Sixth Circuit Affirms Dismissal of Section 10(b) Claims
The Sixth Circuit recently affirmed dismissal of claims brought under the Securities Exchange Act of 1934 in two separate cases.
In Dailey v. Medlock, 2014 U.S. App. LEXIS 907 (6th Cir. Jan. 13, 2014), the Sixth Circuit analyzed Section 10(b) and Rule 10b-5 claims surrounding a bank's $10 million loss in late 2009 in which $5.9 million of the loss was attributable to a "valuation allowance" on the bank's net deferred tax assets. Later, the bank failed and was placed in receivership. The Sixth Circuit affirmed the lower court's decision to dismiss the federal security fraud claims, but it remanded the case under Michigan case law for a separate state law claim of "silent fraud." In discussing the bank's valuation allowance, the Sixth Circuit held that the plaintiffs did not allege sufficient facts to show that the "defendants knew that the [valuation] allowance would be taken but they failed to disclose that information." Id. at * 13. The Court also relied upon the bank's disclosed risks that were not "boilerplate cautionary statements" but detailed the bank's high-risk loan portfolio, loan delinquencies, credit losses, and possible changes in the bank's regulatory capitalization rating. The Court further explained that the bank’s "well capitalized" statements were not false or misleading because no allegations showed how the bank did not meet its "well capitalized" regulatory classification. Id. at *16-17. Finally, the Court found that by the bank's statements about applicable government regulations did not mislead investors because the bank did not state that it was in compliance with such laws and "a generic claim of legal compliance, absent any specifics, does not form the basis for [an actionable] misrepresentation." Id. at *20. Overall, this case gives provides added guidance to financial institutions about how to avoid securities fraud claims when disclosing specific risks.
In Kuyat v. BioMimetic Therapeutics, Inc., 2014 U.S. App. LEXIS 5738 (6th Cir. March 28, 2014), the Sixth Circuit dismissal of security fraud claims surrounding a company's disclosures about the prospects for Federal Drug Administration (FDA) approval of a new drug. The Court held that opposing inferences existed that the Company believed the statements regarding the FDA and plaintiff did not allege sufficient facts to allege an inference of scienter that was "at least as strong as any opposing inference." The Court further held that the Company timely and sufficiently disclosed results of its drug tests and noted that the market reacted when the results of the study were released. "It is doubtful that the company intended to defraud investors in light of its willingness to disclose information that harmed its share prices." Id. at *20. Overall, the Court held that the Company was justified in expressing optimism about the drug's prospects at the time it made statements to investors.