POL SCI 179 Chapter 1-3: CASE BRIEFS Chapters 1-3

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Political Science

CASE BRIEFS Chapters 1-3 Stock Fraud – Direct Reliance Fewell v. Kozak et al. 1. Parties a. Plaintiff  Fewell b. Defendant  Kozak c. Relationships: Hornibrook was Fewell’s personal securities broker and advisor. i. Kozak and Siegel are Hornibrook’s colleagues. Hornibrook made a deal with Kozak for him to buy shares in Gantry. ii. Siegel agreed to allow plaintiff to purchase the gantry stock as long as P agreed to share profits. 2. Issue a. Has plaintiff stated a claim for Rule 10b-5 securities fraud by pleading sufficient facts to satisfy all of the required elements? 3. Holding a. Yes; Plaintiff Fewell won the case. 4. Key facts a. Siegel called plaintiff and confirmed i. H’s description of Gantry ii. Conditions upon which he (Siegel) would sell to plaintiff iii. Gantry’s business contracts and how they extended to AZ iv. Did NOT say Gantry was dissolved b. Plaintiff’s claims against H and Shearson were arbitrated, with the result ending in the favor of the plaintiff i. Siegel motioned for arbitration but motion was denied because Siegel wasn’t covered under the H arbitration agreement. 5. Legal reasoning a. Legal standard: Rule 10b-5 b. Scheme to defraud i. Material Misstatement 1. Siegel’s description of Gantry as “growing and prosperous” isn’t actionable, but a general prediction (puffery). Does NOT satisfy. 2. Phone conversation only repeated what H had previously conveyed. Does NOT satisfy. 3. P’s claim about Gantry extending to AZ isn’t supported by any information which suggests the claim is false. Does NOT satisfy. 4. Siegel’s failure to inform Plaintiff that Gantry was dissolved by Illinois Secretary of State in relation with the info given on the phone. DOES satisfy. ii. Reasonable Reliance 1. Siegel claims it was unreasonable for P to rely on his representations. Court finds the phone call the extra push to close the deal. (See p. 18 for reasonableness factors) 2. Siegel aligned himself with H, a confidante of Fewell’s. Thus, the complaint alleges that Siegel should have known that the info he gave was supported by the trust of the F/H relationship. (DOES satisfy). iii. Proximate Cause of Injury 1. Mere purchase of stock in a defunct corporation is sufficient injury for purpose of stating a fraud claim. (DOES satisfy) SEC v. Park (Tokyo Joe) – Judge Kocoras 1. Parties a. Plaintiff  SEC b. Defendant  Tokyo Joe 2. Issue a. Has plaintiff stated a claim for Rule 10b-5 securities fraud by pleading sufficient facts to satisfy all of the required elements? 3. Holding a. Yes; Defendants’ motion to dismiss denied. SEC wins case. 4. Key Facts: a. Park posted messages on public financial internet bulletin boards, which allow people to electronically post and reply to messages regarding stocks, investments, etc. b. Created email list and sent recipients stock tips. c. Created website from which people can receive emails about his stock picks for $29/month d. Set up a new site that continues to operate under his control. Consisted of limited area for public and a more expanded area for fee paying members ($299 a year) e. Created chat room acting as a forum and conducted dialogues with members about stock picks. f. Collected $1.1 million in his societe anonyme membership fees. g. Through his advice to the thousands of members on his website, the Sec alleges that Park was essentially able to manipulate and affect the price of stocks he would buy and sell. i. Participated in scalping i.e., encouraged members to buy shares of stocks he already owned to inflate the price and then sell the stock and profit. ii. Was selling the same stock he advised members to purchase. h. Never revealed his true interests 5. Legal Reasoning a. Legal standard: rule 10b-5 i. Scheme to defraud 1. Material misstatement a. Defendants argue that the SEC has failed its duty to disclose. Also argue that because any misstatements made were not in connection with the purchase or sale of securities, they cannot be held liable. b. Bottom line defendants allegedly had a relationship with
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