Blue LLP partners Dhamian Blue and Dan Blue III recently attended the Duke Law Bolch Judicial Institute’s invitation-only Distinguished Lawyers conference, held in Arlington, Virginia from June 20-21, 2019. As stated on its website, “[t]he Bolch Judicial Institute’s mission is to study and advance rule-of-law principles, judicial independence, and law reform through technology and innovation.”
The conference, titled Evaluating 2015 Rule 26 Discovery-Proportionality Amendments and Botch-Duke Guidelines and Best Practices, focused on (1) evaluating the effect of the 2015 amendments to the Federal Rules of Civil Procedure, and (2) recommending any revisions or additions to the Bolch Institute’s Rule 26 Guidelines and Best Practices. A critical focus of the conference was how to keep discovery costs reasonable while also ensuring fairness in the federal civil judicial system. The conference also highlighted the use of technology, including Technology Assisted Review, in the efficient administration of complex commercial litigation such as antitrust, consumer, and wage and hour class actions.
Ten federal judges and approximately 75-100 practitioners from across the country attended the conference.
Glancy Prongay & Murray LLP and Blue LLP File Securities Class Action on Behalf of Pyxus International, Inc. (PYX) Investors
Glancy Prongay & Murray LLP and Blue LLP have filed a class action lawsuit in the United States District Court for the Eastern District of North Carolina, captioned Jones v. Pyxus International, Inc. et al., No. 5:19-cv-234, on behalf of persons and entities that purchased or otherwise acquired Pyxus International, Inc. (NYSE: PYX) securities between June 7, 2018 and November 8, 2018, inclusive (the “Class Period”).
The lawsuit alleges the following (reprinted from https://www.glancylaw.com/cases-application/case-information/pyxus-international-inc/):
On November 8, 2018, Pyxus disclosed that sales declined approximately 12% year-over-year due to the timing of shipments and the larger crop last year in South America.
On this news, the Company’s share price fell $7.01, or nearly 28%, to close at $18.26 on November 8, 2018, on unusually heavy trading volume.
On November 9, 2018, the SEC announced that the Company had settled charges that it had materially misstated financial statements with the Commission from at least 2011 through the second quarter of 2015 due to improper and insufficient accounting, processes, and control activities for inventory, deferred crop costs, and revenue transactions in Africa.
On this news, the Company’s share price fell $2.88, or nearly 16%, to close at $15.38 on November 9, 2018, on unusually heavy trading volume.
The complaint filed in this class action alleges that throughout the Class Period, Defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. Specifically, Defendants failed to disclose to investors: (1) that the Company was experiencing longer shipping cycles; (2) that, as a result, the Company’s financial results would be materially affected; (3) that the Company lacked adequate internal control over financial reporting; (4) that the Company’s accounting policies were reasonably likely to lead to regulatory scrutiny; and (5) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.
Most people intuitively know what fraud is. The simplest legal definition is that it is the intentional misrepresentation of a material fact. The common law and several state and federal statutes and regulations prohibit fraud in a number of commercial settings, but when it comes to registered securities, Securities and Exchange Commission Rule 10b-5 is frequently invoked to hold a corporation (and its officers) accountable for fraudulent statements.
Rule 10b-5 makes it unlawful to (a) employ any device, scheme, or artifice to defraud,” (b) “make any untrue statement of a material fact,” or (c) “engage in any act, practice, or course of business” that “operates . . . as a fraud or deceit” in connection with the purchase or sale of securities.
But what happens when someone repeats a fraudulent statement in the sale of securities, knowing the statement to be false, although that person is not the “maker,” ie, the originator of the statement? The Supreme Court recently answered this question in Lorenzo v. SEC, No. 17-1077. In that case, Francis Lorenzo, while he was the director of investment banking at an SEC-registered brokerage firm, sent two e-mails to prospective investors. Lorenzo’s boss supplied the content of the e-mails, which described an opportunity to invest in a company with “confirmed assets” of $10 million. Lorenzo knew, however, that the company had recently disclosed that the assets were worth less than $400,000.
Although the SEC found that Lorenzo had violated Rule 10b-5 (and Section 10b of the Securities Act) by sending false and misleading statements to investors with the intent to defraud, the U.S. Court of Appeals for the District of Columbia Circuit held that he could not be held liable as a “maker” of the fraudulent statement under the Supreme Court’s 2011 decision in Janus Capital Group, Inc.v. First Derivative Traders, 564 U.S. 135. The Circuit Court did, however, sustain the Commissions findings of violations with respect to subsections (a) and (c).
In Janus, the Supreme Court held that to be a “maker” of a fraudulent statement under Rule 10b-5(b), one must have “ultimate authority over the statement, including its content and whether and how to communicate it.” This meant that an investment advisor who had merely participated in the drafting of a false statement that was made by another could not be held liable in a private action.
In a 6-2 opinion, the Court concluded that the “dissemination of false or misleading statements with intent to defraud[,]” regardless of the “maker” of those statements, can fall within the scope of Rule 10b-5 and the relevant statutes. By sending the e-mails, which he knew contained false information about the company’s value, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice” to defraud. By the same conduct, he “engage[d] in a[n] act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under the Rule. Whether he was the “maker” of the statements did not mater under the Rule, read as a whole.
Technical nuances and aspects of the opinion aside, the Court’s analysis makes sense. As the majority notes, “Congress intended to root out all manner of fraud in the securities industry[,]” and anyone who knowingly disseminates a false statement in the sale of securities is subject to civil liability, and in the most egregious cases, criminal prosecution under other provisions.