December 10, 2017

Archives for July 11, 2016

Colorado Supreme Court: Disclosed Costs Can Be Actionable Under CCPA if Costs Are Not Actual, Necessary, and Reasonable

The Colorado Supreme Court issued its opinion in State v. The Castle Law Group, LLC on Monday, July 5, 2016.

In this C.A.R. 21 original proceeding, the State appealed from the trial court’s order barring testimony of market rate prices. The State brought CCPA claims against Castle and several affiliated vendors, alleging that the vendors conspired with Castle to charge above market rate prices for various foreclosure-related services, and the inflated charges were eventually carried by mortgage servicers and the public because they relied on Castle’s representation that the costs were “actual, necessary, and reasonable.”

The trial court limited the State’s ability to provide market rate comparisons because it ruled that charging high prices is not illegal, and as long as Castle disclosed everything it charged, there was no deception. The Colorado Supreme Court disagreed with the trial court’s characterization of the CCPA claims. The court ruled that the trial court misperceived the alleged deception: that the prices charged were not “actual, necessary, and reasonable.” Because market rate comparison evidence directly impacts the determination of whether the charges were “actual, necessary, and reasonable,” the supreme court made its Order to Show Cause absolute and remanded to the trial court for further proceedings.

Colorado Supreme Court: Ballot Initiative Encompasses Multiple Subjects Because it Injects Politics into Supreme Court Nominating Commission

The Colorado Supreme Court issued its opinion in In re Title, Ballot Title, and Submission Clause for 2015-2016 #132 and #133 on Monday, July 5, 2016.

Initiatives #132 and #133 propose to change the way congressional and senatorial districts are drawn in Colorado by restructuring and replacing the state’s Colorado Reapportionment Commission with a newly created Independent Colorado Legislative Redistricting Commission. The initiatives would make several changes to the way legislative districts are drawn, and would require the Supreme Court Nominating Commission to “establish and announce a process for appointment” for the four Commission members who would be required to be from a minor or independent political party.

The Colorado Supreme Court determined that the initiatives violated the single subject requirement by fundamentally altering the role of the Supreme Court Nominating Commission and ultimately injecting politics into the neutral body of the judicial branch. The court also agreed with petitioners that the initiatives violated the single subject requirement by removing the power to redistrict Colorado’s congressional districts from the General Assembly and transferring it to the newly created Redistricting Commission. The court held that the initiative created the possibility of “log rolling” because it would potentially draw “yes” votes from people who are unhappy with the current legislative districting structure but might oppose removing the power to draw those districts from the General Assembly.

Justice Boatright dissented; he would have concluded that because every subject relates to legislative redistricting, the initiative satisfied the single subject rule.

Colorado Supreme Court: Title of Ballot Initiative Misleading and Confusing

The Colorado Supreme Court issued its opinion in In re Title, Ballot Title, and Submission Clause for 2015-2016 #156 on Tuesday, July 5, 2016.

Initiative #156 seeks to restrict the sale of certain “intoxicants” at retail food stores, including full strength beer, liquor, marijuana, and marijuana products. The Colorado Supreme Court held that the title was confusing because it could invoke voter speculation as to whether the initiative sought to prevent current holders of licenses of those “intoxicants” from renewing their licenses, to revoke the licenses of current holders, or to prevent new licenses from issuing. The court remanded to the title board.

Tenth Circuit: Overly Optimistic Reporting Not Enough to Prove Scienter

The Tenth Circuit Court of Appeals issued its opinion in Anderson v. Spirit AeroSystems Holdings, Inc. on Tuesday, July 5, 2016.

Spirit AeroSystems Holdings, Inc., agreed to manufacture parts for two Gulfstream aircraft and a Boeing 787. Spirit managed the production of the parts through three projects, each of which encountered production delays and cost overruns. Nevertheless, Spirit executives expressed optimism to investors about the company’s ability to break even. However, in October 2012, Spirit announced the projected loss of hundreds of millions of dollars on the three projects. The investors brought a class action against Spirit and four of its executives—CEO and president Jeffrey Turner, CFO Philip Anderson, Oklahoma Senior Vice President Alexander Kummant, and Vice President Terry George, who was overseeing the Boeing 787 project—for violating § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Plaintiffs alleged that Spirit and the executives misrepresented and failed to disclose cost overruns and project delays. Defendants moved to dismiss, arguing that the plaintiffs failed to allege facts showing misrepresentations or omissions that were false or misleading and material, and failed to show scienter. The district court granted defendants’ motion, in part agreeing that plaintiffs had failed to show scienter. Plaintiffs appealed.

The Tenth Circuit compared the evidence set forth by plaintiffs to show scienter with the defendants’ explanations, noting that the inference of scienter would only suffice if it were at least as cogent and compelling as any other inference that could be drawn from the facts. Plaintiffs alleged that defendants knew throughout the class period that the projects were experiencing setbacks and generating so much in additional costs that a loss would be inevitable, yet they failed to warn investors of the forward loss until October 2012. Defendants argued that despite the setbacks, they were optimistic that the projects would meet the original cost forecasts, and expected revenues to exceed total costs. When Spirit realized that a loss was likely, it promptly announced a forward loss on the three projects. The Tenth Circuit found Spirit’s explanation that it was overly optimistic more compelling than an inference that the executives intentionally misrepresented or recklessly ignored economic realities. The Tenth Circuit noted that the plaintiffs presented little evidence to presume malevolence over benign optimism.

The Tenth Circuit approved of the district court’s consideration of a lack of a motive to commit securities fraud as a mitigating factor against scienter. Although the plaintiffs did not need to show a motive, the absence of one was relevant. The plaintiffs also proposed testimony by corroborating witnesses, but the Tenth Circuit determined the witnesses were too far removed from the executives to have been able to testify as to the executives’ state of mind. Plaintiffs also alleged that the defendants had a duty to disclose project overruns and delays, but the Tenth Circuit refused to infer scienter from the defendants’ failure to disclose, finding instead that there was no evidence that the defendants knew they needed to disclose more or were reckless in their failure to disclose. The Tenth Circuit disposed of plaintiffs’ remaining claims, characterizing them as “fraud by hindsight” but not securities fraud. Plaintiffs argued that Spirit’s recovery plan for the 787 project supported an inference of scienter, but the Tenth Circuit again accepted the defendants’ explanations of innocent optimism. The plaintiffs also argued that the sheer magnitude of the loss supported an inference of scienter, but the Tenth Circuit noted that the plaintiffs failed to show that the executives knew that their public reports were too encouraging or had recklessly failed to heed red flags from problem reports.

The Tenth Circuit affirmed the district court’s dismissal. Judge McHugh concurred in part and dissented in part; she would have found that Anderson and Turner made materially false statements, therefore satisfying the scienter element.

Tenth Circuit: Unpublished Opinions, 7/8/2016

On Friday, July 8, 2016, the Tenth Circuit Court of Appeals issued no published opinion and one unpublished opinion.

United States v. Quinn

Case summaries are not provided for unpublished opinions. However, published opinions are summarized and provided by Legal Connection.