Justia U.S. 1st Circuit Court of Appeals Opinion Summaries

The case involves an enforcement action by the U.S. Securities and Exchange Commission (SEC) against Gregory Lemelson and Lemelson Capital Management, LLC. The SEC alleged that Lemelson made false statements of material fact, engaged in a fraudulent scheme, and violated securities laws, resulting in approximately $1.3 million in illegal profits. The SEC sought disgorgement of these profits, a permanent injunction, and civil monetary penalties. Lemelson moved to dismiss the complaint, and the district court dismissed one of the challenged statements. The SEC filed an amended complaint, and the jury ultimately found Lemelson liable for three statements but rejected other claims.The District Court for the District of Massachusetts held Lemelson in contempt for violating a protective order and threatening a priest who provided information to the SEC. After the jury verdict, the district court issued a final judgment, including a five-year injunction against Lemelson and a $160,000 civil penalty. Lemelson appealed, and the United States Court of Appeals for the First Circuit affirmed the district court's judgment. Lemelson then moved for attorneys' fees and costs under the Equal Access to Justice Act (EAJA), arguing that the SEC's demands were excessive compared to the final judgment.The United States Court of Appeals for the First Circuit reviewed the district court's denial of Lemelson's motion for fees and costs. The appellate court found that the district court incorrectly compared the SEC's demand to the scope of the initial claims rather than the final judgment obtained. The appellate court vacated the denial of fees and costs and remanded the case for further proceedings to determine whether the SEC's demands were excessive and unreasonable compared to the final judgment. The appellate court also noted that the district court should consider whether Lemelson acted in bad faith or if special circumstances make an award unjust. View "Securities and Exchange Commission v. Lemelson" on Justia Law

The plaintiffs, representing nine closed-end mutual funds, sued Ocean Capital LLC and several individuals and firms for allegedly committing securities violations. The plaintiffs claimed that the defendants misled their shareholders by failing to make complete and accurate disclosures, violating Sections 13(d), 14(a), and 20(a) of the Securities and Exchange Act of 1934 and other applicable SEC rules. The district court granted the defendants' motions for judgment on the pleadings and to dismiss, leading the plaintiffs to appeal.The United States District Court for the District of Puerto Rico initially reviewed the case. U.S. Magistrate Judge Giselle Lépez-Soler recommended dismissing the plaintiffs' complaint on grounds of failure to state a claim and mootness. The district court adopted this recommendation, dismissing the plaintiffs' claims but retaining jurisdiction over the defendants' counterclaims. The plaintiffs then moved for a stay of the proceedings on the counterclaims, which was denied. The district court granted the defendants' requested relief on their counterclaims, ordering the plaintiffs to seat the defendants' nominees for the board of directors of three funds. The plaintiffs timely appealed these decisions.The United States Court of Appeals for the First Circuit reviewed the case. The court affirmed the district court's dismissal of the plaintiffs' Sections 13(d), 14(a), and 20(a) claims. The court found that the plaintiffs failed to state a Section 13(d) claim for the non-PRRTFF IV funds and did not demonstrate irreparable harm for PRRTFF IV. The court also concluded that the plaintiffs' Section 14(a) claims were insufficient, as the statements in question were not materially misleading. Consequently, the court upheld the district court's judgment on the defendants' counterclaims, ordering the plaintiffs to seat the defendants' nominees. View "Tax-Free Fixed Income Fund for Puerto Rico Residents, Inc. v. Ocean Capital LLC" on Justia Law

The Securities and Exchange Commission (SEC) brought a civil enforcement action against Commonwealth Equity Services, LLC, alleging that from 2014 to 2018, Commonwealth failed to adequately disclose potential conflicts of interest related to its revenue-sharing agreement with National Financial Services, LLC (NFS). The SEC claimed this omission violated Sections 206(2) and (4) of the Investment Advisers Act of 1940 and SEC Rule 206(4)-7. Commonwealth's representatives, who provided investment advice to clients, were unaware of the revenue-sharing arrangement, which the SEC argued created a conflict of interest by incentivizing Commonwealth to direct clients to higher-cost mutual fund share classes that generated revenue-sharing income.The United States District Court for the District of Massachusetts granted the SEC's motion for summary judgment on liability, finding that Commonwealth's disclosures were inadequate as a matter of law and that the firm acted negligently. The court also denied Commonwealth's cross-motion for summary judgment and its motion to reconsider. Subsequently, the district court entered final judgment against Commonwealth, ordering disgorgement of $65,588,906 in revenue-sharing income, $21,185,162 in prejudgment interest, and a civil penalty of $6,500,000. The court struck Commonwealth's expert declaration proposing an alternative disgorgement calculation and adopted the SEC's proposed amount.The United States Court of Appeals for the First Circuit vacated the district court's grant of summary judgment and the disgorgement order, remanding for further proceedings. The appellate court held that the issue of materiality should have been decided by a jury, as reasonable minds could differ on whether the additional disclosures would have significantly altered the total mix of information available to investors. The court also found that the SEC had not adequately shown a reasonable approximation or causal connection between Commonwealth's profits and the alleged violations, and that the district court must consider whether Commonwealth is entitled to deduct its expenses from any disgorgement awarded. View "Securities and Exchange Commission v. Commonwealth Equity Services, LLC" on Justia Law

