July 22, 2019

Archives for October 2015

Tenth Circuit: Dismissal Appropriate Where Plaintiffs Failed to Show Scienter

The Tenth Circuit Court of Appeals issued its opinion in In re ZAGG, Inc. Securities Litigation: Swabb v. ZAGG, Inc. on Tuesday, August 18, 2015.

Robert Pedersen, former CEO and Chair of ZAGG, Inc., pledged nearly half of his shares in ZAGG, Inc., as collateral in a margin account. Pedersen’s pledged shares equaled nearly 9 percent of the company. ZAGG was required by SEC Rule S-K to disclose the amount of shares pledged as security “in a footnote or otherwise” in ZAGG’s Form 10-K, but Pedersen failed to make the required disclosure. In December 2011, ZAGG share prices fell, creating a deficiency in Pedersen’s account, and he was forced to sell 345,200 of his shares to meet the margin call. He mailed a Form 144 to the SEC disclosing the margin call on December 22, 2011, and electronically filed a Form 4 the next day. Pedersen’s account experienced a second margin deficiency in August 2012, and he was forced to sell an additional 515,000 shares. Pedersen filed a Form 4, stating the sale occurred “to meet margin calls.”

On August 17, 2012, ZAGG issued a press release announcing Pedersen was stepping down as Chair and CEO. ZAGG also filed a Form 8-K with the SEC, stating the company had implemented a policy prohibiting officers, directors, and 10 percent shareholders from pledging ZAGG securities on margin. A week later, after Pedersen’s resignation was final, a third margin call resulted in the forced sale of his remaining ZAGG shares. ZAGG held a conference call to reassure investors, and stated that Pedersen’s departure was entirely related to the margin call situation. Pedersen also spoke at the call, telling investors he had taken a step toward building investor confidence by completely deleveraging his ZAGG stock.

Plaintiffs filed a complaint against ZAGG and six individual officers and directors on behalf of a putative class of all people who purchased ZAGG stock during the relevant time period, alleging the company’s filings omitted material information regarding Pedersen’s pledged shares and also that ZAGG failed to disclose a secret succession plan that had been implemented after Pedersen’s first margin call in December 2011. Defendants filed two motions to dismiss, the first by Pedersen and the second by ZAGG and several individual officers and directors. After a hearing on the motions, the court dismissed the complaint with prejudice, finding the § 10(b) and § 14(a) claims failed because they did not allege with particularity facts giving rise to a strong inference Pedersen intended to violate securities laws. Plaintiffs appealed only the dismissal of their §10(b) and Rule 10b-5 claims and only as to Pedersen and ZAGG, and only as to Pedersen’s material omission of his margin account.

The Tenth Circuit agreed with the district court that plaintiffs failed to meet the heightened pleading requirements applicable to the scienter element in § 10(b) claims. The district court held that plaintiffs proved only one element of scienter—that Pedersen knew of the pledged securities in the margin account. The district court held, and the Tenth Circuit agreed, that the complaint failed to allege any facts showing that Pedersen knew failure to reveal the account would likely mislead investors. Plaintiffs listed five facts they claimed proved scienter: (1) Pedersen made inconsistent statements following the first margin call, (2) Pedersen selectively complied with the Item 403(b) disclosure requirement, (3) Pedersen knew that disclosing his margin account would jeopardize his position at ZAGG, (4) Pedersen was forced to resign because of his margin account, and (5) following Pedersen’s resignation, ZAGG adopted a policy prohibiting holding stock in margin accounts. The Tenth Circuit analyzed each claim.

First, the Tenth Circuit evaluated plaintiffs’ claim that Pedersen’s statements on the Forms 144 and 4 in December 2011 were inconsistent. Pedersen stated on the Form 4 that the sale was made “to meet an immediate financial obligation” and on the Form 144 that the sale was made “to meet margin calls.” The Tenth Circuit found no inconsistency in these two statements, as margin calls could certainly be characterized as immediate financial obligations. Plaintiffs also argued that it was deceptive of Pedersen to mail the Form 144 when he e-filed the Form 4, but the Tenth Circuit noted Pedersen was under no obligation to deliver the forms via the same method.

The Tenth Circuit next addressed plaintiffs’ argument that Pedersen’s failure to disclose his margin account amounted to scienter. Defendants argued that the violation of a rule is not enough to show scienter, and the Tenth Circuit agreed. Without some other facts evidencing Pedersen knowingly omitted the disclosure, the violation alone was not enough. Plaintiffs argued Pedersen failed to disclose the account because he knew it would jeopardize his position at ZAGG, but the Tenth Circuit again found that at most Pedersen’s execution of the certifications supported an inference of negligence.

