Shareholder Suit Shot Down

On February 4th, the First Circuit affirmed the dismissal of a shareholder derivative suit alleging that Smith & Wesson made misleading statements about demand for its products. Applying de novo review to the trial court’s finding that the special litigation committee (“SLC”) was independent, the Court finds that no per se rule holds that an SLC's independence is destroyed by either naming a member as a defendant or a members' past approval of a disputed statement. And here, plaintiff offers no evidence of actual bias. In addition, there is inadequate evidence to conclude that SLC counsel was conflicted or that the SLC failed to act in good faith. Sarnacki v. Golden.

Stock Manipulation Pleading Standard Clarified

On January 30th, the Second Circuit denied a petition for panel rehearing of its May 7, 2013 opinion and separate summary order dismissing federal securities law fraud claims against a clearing broker and individual investors. Victims of a “pump and dump” securities fraud scheme sued those who orchestrated the scheme and various groups who allegedly benefited from and participated in the scheme by allowing stock to be placed in their accounts while trading volume and prices rose. In the original opinion, a divided Second Circuit panel held that although plaintiffs pleaded that defendants provided knowing and substantial assistance to the fraud, because plaintiffs did not allege defendants made a direct misrepresentation to plaintiffs, the securities fraud claims against them failed. In the order denying panel rehearing, the Court clarified its reasoning. The Court is not requiring that reliance by a victim on direct oral or written communications by a defendant be shown in every manipulation case. Rather, in a manipulation claim a showing of reliance may be based on “market activity” intended to mislead investors by sending “a false pricing signal to the market,” upon which victims of the manipulation rely. However, the facts here do not involve false pricing signals to the market, but rather misrepresentations to the victims. Fezzani v. Bear, Stearns & Co., Inc.