The Commodity Futures Trading Commission brought an enforcement action against several investment firms and affiliated individuals for the fraudulent operation of a foreign currency trading firm. The CFTC’s complaint grouped defendants together when discussing the alleged fraudulent scheme and did not link specific defendants to the fraudulent acts alleged in the complaint.

Defendants filed a motion for a more definite statement under Rule 12(e) of the Federal Rules of Civil Procedure, arguing that the CFTC’s fraud claim was subject to the strictures of Federal Rule of Civil Procedure 9(b), which requires, among other things, that a party plead fraud with particularity. The CFTC argued that it was entitled to use group pleading because it alleged that the individual defendants were controlling persons responsible for the fraud committed by the companies.

The district court granted defendants’ motion, holding that while the CFTC could use group pleading to attribute statements to business entities through principles of agency or corporate law, the CFTC’s complaint exceeded this allowance by combining all of the defendants and occasionally combining unspecified representatives as well. Furthermore, the allegations as a whole did not adequately connect the particular defendants with knowing or reckless conduct necessary to establish scienter—an essential element of fraud. (United States Commodity Futures Trading Comm’n v. M25 Inv., Inc. No. 3:09-CV-1831-M, 2010 WL 769367 (N.D. Tex. Mar. 6, 2010))

Summary Judgment on Fiduciary Duty of Disclosure Claim Vacated

The U.S. Court of Appeals for the Fifth Circuit vacated and remanded the U.S. District Court for the Western District of Louisiana’s grant of summary judgment in favor of defendants in an action brought by a minority shareholder of an entity-defendant for breach of fiduciary duty arising out of the individual defendant’s failure to disclose to plaintiff that the entity-defendant was in talks to be acquired by another entity.

The individual defendant, Chief Financial Officer of the entity-defendant, acted as plaintiff’s agent for the purposes of redeeming plaintiff’s shares. Plaintiff argued that individual defendant thus had a duty to disclose to plaintiff facts that were material to the stock redemption by virtue of their relationship. Plaintiff further argued that the entity-defendant’s ongoing merger acquisition discussions with a third party were material to plaintiff’s stock redemption. Plaintiff claimed that by failing to disclose this fact, the individual defendant breached his fiduciary duty of disclosure.

The district court granted summary judgment in favor of defendants on statute of limitations grounds, holding that Louisiana’s two-year limit for bringing claims for breach of fiduciary duties against officers and directors had lapsed. The Fifth Circuit vacated the order and remanded the action, directing the district court to explore the scope of plaintiff’s relationship with the individual defendant, as the 10-year statute of limitations relating to agency relationships may apply. (D&J Tire, Inc. v. Hercules Tire & Rubber Co., No. 09-30275, 2010 WL 670634 (5th Cir. Feb. 26, 2010))