by T. GormanPosted on Posted in SECActions

The number of securities class actions filed in the first half of the year, as well as the number of mega maximum dollar loss filings during that period, increased significantly, according to a new report from Cornerstone Research (here). Highlights from the report include:

Number of cases: In the first half of 2016, 119 new securities class actions were filed. That compares to 87 filed during the same period one year earlier. The number of filings also eclipses the 94 actions filed on average from 1997 through 2015. The increase is explained, according to the report, by the substantial uptick in the number of M&A class actions. If this trend continues, this it will be the first year since 2008 to be above average and the second largest number of filings in one year, exceeded only by the 242 actions brought in 1998.

Mega cases: There were 10 mega maximum dollar loss fillings in the first half of the year compared to the historical average of six. The percentage of these filings relative to the total number of cases brought increased to 11% from 5%.

M&A cases: Federal M&A filings increased by 167% over the second half of last year. This was the highest number since the second half of 2010.

Foreign issuers: The number of actions brought against foreign issuers declined slightly to 18% of the cases filed compared to 19% in 2015. Generally, over the last 19 years the filings against foreign issuers have increased.

Chinese firms: In the first half of 2016 no Chinese company was named as a defendant. That contrasts sharply with the period from 2010 through 2015 when these firms were targeted.

S&P Firms: If the current trend in filings continues, about 5% of the firms listed on a major U.S. exchange will be named as defendants in an action. In contrast, on an annualized basis, 6.1% of the S&P 500 market capitalization was subject to new filings. This is higher than in recent years but below the historical average of 9.1%. Health care, industrial, telecom/information technology and utilities had 7% or more of their market capitalization subject to new filings on an annualized basis. Historically larger S&P 500 firms had been more likely targets of class actions. This pattern was not evident in the first half of 2016.

Industries: The number of filings against firms in the financial sector increased to 17% in the first half of 2016. That is about the same as the 1997—2015 semiannual average and equals the total for 2015. Filings in the non-cyclical sector increased to 43, accounting for 36% of the filings in the first half of 2016. This sector has had the most filings for the past 10 semiannual periods.

Exchanges: The number of filings against NYSE listed firms increased by 2% over the second half of 2015. For NASDAQ firms the increase was 27%.

Circuit: For the first half of the year there were 38 filings in the Ninth Circuit and 36 in the Second.

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by T. GormanPosted on Posted in SECActions

The SEC prevailed in an offering fraud case against the promoters of an oil and gas investment scheme. The court granted summary judgment in favor of the Commission. SEC v. Downey, Civil Action No. 1:14-cv-00185 (N.D. Tex. Nov. 20, 2014).

The action was brought against Paul Downey, Jeffry Downey (father and son) and the principals of Quest Energy Management Group, Inc., and John Leonard who acted as a salesman. From January 2010 through May 2011 the father and son sold the preferred stock of Quest and limited partnership units in Permaian Advanced Oil Recovery Investment Fund I, LP, according to the complaint. Investors were told that the LP would acquire working interests in oil and gas leases from Quest and receive revenue from those leases. About $4.8 million was raised from 17 investors. In fact the representations were false. The PPM did not provide accurate financial information or fully describe the use of the proceeds. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).

The court granted the Commission’s motion for summary judgment as to all defendants but in separate orders. In the order as to the Downey defendants, the court first concluded that the limited partnership interests were securities. The Commission’s claim was supported by voluminous evidence, according to the court. At the same time the “Downey Defendants have failed to come forward with any evidence or argument that creates a genuine issue of material fact that would thereby preclude the granting of summary judgment . . .” according to the order.

The Court went on to find in favor of the SEC on its fraud claims, centered on the sale of the interests. At the time of the sales “there was a receivership involving other entities with which the Downeys were involved (including the operating general partner of the limited partnership), and the Downeys failed to inform investors of the receivership and how it could impact the investors by recovering over five million dollars from the operating general partner.” There were, in addition, other misrepresentations including about the use of proceeds, the court concluded. The court thus found violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Finally, the court found in a separate order that defendant Leonard acted as an unregistered broker in selling the securities. This is reflected by the over $400,000 in commissions he was paid for selling over $4 million in limited partnership units to 13 investors. He solicited those investors in person, by phone and through emails, recommending the investment. Accordingly, the Court found violations of Exchange Act Section 15(a).

The court had established a briefing schedule regarding remedies. See Lit. Rel. No. 23608 (July 29, 2016).

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