The Tenth Circuit similarly found that neither Pedersen’s forced resignation nor ZAGG’s implementation of a new policy barring investors from pledging ZAGG shares on margin accounts established an intent to defraud. Rather, the Tenth Circuit found that both the resignation and new policy acknowledged that the company had found a better way to run its business moving forward. The district court found, and the Tenth Circuit agreed, that the complaint failed to allege any facts giving rise to an inference of scienter. Plaintiffs argued that even if the knowing element was not met, the facts showed that Pedersen acted with reckless disregard of a substantial likelihood of misleading investors. The Tenth Circuit disagreed, finding that plaintiffs failed to overcome the high standard necessary to show recklessness.

The Tenth Circuit affirmed the district court.

Tenth Circuit: Remand Order Non-Reviewable Where Based on Lack of Unanimity

The Tenth Circuit Court of Appeals issued its opinion in Harvey v. Ute Indian Tribe of the Uintah and Ouray Reservation on Thursday, August 13, 2015.

Ryan Harvey and other plaintiffs filed a complaint in Utah state court against the Ute Indian Tribe of the Uintah and Ouray Reservation, seeking a declaration regarding the authority of the Tribe over non-Indian businesses operating on certain categories of land. Plaintiffs also alleged three individuals affiliated with the Uintah Tribal Employment Rights Office had harassed and extorted Plaintiffs. Defendants filed a motion to dismiss, arguing that service of process had been insufficient, the state court lacked jurisdiction in the absence of a valid waiver of tribal immunity, the Tribe and its officers were immune from suit but were indispensable parties, and Plaintiffs failed to exhaust administrative remedies in tribal court. Following a hearing on the motion to dismiss, the state court ordered further briefing regarding whether the defendants’ motion constituted a general appearance. The court granted Plaintiffs’ motion to amend its complaint to add defendants.

Defendants filed a notice of removal in the U.S. District Court for the District of Utah, stating that certain defendants consented to removal and the others would consent. All except one eventually consented to removal. Plaintiffs then filed a motion to remand, arguing the initial defendants waived their right to remove by litigating in state court, removal was untimely, the defendants had not unanimously consented to removal, and the federal court lacked subject matter jurisdiction. The district court granted the motion to remand, finding the initial defendants waived their right to consent to removal because they manifested an intent to litigate in state court, and the unanimity requirement could not be met.

The Tenth Circuit first noted that 28 U.S.C. § 1447(d) specifies that a district court order remanding to state court is “not reviewable on appeal or otherwise.” Following Supreme Court precedent establishing that some orders are reviewable despite the statute’s plain language, the Tenth Circuit noted that § 1447(d) has been interpreted to preclude review only for lack of subject matter jurisdiction or defects in removal procedure. The Tenth Circuit commented that although the circuits are split on whether remand based on waiver is reviewable, it would only address remand for lack of unanimity. The Tenth Circuit evaluated whether the remand was based on lack of unanimity and found that it was. The Tenth Circuit declined to review the remand order.

The Tenth Circuit granted appellees’ motion to dismiss and dismissed the appeal.

Tenth Circuit: Unpublished Opinions, 10/29/2015

On Thursday, October 29, 2015, the Tenth Circuit Court of Appeals issued one published opinion and six unpublished opinions.

Chance v. Vandiver

United States v. Grigsby

United States v. Camargo-Chavez

United States v. Collins

Hernandez v. Bryan

KF 103-CV, LLC v. American Family Mutual Insurance Co.

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

The Culture of Law (Part 12): To Epiphany or Not to Epiphany

rhodesA couple installments back, we looked at lawyers whose personal epiphanies led them to break from the profession’s “show me the money” culture.

Epiphanies find us in our ruts, grab us under the armpits, and yank us out. The view from up top is exhilarating at first, but epiphanies fade quickly without new thoughts, beliefs, and behaviors to sustain them. To get all that, we need new brain wiring, which doesn’t come easily. Plus, once we’re out of our professional rut, we’re out of our other ruts, too, which means that our need for new neurons and neural pathways spills over to our relationships with family, friends, employees, co-workers… all the people most invested in the cultural status quo we intend to change.

In her book Stitches: A Handbook on Meaning, Hope, and Repair, Anne Lamott writes in her funny-but-so-honest-it-hurts style about the effect our epiphanies have on those close to us, especially when we come from a high achievement family culture.

The grown-ups we trusted did not share the news that life was going to include deep isolation, or that the culture’s fixation on achievement would be spiritually crippling to those of more gentle character. No one mentioned the peace that was possible in surrender to a power greater than oneself, unless it was to an older sibling, when resistance was futile anyway. Teachers forgot to mention that we could be filled only by the truth that suffuses our heart, presence, humanity. So a lot of us raced around the rat exercise wheel, to get good grades and positions, to get into the best colleges and companies, and to keep our weight down.

Most of us have done fairly well in our lives. We learned how to run on that one wheel, but now we want a refund.

