In a self-described “precedent-setting” order, the US District Court for the Eastern District of Pennsylvania recently found that the Securities Exchange Act of 1934 (Exchange Act) can apply to a scheme aimed at gaining control over a corporation’s stock “float.” The District Court, considering a motion to dismiss a defendant’s amended counterclaims and third-party claims, was presented with the unique question of whether a violation of Section 10(b) and Rule 10b(5) can be committed by officers of a corporation, not by their misrepresentations to investors in connection with the sale of a corporation’s shares (as is usually alleged), but by the officers’ alleged scheme to manipulate the restricted nature of a company’s shares in order to gain control over the stock’s float and enrich themselves to the detriment of the corporation. The District Court found that the Exchange Act could cover such allegations, and reasoned that the US Supreme Court’s broad holdings enforcing Section 10(b) and Rule 10b(5) extended to a corporate officer’s scheme to manipulate the stock’s float, artificially inflate its share price through fraud on the market and reap substantial gains by selling off his shares while causing the corporation and its other shareholders to suffer loss. As such, the District Court denied the motion to dismiss defendants’ counterclaims, and held that, while this was a novel situation, it could not conclude on a Rule 12 motion that it would be legally impossible for defendants to satisfy a jury that the alleged scheme described in their counterclaims entitles them to relief.
Advanced Multilevel Concepts, Inc. et al. v. Edward Bukstel et al., Civil Action No. 11-3718 (E.D. Pa. Jan. 25, 2013).©2014 Katten Muchin Rosenman LLP