by T. GormanPosted on Posted in SECActions

There was a significant increase in the number of securities class actions filed in 2016. It is the second straight year of increased filings, according to reports prepared by Cornerstone Research and NERA Economic Consulting. While each firm reports slightly different numbers, stemming from the manner in which actions are counted, the trend is clear. For example, Cornerstone reports that last year 270 securities class actions were filed. That compares to 188 in 2015 and 170 in 2014. Cornerstone Research, Securities Class Action Filings, 2016 Year in Review (here). Similarly, NERA reports that 300 securities class actions were filed last year compared to 228 in 2015 and 218 in 2014. NERA reports that the number for 2016 is the highest since 1996 with the exception of 2001, the aftermath of the dot-com crisis. NERA, Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review (here).

The actions filed were, for the most part, based on Exchange Act Section 10(b) and Rule 10b-5 in 2016. Over the last several years, however, the number of cases based on that Section and Rule has continued to decline. For example, in 2016 67% of the cases were based on the Section and Rule compared to 84% in 2015 and 85% in 2012, according to Cornerstone. The vast majority of those claims centered on misrepresentations in financial documents in 2016 as in prior years. At the same time Cornerstone reports that fewer actions in 2016 were based on GAAP violations than the prior year – 30% compared to 38%. Likewise, the number of complaints tied to a restatement of the financial statements declined to 10% from 12% in 2015 and 19% in 2014.

Firms in the health technology and services sector were most frequently named as defendants in securities class actions in 2016, according to NERA. Last year 28% of the complaints named firms in that sector as defendants while 16% of the actions involved the electronic technology and technology services sector and 16% named firms in the finance sector. In 2015 the same three sectors were the focus of securities class actions, but in a different order: 22% of the complaints focused on the electronic technology and technology services sector, 20% on finance and 19% on health technology and services.

Other key points from the two reports include:

  • The number of M&A filings in federal courts spiked in 2016 to 80 compared to 17 in 2015 and 13 in 2014. Those filings, however, have a higher dismissal rate than overs over the last seven years, according to Cornerstone.
  • Filings against foreign issuers increased to 42 in 2016, well above the historical average of 23 filings, Cornerstone found.
  • The number of filings related to earnings guidance and regulatory violations declined last year, continuing a three year trend in each area, according to NERA.
  • Allegations of insider trading also declined last year, continuing the trend of recent years; only 4% of the cases last year contained such an allegation compared to 11% in 2015, 14% in 2014 and 24% in 2013, NERA reports.
  • The number of cases terminated by dismissal or settlement increased significantly last year to 206 compared to 198 in 2015, 181 in 2014 and 196 in 2013, according to NERA.
  • NASDAQ listed stocks were named in the most filings last year compared to those listed on other exchanges, a fact which is consistent with 2015 and the average from 1997 through 2015, according to Cornerstone.

Finally, the average settlement amount exceeded $72 million in 2016, up over 35% over the 2015 average of $53 million. Those amounts compare to the near ten year low of $36 million in 2014 and the $119 million of 2010 which is the highest since 1996. The two largest settlements last year were the $1,577 million paid by Household International, Inc. and the $1,0662 by Merck & Co Inc., NERA reports.

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by T. GormanPosted on Posted in SECActions

People are always searching for the next great thing; the next great innovation; the next great adventure; and the next great investment. Often it is the search for that safe, sure thing return; the one where the investment can’t be lost; and, of course, the return is good and above average. Enter the Commission’s latest investment fund/Ponzi scheme case. The action centers on a scheme to buy blocks of tickets to the Broadway show Hamilton which is sold out. Everyone wants to go; no tickets are available; but for those who invest now there is a guaranteed return and a split of the profits, according to the promoters. SEC v. Meli, Civil Action No. 1:17-cv-00632 (S.D.N.Y. Filed January 27, 2017).

The defendants in this action are Joseph Meli, Matthew Harriton, 875 Holdings, LLC, 127 Holdings, LLC, Advanced Entertainment, LLC and Advanced Entertainment II, LLC. Messrs. Meli and Harriton directly or indirectly control the entity defendants. Beginning in January 2015, and continuing through October 2016, four offerings were conduct using the entity defendants centered on a sale pitch tied to ticket sales. About $81 million was raised in the offerings which were similar but not identical.

  • 875 Holdings: In August the firm filed a Form D with the Commission, stating that a private offering of equity securities would be made. No business was specified; the firm had no revenue but it had sold over $1 million is securities. A subsequent amendment to the Form D sated that 25 persons had invested about $3.4 million. The investments were to be pooled and the cash used to purchase a participation interest in tickets for resale. Investors were told they would receive a participation percentage within nine months of 10% and overall 50% of the profits.
  • Advance Entertainment: From January 2015 through October 2016 the firm received at least $50 million from what the complaint calls “apparent investors.” In December 2015 a “Funding Agreement” was executed by Mr. Meli with an investor which represented that the firm had an agreement to purchase 35,000 tickets to Hamilton. The investor was to receive his investment back within eight months along with a 10% return and 50% of the profits. The representations regarding the contract were false.
  • Advance Entertainment II: The firm filed a Form D with the Commission in March 2016. As with the filing for 875 Holdings, no business was specified; the firm had no revenue but had made sales of over $10 million. By August the firm filed a Form D reporting an offering of $13 million. Investors were told their funds would be pooled to purchase tickets for high profile events, including Hamilton and an Adele concert. Investors were to receive a 10% return and 50% of the profits.
  • 127 Holdings: From January through October 2016 the firm received at least $7.7 million from “what appear” to be investor funds. One investor in the enterprise who put up $500,000 stated that the sales pitch was the same as for Advance Entertainment – tickets for Hamilton would be purchased in bulk and investor funds would be used to pay the costs.

In fact there was no contract to purchase a block of Hamilton tickets. From January 2015 through October 2016 Messrs. Meli and Harriton caused the four entities to spend about 10% of the money raised with third party entities that appear to be connected with thicket selling businesses. Indeed, in December 2016 Mr. Meli stated he had been running a “shell game” that involved using certain investor funds to pay back other investors. During the period the Defendants also used about $2 million of the investor money for personal expenses. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The complaint is pending. The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action. See Lit. Rel. No. 23723 (January 27, 217).

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