Last month, a federal judge in Austin dismissed a securities fraud class action brought against EZCorp, Inc. and its CFO alleging that the defendants made false and misleading statements that overstated EZCorp’s net income and misrepresented the nature of certain loan sales by improperly recording the sales as gains. The co-lead plaintiffs alleged the defendants violated Section 10(b) of the Securities Exchange Act of 1934, and to prevail under a Section 10(b) claim, the plaintiff must plead that the defendant made the misrepresentation or omission with scienter. To satisfy the scienter element, the co-lead plaintiffs alleged, in part, that EZCorp overstated its net income by 52.9% in FY 2013, 29.4% in FY 2014, and 31% in the first quarter of 2015; that confidential witnesses would testify that the CFO knew of the inaccuracies surrounding the accounting issues; and that the CFO received a $350,000 bonus for his role in the loan sales.

The Court determined that the 52.9%, 29.4%, and 31% overstatements, while high, were merely “some basis from which to infer scienter” because accounting violations are insufficient in and of themselves to establish scienter. As to the confidential witness statements, the Court explained that allegations from confidential witnesses must be viewed with some level of skepticism and that the statements at issue failed to establish that the confidential witnesses had personal knowledge of the events at issue, made vague allegations, and failed to provide certain specifics, such as when and where a key conversation occurred. Finally, as to the CFO’s bonus, the court determined that the alleged desire to increase compensation did not support a strong inference of scienter standing alone, especially because the $350,000 bonus was not a bonus of an extraordinary amount.

The Court dismissed the case without prejudice and provided the co-lead lead plaintiffs the opportunity to file an amended complaint. The case is styled, Huang & Rooney v. EzCorp, Inc. & Kuchenrither, No. A-15-CA-00608-SS.


Late last month the Department of Justice Antitrust Division and the Federal Trade Commission jointly issued ANTITRUST GUIDANCE FOR HUMAN RESOURCE PROFESSIONALS. The Guidance, written in plain English rather than antitrust jargon, “is intended to alert human resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of antitrust laws.” The release doesn’t break new ground in terms of antitrust principles; instead, it serves as a reminder that those who hire employees and set compensation are subject to the same antitrust rules and potential penalties—including treble damages in civil actions and possible criminal liability—as those who compete in the sale of products. “From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services."

The Guidance offers two broad admonitions:

  1. “Agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.”
  2. “Avoid sharing sensitive information with competitors.”
As to the first, the agencies warn that, “Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.” As to the second, the agencies explain, “Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information [such as current or planned wage decisions] could serve as evidence of an implicit illegal agreement.”

The Guidance includes several pages of questions and answers designed to put real-world “meat” on the bones of the antitrust principles discussed earlier in the pronouncement. These illustrate both how an HR professional might unwittingly violate the law and ways that violations can be avoided. The repeated warnings about potential criminal liability should be taken to heart, particularly in light of the DOJ’s recent focus on individual responsibility and accountability, crystallized in the “Yates Memo” last fall. The Guidance should be required reading for any HR professional.


Last month, the SEC released its enforcement results for fiscal year 2016, which ended September 30, 2016. In FY 2016, the SEC filed a record 868 enforcement actions, a 7.5% increase from FY 2015. It was also the third straight year that the number of enforcement actions filed by the SEC increased from the prior year. The 868 enforcement actions included a record number of enforcement actions involving investment advisors and investment companies (160 enforcement actions) and a record number of Foreign Corrupt Practices Act-related enforcement actions (21 enforcement actions).

The SEC reported that it obtained over $4 billion in disgorgement and penalties, which is consistent with the amount obtained in disgorgement and penalties for the two previous fiscal years.  The SEC also reported that it distributed a record $57 million to whistleblowers in FY 2016.

