National Economic Interest Trumps State Fiduciary Duty Law.
On January 29th, the Second Circuit affirmed the dismissal of Starr International's lawsuit against the Federal Reserve Bank of New York ("FRBNY") for breach of fiduciary duty when FRBNY rescued American International Group during the 2008 financial crisis. Because of the uniquely federal interests at stake in stabilizing the national economy, state fiduciary duty law does not apply to FRBNY's rescue activities and is preempted and replaced by federal common law. Starr International Co., Inc. v. Federal Reserve Bank of New York.
Call Option Expiration is Matched Against Writing For Short-Swing Profits if Insider on Both Dates.
On January 29th, the Second Circuit affirmed the dismissal of plaintiff's complaint seeking disgorgement of short-swing profits. Defendant allegedly violated Section 16(b) of the Securities Exchange Act and Rule 16b-6(d) by failing to disgorge short-swing profits derived from writing call options on stock issued by Leap Wireless. The Court, adopting the SEC's interpretation, held that for purposes of Section 16(b), the expiration of a call option within six months of its writing is a purchase by the option writer to be matched against the sale deemed to occur when that option was written. And dismissal was proper here because defendant was not a statutory insider at both the time of purchase and sale, as required by Section 16(b). Defendant was a statutory insider only when the options were written, but not when they expired. In so holding, the Court rejected plaintiff's argument that the writing of a short call option constitutes a simultaneous sale and purchase. Roth v. The Goldman, Sachs Group, Inc.
Private Sector Payments to Third Parties Can Still Be Kickbacks.
On January 28th, the Second Circuit addressed private-sector honest services fraud. Defendant DeMizio was charged with conspiracy to commit securities fraud and wire fraud by causing his employer, Morgan Stanley, to conduct stock-loan transactions through intermediary firms in a manner that, at Morgan Stanley's expense, caused large sums of money to be paid to DeMizio's brother and father for little or no work. Affirming the honest services fraud conviction, the Second Circuit rejected DeMizio's contention that a payment in a private sector scheme does not qualify as a kickback unless the defendant employee himself or herself receives the payoff. U.S. v. DeMizio.
Duty to Refrain from Insider Trading Arises from Federal Common Law.
On January 27th, the Second Circuit explicitly held that that the duty of corporate insiders to either disclose material nonpublic information or abstain from trading is defined by federal common law and applies to unregistered securities. Plaintiff, a former Xcelera minority shareholder, appealed the dismissal of her securities fraud claims which alleged that Xcelera insiders purchased Xcelera stock by making a tender offer through a shell corporation without disclosing any information about Xcelera's financial state. The Second Circuit held that the duty of corporate insiders to either disclose material nonpublic information or abstain from trading is defined by federal common law and applies to unregistered securities. The Court therefore reinstated plaintiff's Section 10(b) insider trading claims. However, the Court affirmed the dismissal of the market manipulation claims and the insider trading claims based on Securities Exchange Act Section 14(e). Steginsky v. Xcelera Inc.