Madoff Feeder Fund Victims Don’t Get Second Chance

On May 28th, the Second Circuit denied a petition for panel rehearing or rehearing en banc filed by victims of Bernard Madoff’s Ponzi scheme. The panel previously held that the Securities Litigation Uniform Standards Act precluded plaintiffs’ state  law class action claims against the defendant banks because the claims were predicated on the banks’ alleged involvement with the fraudulent securities transactions of Madoff. The Supreme Court’s intervening decision in Chadbourne & Park LLP v. Troice did not change that conclusion. In Troice, the Supreme Court held that SLUSA did not preempt the state law claims brought by victims of Allen Stanford’s Ponzi scheme even though the certificates of deposit bought by plaintiffs were allegedly backed by “marketable securities.” The Supreme Court found that the connection between the CDs and SLUSA covered securities was insufficient to invoke SLUSA preemption. A fraudulent misrepresentation or omission is not made “in connection with” a “purchase or sale of a covered security” unless it is material to a decision to buy or to sell a “covered security.” Here, unlike the investments at issue in Troice, Madoff’s fraud was material to a decision by one or more individuals to buy or to sell a “covered security.” Trezziova v. Kohn.

Prospectus Supplements Need Not Bear “Skull and Crossbones” Stickers

On May 20th, the D.C. Circuit affirmed the dismissal of an investor lawsuit against the now defunct investment fund Carlyle Capital, which invested in residential mortgage-backed securities (“RMBS”). Carlyle’s investors allege Carlyle misrepresented the value of its RMBS portfolio, violating state and federal securities laws. Affirming dismissal, the Court noted that the alleged misstatements were corrected by a supplemental offering memorandum. And although plaintiffs claim to have not received the supplement and/or failed to read it, a reasonable investor, especially these wealthy and sophisticated investors, would have paid attention to the supplement. And contrary to plaintiffs’ suggestion at oral argument, defendants had no duty to place a “skull and crossbones” on the press releases announcing the prospectus supplement. Wu v. Stomber.

Market Timing Verdict Reversed

On May 19th, the Second Circuit reversed a jury’s verdict finding that Frederick O’Meally, a broker at Prudential Securities, negligently violated the Securities Act by engaging in manipulative mutual fund market timing activities. The Court found that the evidence did not support either of the SEC’s two theories of liability: that O’Meally made false or misleading statements to the mutual funds or that he unreasonably failed to follow his supervisors’ instructions. The SEC’s own witnesses from the funds testified that exceptions were made to allow market timing; Prudential’s legal and compliance departments approved his actions; and O’Meally submitted evidence showing that the use of multiple account numbers had legitimate purposes. The Court concluded that the funds were inconsistent in their proscriptions on market timing and that Prudential supported O’Meally’s practices. The jury, therefore, could not find negligence in these circumstances without evidence as to an appropriate standard of care. The verdict was reversed and the district court ordered to dismiss the case. SEC v. O’Meally.