The SEC used the opportunity to note its success in “first-of-their-kind” actions, which included actions against a firm solely based on its failure to file Suspicious Activity Reports, against an audit firm for auditor independence failures based on personal relationships, and against a private equity advisor for acting as an unregistered broker. The Director of the SEC’s Enforcement Division also noted groundbreaking insider trading and FCPA cases, and the SEC’s press release detailed four favorable jury verdicts in U.S. District Court in FY 2016. The full press release is available here:


Multiple federal circuit courts have previously ruled that they did not have jurisdiction to hear a collateral challenge to the constitutionality of the SEC’s administrative proceedings before an Administrative Law Judge (“ALJ”) and that the respondents must raise challenges to the forum’s constitutionality as an appeal after the administrative proceeding concludes. In Raymond J. Lucia Companies, Inc. v. SEC, however, the D.C. Circuit became the first federal appellate court to consider the merits of the issue and concluded that the SEC’s administrative forum’s use of ALJs—who are not appointed by the President—does not violate the Appointments Clause, which requires the President to appoint all “Officers of the United States.”

The SEC instituted an administrative action against Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (“petitioners”) alleging violations of the Investment Advisers Act of 1940. An ALJ heard the case, concluded that the petitioners were liable based on one of the four charged misrepresentations, and imposed sanctions. The SEC granted a petition for review, found that the petitioners committed anti-fraud violations, imposed the same sanctions as the ALJ, and concluded that its ALJs are employees, not Officers, and that their appointment did not violate the Appointments Clause. Petitioners then sought review with the D.C. Court of Appeals, which agreed with the SEC’s determination.

The D.C. Circuit explained that the Appointments Clause applies to judicial Officers but not employees or other “lesser functionaries,” and that an appointee is only an Officer if he or she exercises “significant authority pursuant to the laws of the United States.” The criteria for determining whether an appointee is an Officer are: “(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.” The D.C. Circuit determined that the SEC’s ALJs do not issue final decisions and thus cannot be Officers within the meaning of the Appointments Clause.

The D.C. Circuit agreed with the SEC that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case. The D.C. Circuit relied heavily on its 2000 decision in Landry v. FDIC, which held that ALJs of the FDIC were not Officers because they could only issue “recommending decisions” that are then forwarded to the FDIC Board of Directors for a final decision. After determining that the SEC’s use of ALJs passed constitutional muster, the D.C. Circuit also affirmed the finding of liability and lifetime industry bar sanction against the petitioners.


Cornerstone Research recently released its “Securities Class Action Filings: 2016 Midyear Assessment,” which tracks the number and type of securities class action lawsuits filed nationwide each semiannual period. In the first half of 2016, plaintiffs filed 119 new federal securities class actions nationwide, which is a 17% increase from the 102 new federal securities class actions filed in the second half of 2015 and a 38% increase from the 87 new federal securities class actions filed in the first half of 2015. The number of filings in the first half of 2016 is also above the historical average of 94 new federal securities class actions filed each semiannual period between 1997 and 2015.

Of those 119 new federal securities class actions filed in 2016, only four were filed in district courts located within the Fifth Circuit, which is down from the 10 that were filed in the Fifth Circuit in the second half of 2015. The Fifth Circuit filings accounted for approximately 3% of the nationwide federal securities class actions, down from the 6% historical trend, between 1997 and 2015. The Ninth Circuit continued to lead the way with 38 new federal securities class actions filed within its district courts, 9 more than were filed in the second half of 2015. Filings in the Second Circuit were also up significantly as compared to the two previous semiannual periods.

In the first half of 2016, new federal securities class actions filed against companies in the financial, consumer, and industrial sectors increased as compared to second half of 2015. In contrast, there were fewer new federal securities class actions filed against technology, communications, energy, and utilities firms than in the previous semiannual period. Click to view the full Cornerstone Research report.


Decisively resolving a split among Texas courts, the Texas Supreme Court held that arbitration awards under the Texas Arbitration Act can be set aside only on the grounds identified in section 171.088 of the Texas Civil Practice and Remedies Code. Common law grounds, including “manifest disregard of the law,” do not justify vacating an arbitration award.

Hoskins v. Hoskins
Supreme Court of Texas (May 20, 2016)
Opinion by Justice Lehrmann; Concurrence by Justice Willett

The case arose from a family feud, with one son accusing his mother, his brother, and a family company of a host of wrongs, including fraudulent conveyance of real property. A previous settlement agreement and a bankruptcy court order required arbitration of the dispute. After the arbitrator entered a take-nothing award, the complaining son asked a trial court to vacate the award on multiple grounds. The court confirmed the award, and the court of appeals affirmed.

