11th Circuit Court of Appeals Affirms Dismissal of Purported Pump and Dump Scheme

  • September 9th, 2014
  • Russell Weigel
  • Comments Off on 11th Circuit Court of Appeals Affirms Dismissal of Purported Pump and Dump Scheme

On May 22, 2014 the U.S. Eleventh Circuit Court of Appeals, in a fourteen page unpublished opinion, affirmed a district court’s dismissal of an amended complaint with prejudice. The plaintiff alleged claims for relief for sales of unregistered securities, securities fraud, and violation of the Racketeering Influenced and Corrupt Organizations Act (“RICO”). The plaintiff predicated his relief on a purported pump-and-dump securities scheme. The plaintiff in the case was an officer and controlling shareholder of an over-the-counter-traded microcap securities issuer who sued in his capacity as a shareholder of the issuer. The plaintiff claimed that he was damaged due to the drop in price of his stockholdings in his company’s stock as the result of the alleged dumping of the company’s stock on the market by the financiers of the company. Documents attached to the amended complaint, and factual allegations therein made clear that: the financiers had loaned the company money; with the company’s assistance, the financiers converted the loans into free trading stock and subsequently sold their stock. The plaintiff did not buy or sell stock during the time period that he complained that he had been damaged.

The Eleventh Circuit held that the plaintiff had not established federal court jurisdiction under the securities laws or RICO. This was because the plaintiff did not allege that he was a purchaser or seller of securities, and, therefore, the securities laws were not applicable to his claims. However, because the amended complaint sounded in securities fraud, the plaintiff’s RICO claims were barred by the RICO statute. The plaintiff argued that he should nevertheless be protected by the securities laws because his securities had suffered damage. He based that argument on the “forced-seller” doctrine. The Eleventh Circuit rejected the plaintiff’s argument that he was a forced seller (because he pled that he held his stock and did not sell) and could thereby avoid the purchaser/seller requirement of the federal securities laws. The so-called “forced-seller” doctrine only applied to corporate restructurings where equity holdings are liquidated without action by the stockholder, the Eleventh Circuit said.

The appeals court also affirmed the dismissal of numerous other defendants who did not participate in the underlying trial court case. The appellate court held that all defendants (even those that had been defaulted by the clerk of court) were properly dismissed because the trial court lacked jurisdiction over any of them on any federal claim for relief alleged in the amended complaint.

Licht v. Watson, Case No. 13-14249 (11th Cir. 2014).


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