Dodd­Frank Act Was A Capital Event

On February 10th, the Ninth Circuit considered the meaning of the term “Capital Treatment Event” as used in the indenture for certain trust preferred securities. Turkle Trust alleged that, by redeeming certain trust preferred securities when it did, Wells Fargo breached the agreements governing those securities and the implied covenant of good faith and fair dealing. Affirming dismissal of the complaint, the Court held that under the Dodd­ Frank Act’s prospective changes that would no longer treat trust preferred securities as Tier 1 capital, a Capital Treatment Event occurred as defined by the trust indenture, permitting Wells Fargo’s early redemption of the securities. James A. Turkle Trust v. Wells Fargo & Co. (Unpublished).

Receiver Can’t Claw Out of Arbitration

On February 10th, the Eleventh Circuit affirmed a district court’s order confirming an arbitrator’s award. The court­ appointed receiver for hedge funds used as part of a Ponzi scheme sued one of the scheme’s “net winners” in an effort to clawback his gains. The executors of the investor’s estate moved to compel arbitration based on arbitration clauses in the agreements governing the investment in one of the funds in question. Affirming an order compelling arbitration, the Eleventh Circuit held that no inherent conflict exists between arbitration and the underlying purpose of court­appointed receivers pursuing clawback claims. Affirming the arbitrator’s award of summary judgment to the investor’s estate, the Court held that the arbitrator did not so exceed or imperfectly use his powers that the trial court erred in declining to vacate the award. Wiand v. Schneiderman.

Although Privity Existed, Breach of Duty Did Not

On February 9th, the Second Circuit affirmed the dismissal of an accounting malpractice suit brought against Friedberg, Smith & Co., P.C., auditors to Beacon Associates, LLC, a Madoff feeder fund. Plaintiffs, investors in Beacon, allege Friedberg committed malpractice by failing to uncover the Madoff fraud. The Second Circuit found that the plaintiffs adequately pleaded privity. The complaint alleged that Friedberg addressed reports directly to plaintiffs and that the auditors knew that the plaintiffs would rely on those reports when investing in Beacon. However, the Court nevertheless affirmed dismissal of the complaint because the auditors were under no obligation to audit Madoff; their only obligation was to audit Beacon. Delollis v. Friedberg (Summary Order).

FDA Violations Didn’t Amount to Securities Violations

On February 6th, the First Circuit affirmed the dismissal of a putative class action securities fraud compliant. Plaintiffs allege defendants made misleading statements concerning Abiomed’s marketing of a medical device and their level of cooperation with the ensuing U.S. Food and Drug Administration (“FDA”) investigation. The Court held that, assuming plaintiffs plausibly alleged that defendants made false or misleading statements, plaintiffs failed to sufficiently allege defendants made those statements with the conscious intent to defraud or with a high degree of recklessness. The marginal materiality of the alleged statements and omissions weighed against an argument that defendants possessed the requisite scienter. Moreover, defendants warned investors that the FDA might disagree with the company's assessment of the legality of its marketing practices and that, if the FDA took enforcement action against it, that action could result in reduced demand for Abiomed’s products and would have a material adverse effect on operations and prospects. The court held that, since the FDA’s investigation remained unresolved, it would have been a perverse result to require Abiomed to disclose an adverse regulatory decision when no such decision has been made. There must be some room for give and take between a regulated entity and its regulator. Fire and Police Pension Association of Colorado v. Abiomed, Inc.