The Supreme Court granted the petition “to resolve a split in the courts of appeals on whether the TAA permits vacatur of an arbitration award on common-law grounds not enumerated in the statute.” The answer, according to the Court, was easy: “The statutory text could not be plainer: the trial court ‘shall confirm’ an award unless vacatur is required under one of the enumerated grounds in section 171.088.” Consequently, “the TAA leaves no room for courts to expand on those grounds, which do not include an arbitrator’s manifest disregard of the law.”

Justice Willett agreed fully with Justice Lehrmann’s analysis, and filed a concurring opinion to highlight the decision’s significance. In particular, he noted a similar split of authority (a “quagmire”) continued to plague courts applying the Federal Arbitration Act, following the United States Supreme Court’s 2008 opinion in Hall Street Assocs. v. Mattel, Inc., which left some doubt about the role of “manifest disregard” in reviewing arbitration awards. In 2009, the Fifth Circuit construed Hall Street as precluding vacatur on common-law grounds not listed in the FAA, in Citigroup Global Mkts. v. Bacon. In Texas, therefore, the role of the common law is restricted under both federal and state arbitration statutes.

One distinct difference remains between the TAA and the FAA. In Hall Street, the United States Supreme Court held the FAA voided an agreement that an arbitration award can be set aside if factual findings are not supported by substantial evidence or legal conclusions are erroneous. The Texas Supreme Court refused to apply that holding to identical terms in the TAA in Nafta Traders, Inc. v. Quinn (2011), because an “arbitrator derives his power from the parties’ agreement.” The Court in Hoskins reiterates its criticism of Hall Street’s “textual analysis.”


Earlier this year, the Chancery Court of Delaware denied approval of a proposed settlement of a derivative action based solely on a personal benefit the named plaintiff was to receive. Plaintiff Marvin Smollar brought a derivative action on behalf of VitalSpring Technologies, Inc. in an attempt to remedy certain alleged corporate governance failures. The parties reached a settlement of the litigation, and Smollar was able to achieve “much of, it not most of, the relief which he sought,” including a shareholder’s meeting, the appointment of two independent directors and a special review committee, and the hiring of an independent auditor. In addition to that relief, the settlement agreement also afforded Smollar the opportunity to sell back his VitalSpring shares at the price he paid for the stock. This was a unique and personal benefit not afforded to VitalSpring’s other shareholders, and it was especially beneficial to Smollar because there is little opportunity to trade in VitalSpring stock due to the federal securities laws and certain provisions in VitalSpring’s stock purchase agreement. In fact, counsel for neither party could identify a sale of VitalSpring stock within the last year.

Despite the fact that the settlement was recommended by the special review committee and the board of directors and generally supported by a majority of VitalSpring’s shareholders (eleven shareholders objected to Smollar’s personal benefit), the Chancery Court denied approval based on Smollar’s equity buy-back. The court explained that its task in assessing a proposed settlement is to determine whether the settlement is fair and reasonable and that an award of disparate benefits to the representative plaintiff, who owes a fiduciary duty to other shareholders, “will be closely scrutinized by the Court.” The court rejected Smollar’s argument that the settlement should be approved because the bulk of the settlement benefits were obtained through his efforts even before his equity buy-back was negotiated. Instead, the court characterized the buy-back as “self-dealing” that “drifts far from the conduct expected of a fiduciary” and distinguished a case where the named plaintiff’s personal benefit also resulted in a corporate benefit, unlike in this case. Even though the special committee and board of directors recommended the proposed settlement, the court believed that they did not properly assess how Smollar’s personal benefit discredited the fairness and reasonableness of the settlement and denied approval.

The case remains pending and illustrates the limitations on what benefits can be given to a named plaintiff who chooses to prosecute a derivative claim under Delaware law. Smollar v. Potarazu, C.A. No. 10287-VCN, 2016 Del. Ch. LEXIS 4 (Jan. 14, 2016