BLOGS: Financial Services Litigation

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Friday, March 29, 2013, 9:00 AM

The Pleading Bar for Securities Fraud Cases Is Higher Than It Looks

Posted by: Bob Gaumont
Cases involving securities fraud in the United States District Court for the District of Maryland have become rare, much rarer than in the past.  The Plaintiffs’ bar might attribute this to passage of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1).  Among other things, the PSLRA requires that Plaintiffs plead facts in the complaint warranting a strong inference of “scienter,” which means “a mental state embracing intent to deceive, manipulate, or defraud.” 

In re Human Genome Sciences, Inc. Securities Litigation, Civil Action No. RWT 11-cv-3231 tested how PSLRA applies to disclosures related to clinical trials of a drug.  In re Human Genome Sciences, Inc. Secs. Litig., 2013 U.S. Dist. LEXIS 42049 (D. Md. March 26, 2013).  The drug, Benlysta, was the first FDA-approved treatment for lupus in 56 years.  Id.  But during the course of several clinical trials involving more than 1,900 patients, three participants committed suicide.  Id.  The class shareholders serving as plaintiffs in this case claimed that the companies who developed and marketed Benlysta deliberately misrepresented the results of these clinical trials.  Id.

The Honorable Roger W. Titus of the United States District Court for the District of Maryland disagreed and dismissed the complaint.  Id.  What is interesting about this decision is it highlights the degree to which courts will now look at matters outside the pleadings to determine whether “scienter” exists and thus whether a cause of action exists under Section 10(b) of the Securities and Exchange Act.  Citing two decisions from the United States District Court for the Middle District of North Carolina, the Court noted that, in the Fourth Circuit, district courts “routinely take judicial notice of newspaper articles, analysts’ reports, and press releases in order to assess what the market knew at particular points in time, even where the materials were not specifically referenced in the complaint.”  Id.

Considering those materials, the Court found that the drug companies did not “selectively disclose” only favorable aspects of the studies at issue.  Id.  The companies actually disclosed at least one suicide, albeit concluding that it was unrelated to the use Benlysta.  Id.  This conclusion was shared by the operators of the study.  Id.  This is not the same as, for example, a drug company deliberately failing to disclose side effects of a drug that become evident after numerous trials and independent studies.  Id.  Thus, “[i]n securities litigation cases premised upon a drug company’s partial non-disclosure of drug trials to the investing public, the key inquiry is whether the non-disclosure at issue results in a suspiciously incomplete data set that yields a strong inference of scienter.”  Id.  The Court did not find that such scienter existed in this case.  Id.

The Court granted the Motion to Dismiss on March 26, 2013.  We will watch this decision to see whether it is appealed to the Fourth Circuit. 

Read the full opinion here.

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Monday, March 25, 2013, 11:00 AM

Liability from Maryland’s Secondary Mortgage Loan Law Fails Its Assignment

Posted by: Bob Gaumont
Cases involving Maryland’s Secondary Mortgage Loan Law (“SMLL”) can be difficult to defend.  Instead of imposing the typical “reasonable person” or (since this is a banking statute) a “reasonable and prudent borrower” standard, Maryland courts have held that SMLL is designed to guard against the “foolish or unsophisticated borrower.”  This is something close to strict liability, where lenders must closely comply with the regulations and disclosures of SMLL without regard to its impact on a normal or prudent borrower.  Tough stuff.
So the Court of Special Appeals' recent decision in Thompkins v. Mortgage Lenders Network USA, Inc. will be a relief to those lenders that have obtained a secondary mortgage through assignment.  Absent either an express agreement to assume SMLL liability or a direct violation of the SMLL, assignees are not liable under the SMLL.  Simply put, the assignees do not have a duty to make sure that the loan that they are requiring complies with SMLL. 
Thus, there is no derivative liability under the SMLL.  Or, if you prefer, no secondary liability in the secondary mortgage market.  Or let’s just say that liability from Maryland’s SMLL has failed its assignment.

Tuesday, March 12, 2013, 11:05 AM

North Carolina Supreme Court Gives Stamp, Its Stamp of Approval

Posted by: Matt Cherep

Photo By:
 By: Matt Cherep

On March 8, 2013, the North Carolina Supreme Court overturned the Court of Appeals and held that a stamp alone can serve as a valid indorsement of a promissory note. In Re Foreclosure of Bass, No. 554PA11, 2013 WL 865408 (N.C. Mar. 8, 2013). The Supreme Court also held that a signature serving as an indorsement is entitled to a presumption in favor of validity. Id. at *5. Therefore, a party contesting the validity of the signature purporting to be an indorsement bears the burden of producing evidence to “support a finding that the signature [was] forged or unauthorized.” Id. at *4.

