On April 20, 2018, Judge William H. Pauley III of the United States District Court for the Southern District of New York dismissed a class action against defendants GFI Group, Inc. (“GFI”) and certain executives of GFI, alleging securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5. Gross v. GFI Group, Inc. et al., No. 1:14-cv-09438 (S.D.N.Y. Apr. 20, 2018). Plaintiffs alleged that the defendants deceived shareholders by falsely representing in a press release that a takeover bid by CME Group (“CME”) was a “singular and unique” opportunity and implying that the CME deal was the best possible deal for GFI shareholders when it knew there were alternative potential bidders. In fact, another bidder later waged a hostile takeover, which led GFI’s stock price to surge after plaintiffs sold their stock. The Court granted defendants’ motion for summary judgment, holding that a proxy statement related to the proposed CME deal defeated plaintiffs’ ability to prove scienter.
GFI had an inter-dealer brokerage business (“IBD”) and a software unit. In a board meeting, senior executives recommended that GFI consider selling its software unit to CME. Under the proposal, the executive chairman would purchase back the IBD business from CME at a substantial discount. BGC Partners (“BGC”), another inter-dealer broker, expressed interest in purchasing GFI, but the chairman rejected its proposal. A special committee was appointed to evaluate the proposed CME deal and explore alternatives. Three months later, however, the chairman, GFI’s then-largest shareholder, indicated he would vote against any other transaction, and the special committee approved the CME deal. At a subsequent GFI Board meeting, the chairman disclosed that BGC offered to acquire GFI at a price per share substantially exceeding its current trading price, but he refused to support a deal with BGC. The board then approved the CME deal. In a joint press release announcing the proposed merger on July 30, 2014, the chairman stated that optimizing GFI’s value for stockholders had always been a goal of management and that the transaction represented a singular and unique opportunity to return value to stockholders. BCG then purchased millions of GFI shares, and on September 9, 2014, announced it would make an all-cash tender offer for GFI for a higher price per share than that offered by CME. GFI’s share price rose from $5.03/share to $6.02/share. On January 30, 2015, GFI’s shareholders rejected CME’s deal, and BGC obtained a controlling interest in GFI through the tender offer. Plaintiffs included a class of investors who sold their GFI stock after the joint press release but before BGC announced its tender offer.
Although the Court held that it could not resolve on summary judgment whether the chairman’s statements were misleading or material, the Court granted summary judgment on the element of scienter. Specifically, the Court found that although plaintiffs could prove defendants had a motive to commit fraud because of their financial interest in the transaction, they could not prove defendants had an opportunity to commit fraud because (i) the joint press release noted that the proposed CME deal could not close without the majority of GFI’s shareholders’ approval, and (ii) the shareholder vote could not occur until proxy materials were distributed. The proxy statement then disclosed that a financial advisor retained by the special committee identified 22 third-parties that might be interested in acquiring GFI, and also disclosed the chairman’s intention to vote against any transaction other than the proposed CME deal. As such, the Court found that the public, including shareholders and analysts, had information that conflicted with the chairman’s statement prior to voting, and defendants therefore had no opportunity to commit fraud. The Court also held that plaintiffs could not prove loss causation because BGC’s superior offer was only part of a “mix of new information” that likely led to the surge in GFI’s share price.