The case involves a civil enforcement action by the Securities and Exchange Commission (SEC) against Henry B. Sargent for allegedly violating registration and antifraud provisions of federal securities laws. The district court granted partial summary judgment to the SEC, finding that Sargent violated section 5 of the Securities Act of 1933 by directing unregistered public offerings of penny stocks. The court ordered equitable remedies, including disgorgement and a ten-year ban on trading penny stocks, but dismissed the SEC's fraud claims and denied an additional civil penalty.Sargent appealed the partial summary judgment, arguing that his transactions were exempt from registration and that the district court abused its discretion in imposing the ten-year ban and calculating the disgorgement amount. The SEC cross-appealed, contending that the district court erred in not imposing a civil penalty and in dismissing its fraud claims.The United States Court of Appeals for the First Circuit affirmed the district court's grant of partial summary judgment, the disgorgement amount, and the dismissal of the SEC's fraud claims. However, it found that the district court erred in imposing equitable remedies and in concluding that it lacked the power to issue a civil penalty. The appellate court vacated the injunction against Sargent and remanded the case for further proceedings to assess the appropriateness of injunctive relief and civil penalties for Sargent's section 5 violation. View "Securities and Exchange Commission v. Sargent" on Justia Law

Sophia Zhou and other investors filed a federal securities fraud class action against Desktop Metal, Inc. and several of its corporate officers after the company's stock price dropped in late 2021. The stock lost value following Desktop Metal's disclosure of an internal investigation that revealed corporate mismanagement and necessitated the recall of two key products. Zhou alleged that the defendants engaged in fraudulent schemes, including manufacturing Flexcera resin at non-FDA-registered facilities and marketing the PCA 4000 curing box for use with Flexcera without FDA certification.The United States District Court for the District of Massachusetts dismissed Zhou's complaint for failure to state a claim. Zhou appealed, arguing that the district court erred in dismissing her "scheme liability" claim and that she adequately stated a securities fraud claim based on material misrepresentations and omissions. The district court had found that Zhou did not preserve her scheme liability claim and that her complaint failed to plead any materially false or misleading statement or omission.The United States Court of Appeals for the First Circuit reviewed the case de novo. The court concluded that Zhou did not preserve her scheme liability claim because she failed to adequately argue it in her opposition to the motion to dismiss or in her supplemental briefing. The court also determined that the district court correctly found that Zhou's complaint did not allege any materially false or misleading statements. Specifically, the court held that statements about Flexcera's FDA clearance, regulatory compliance, and product qualities were not rendered misleading by the alleged omissions. Consequently, the court affirmed the district court's dismissal of Zhou's complaint. View "Zhou v. Desktop Metal, Inc." on Justia Law

Boris Bergus and Agustin Florian, both doctors, were colleagues and later co-investors in a company managed by Florian's brother-in-law, Edgardo Jose Antonio Castro Baca. Bergus invested in the company in 2012 and 2014, purchasing stock. Years later, after their relationship deteriorated, Bergus sued Florian, alleging that Florian had omitted material information about the investments, violating the Massachusetts Uniform Securities Act (MUSA). The trial featured testimony from Bergus, Florian, and Baca. The district court precluded Florian from cross-examining Bergus about a 2013 state medical board finding that Bergus had misrepresented his medical credentials. The jury found in favor of Bergus regarding the 2012 investment but not the 2014 investment.The United States District Court for the District of Massachusetts ruled in favor of Bergus for the 2012 investment, awarding him $125,000 plus interest, totaling $202,506.85, and additional attorney's fees and costs, bringing the total judgment to $751,234.86. The court dismissed Florian's counterclaim for abuse of process, suggesting it be litigated in state court.On appeal, the United States Court of Appeals for the First Circuit reviewed several issues, including the district court's limitation on Florian's cross-examination of Bergus. The appellate court found that the district court abused its discretion by precluding cross-examination about Bergus's misrepresentations of his medical credentials, which were probative of his character for truthfulness. The court concluded that this error was not harmless, as the case hinged on the credibility of the witnesses.The First Circuit vacated the judgment regarding the 2012 investment and remanded for a new trial on that issue. The jury's verdict on the 2014 investment remained intact. The appellate court did not address Florian's other arguments due to the need for a new trial. View "Bergus v. Florian" on Justia Law