In Bass, the Borrower executed a promissory note with Mortgage Lenders Network USA, Inc. (the “Note”). The Note was transferred several times and eventually ownership was transferred to U.S. Bank. Id. at *1.  The Borrower defaulted on her obligations under the Note and in March 2009 U.S. Bank filed a foreclosure action.  Id. at *2. Following U.S. Bank’s showing of the statutory elements necessary to prove foreclosure in North Carolina, the Clerk of Superior Court entered an order permitting foreclosure to proceed. Id.; see generally N.C. Gen. Stat. § 45.21.16(d) (2011).

The Borrower appealed, alleging that a stamp on the Note purporting to show transfer of ownership was insufficient to show intent or authority to negotiate the Note. The Superior Court sided with the Borrower, holding that the Note “was not properly [i]ndorsed and conveyed;” therefore, U.S. Bank was not the rightful holder of the Note and lacked standing to foreclose. Id. The Court of Appeals affirmed, holding that “the facial invalidity of th[e] stamp is competent evidence from which the trial could conclude the stamp is ‘unsigned’ and failed to establish negotiation.” Id. (citing In re Foreclosure of Bass, 720 S.E.2d 18, 27 (2011)).

The contested stamp reads:

Pay to the order of:
Emax Financial Group, LLC
Without recourse
By: Mortgage Lenders Network USA, Inc.

The Supreme Court held that under the UCC the contested stamp was a valid indorsement. Id. at *4.  The Supreme Court noted that “the UCC defines ‘signature’ broadly” as including a “symbol [that] may be printed, stamped or written” as long as “the symbol was executed or adopted by the party with the present intention to adopt or accept the writing.”  Id. at *3 (quoting N.C. Gen. Stat.  § 25-1-201 cmt. 37 (2011)). Thus, the stamp itself constituted a valid signature. Id. at *4. The Supreme Court noted that the stamp “indicates on its face an intent to transfer the debt from Mortgage Lenders to Emax.” Id.

Finally, the Supreme Court held that under the UCC, a “signature is presumed to be authentic and authorized [. . .] until some evidence is introduced which would support a finding that the signature is forged or unauthorized.” Id. at *4 (quoting N.C. Gen. Stat.  § 25-3-308 cmt. 1 (2011). The Borrower failed to overcome the presumption of authenticity of the signature, and therefore U.S. Bank was not required to prove the signature was valid.

The ruling represents a victory for financial institutions who were concerned that a ruling in favor of the Borrower would call into question the ownership of countless promissory notes.

Click for .pdf version

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Wednesday, March 6, 2013, 8:17 PM


Posted by: Kara Boyle

                                 Photo: Katherine Reifman,

Bob Gaumont co-authored this post with Kara Boyle.

In a recent opinion, the Fourth Circuit affirmed the district court’s judgment permanently enjoining FINRA arbitration proceedings initiated by defendants against Morgan Keenan & Company, Inc. (“Plaintiff”) on the grounds that under the controlling FINRA Rule, the defendants were not “customers” of Morgan Keenan and were therefore not entitled to compel arbitration of their dispute. 

Defendants Louise and Max Silverman and the Louise Silverman Trust, (collectively, the “Defendants”) had brought the underlying FINRA arbitration claim against Plaintiff, alleging that Morgan Keenan “engaged in misconduct relating to the valuation and marketing of certain bond funds purchased by the [D]efendants through their brokerage firm, Legg Mason Investor Services, LLC.”   Thereafter, Plaintiff filed suit in district court to enjoin the arbitration proceedings, arguing that the Defendants were not Plaintiff’s “customers” under the applicable FINRA Rule because Defendants purchased the bonds at issue through a third-party broker, Legg Mason, rather than directly from Plaintiff, during an initial public offering.  Plaintiff claimed that Defendants were therefore not entitled to invoke the mandatory arbitration provision in the FINRA Rule.  The district court agreed with Plaintiff, and the Fourth Circuit affirmed.  In sum, the Fourth Circuit stated, “FINRA Rule is FOR CUSTOMERS ONLY.”

Read Fourth Circuit opinion.

Read The Daily Record article regarding the case. 

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