicitation rules: Section 14(a) of the Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. BoA also agreed to pay a $33 million financial penalty.

S.E.C. v. Bank of America Corp., Case No. 09 Civ. 6829 (S.D.N.Y.) (Rakoff, J.).

A class action regarding BoA’s disclosures in the Merrill merger is currently pending in the Southern District of New York before District Judge Denny Chin. On June 30, 2009, Judge Chin entered an Order organizing the class litigation.

In re Bank of America Corp. Securities, Derivative and ERISA Litigation, Case No. 09 MDL 2058, No. 09 Civ. 580 (S.D.N.Y.) (Chin, J.)