In 2017, the SEC filed a lawsuit against investment advisers Louis Navellier and Navellier & Associates, Inc. (NAI), alleging violations of sections 206(1) and 206(2) of the Investment Advisers Act. The SEC claimed that the defendants made materially false and misleading statements about the performance track record of their investment strategies. The United States District Court for the District of Massachusetts granted summary judgment in favor of the SEC, ordering disgorgement exceeding $22 million. The defendants appealed, challenging the summary judgment, the denial of their motion to stay pending appeal, and the denial of their motion to reduce the supersedeas bond.The district court found that the defendants had violated sections 206(1) and 206(2) by making false statements about the inception date and performance of the AlphaSector strategy, which they marketed as having been live-traded since 2001. The court determined that these statements were material and that the defendants acted with scienter (intent to defraud) or, at the very least, negligence. The court also rejected the defendants' selective enforcement defense, concluding that they were not similarly situated to other firms that were not prosecuted.The United States Court of Appeals for the First Circuit reviewed the case and affirmed the district court's decisions. The appellate court agreed that the defendants' statements were false and material, and that they acted with a high degree of recklessness, satisfying the scienter requirement. The court also upheld the disgorgement order, finding it to be a reasonable approximation of the profits causally connected to the violations. The court rejected the defendants' argument that disgorgement was inappropriate because their clients did not suffer pecuniary harm, emphasizing that disgorgement is meant to deprive wrongdoers of their ill-gotten gains. Finally, the court found no abuse of discretion in the district court's decision not to reduce the supersedeas bond amount. View "SEC v. Navellier & Associates, Inc." on Justia Law

The case revolves around Frequency Therapeutics, a biotech startup that was developing a treatment for severe sensorineural hearing loss called "FX-322". Initial trials were positive, but subsequent testing yielded disappointing results, causing a sharp drop in Frequency's stock price. Three stockholders filed a class action lawsuit alleging violations of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5. They claimed that Frequency's CEO, David Lucchino, and its Chief Development Officer, Carl LeBel, knew of problems with the study before the results were announced, yet gave investors assurances to the contrary.The United States District Court for the District of Massachusetts dismissed the complaint, finding that the plaintiffs failed to allege sufficient facts to support a finding of scienter under the Private Securities Litigation Reform Act. The plaintiffs appealed to the United States Court of Appeals for the First Circuit.The Court of Appeals affirmed the dismissal. The court found that the plaintiffs failed to demonstrate that the defendants had made the false statements with the degree of scienter required to state a Securities and Exchange Act claim. The court noted that the complaint did not provide specific facts about when the defendants learned of the adverse events, which was a glaring omission. The court also found that the increase in stock sales by the CEO was not sufficient to establish an inference of scienter on its own. The court concluded that the plaintiffs' allegations, taken collectively, did not give rise to a strong inference of scienter. View "Quinones v. Frequency Therapeutics, Inc." on Justia Law

The case involves a dispute over the rights of parties holding certain revenue bonds issued by the Puerto Rico Electric Power Authority ("PREPA") before it entered reorganization proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). The Financial Oversight and Management Board for Puerto Rico ("the Board") filed an adversary proceeding within the Title III restructuring proceeding to define the rights and remedies that bondholders had against PREPA. The United States District Court for the District of Puerto Rico held that the bondholders only had a secured claim on moneys deposited into the Sinking and Subordinate Funds, and that the bondholders had an unsecured claim on PREPA's Net Revenues.The United States Court of Appeals for the First Circuit disagreed with the district court's findings. The appellate court held that the bondholders have a lien on PREPA's present and future Net Revenues, and that the bondholders' lien is not avoidable. The court also held that the proper amount of the bondholders' claim is the face value (i.e., principal plus matured interest) of the Revenue Bonds. The court affirmed the district court's dismissal of the bondholders' breach of trust claim, but reversed the dismissal of the bondholders' accounting claim. The case was remanded for further proceedings consistent with the appellate court's opinion. View "Financial Oversight and Management Board v. U.S. Bank National Assn." on Justia Law

The case involves Francis M. Reynolds, who was convicted of three counts of obstruction of a United States Securities and Exchange Commission proceeding and one count of securities fraud. The District Court sentenced him to seven years of imprisonment plus three years of supervised release, ordered him to pay restitution to the victims of his fraud in the amount of $7,551,757, a special assessment of $400, and to forfeit $280,000 to the United States. Reynolds appealed his conviction, but he died while the appeal was pending.Reynolds was convicted in the United States District Court for the District of Massachusetts. He appealed his conviction to the United States Court of Appeals for the First Circuit. While the appeal was pending, Reynolds died. The government suggested that the court should either dismiss the appeal as moot or follow the practice of the Supreme Judicial Court of Massachusetts and dismiss the appeal as moot while instructing the District Court to add a notation in the record.The United States Court of Appeals for the First Circuit had to decide whether to apply the doctrine of abatement ab initio, which holds that when a criminal defendant dies during the pendency of a direct appeal from his conviction, his death abates not only the appeal but also all proceedings had in the prosecution from its inception. The court decided to apply the doctrine, aligning itself with other federal courts of appeals and its own past decisions. The court dismissed the appeal and remanded the case to the District Court to vacate the convictions and dismiss the indictment. The court also instructed the District Court to vacate the orders of restitution and criminal forfeiture that were imposed in this case, as well as the special assessment. View "United States v. Reynolds" on Justia Law