Most people in most families aren’t going to feel, “Oh, great, Jack has embarked on a search for meaning. And he’s writing a family memoir! How great.” To the world, Jack has figured out the correct meaning. He’s got a mate, a house, a job, children. He’s got real stuff that he should fully attend to. At best, his seeking his own truth is very nice, but it’s beside the point. At worst, one would worry that he was beginning to resemble a native Californian.

It is not now and never was in anybody’s best interest for you to be a seeker. It’s actually in everybody’s worst interest. It’s not convenient for the family. It may make them feel superficial and expendable. You may end up looking nutty and unfocused, which does not reflect well on them. And you may also reveal awkward family secrets, like that your parents were insane, or that they probably should have raised Yorkies instead of human children. Your little search for meaning may keep you from going as far at your school or your company as you might otherwise have gone, if you had had a single-minded devotion to getting ahead. Success shows the world what you’re made of, and that your parents were right to all but destroy you to foster this excellence.

So you — I — stuck to the family plan for a long time, because your success made everyone else so happy, even if you made yourself frantic and half dead trying to achieve it. You couldn’t win at this game, and you couldn’t stop trying. At least it was a home to return to, no matter how erratic, which is better than no home.

Are epiphanies worth the trouble they bring to our close relationships? Enjoy the humor, take the dose of honesty, breathe deeply, and then… you decide.

Next time: some scary cultural stuff — too late for Halloween, but worth a look.

Kevin Rhodes has been a lawyer for 30 years. He’s on a mission to help lawyers (and anybody else) to live large in their work in or out of law practice. He also believes law culture is ripe for change. He lives in Denver.

Colorado Supreme Court: Pro Se Non-Attorney Trustee May Not Represent Trust’s Interest in Court

The Colorado Supreme Court issued its opinion in Tucker v. Town of Minturn on Monday, October 26, 2015.

Trustees—Pro Se Litigants.

In this appeal, the Supreme Court considered whether a non-attorney trustee of a trust may proceed pro se before the water court. Opposer-appellant appealed the water court’s order ruling that as trustee of a trust, he was not permitted to proceed pro sebecause he was representing the interests of others. He further appealed the water court’s order granting applicant-appellee’s application for a finding of reasonable diligence in connection with a conditional water right. He asserted that the water court erred in granting the application because its supporting verification was deficient. Addressing a matter of first impression in Colorado, the Court concluded that the water court correctly ruled that a non-attorney trustee cannot proceed pro se on behalf of a trust. In light of this determination, the Court declined to address opposer-appellant’s arguments regarding the sufficiency of the verification. Accordingly, the Court affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Supreme Court: Search of Cell Phone Exceeded Scope of Warrant

The Colorado Supreme Court issued its opinion in People v. Herrera on Monday, October 26, 2015.

Searches and Seizures—Criminal Law.

The Supreme Court held that neither the warrant permitting the police to search defendant Herrera’s cellphone for indicia of ownership nor the plain  exception to the warrant requirement authorized the police to seize evidence of text messages between Herrera and a juvenile girl named Faith W. The warrant did not permit the police to search every folder in the phone for indicia of ownership because if it did, it would qualify as a general warrant in violation of the Fourth Amendment’s particularity requirement. The warrant authorizing a search for text messages between Herrera and “Stazi” (the name used by an officer posing as a juvenile girl) rendered the police’s initial intrusion into the text messaging application legitimate, and the incriminating nature of the particular folder they searched was immediately apparent under the circumstances. However, the third requirement of the plain view doctrine—that the police have lawful access to that folder’s contents—was not met because there was no objective basis for the police to believe that it would contain messages from “Stazi.” Accordingly, the Court affirmed the trial court’s suppression of the evidence seized from the folder.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Announcement Sheet, 10/29/2015

On Thursday, October 29, 2015, the Colorado Court of Appeals issued no published opinion and 39 unpublished opinions.

Neither State Judicial nor the Colorado Bar Association provides case summaries for unpublished appellate opinions. The case announcement sheet is available here.

Tenth Circuit: Unpublished Opinions, 10/28/2015

On Wednesday, October 28, 2015, the Tenth Circuit Court of Appeals issued no published opinion and two unpublished opinions.

United States v. Hendrix

United States ex rel. Troxler v. Warren Clinic, Inc.

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

The Colorado Marijuana Industry—Legal and Accounting Advice and Compliance

Colo_MJ_IndustryTwenty years ago, the idea of legalized marijuana was laughable. Today, there are 23 states that have legalized marijuana for medicinal purposes, and four states (Oregon, Washington, Alaska, and Colorado) along with Washington, DC, that are experimenting with the legalization of recreational marijuana. The marijuana movement appears to be an unstoppable force.

We have witnessed a major shift in how the American public views marijuana. Practically all major national polls now show that a slim majority of respondents are in favor of legalizing marijuana, or share a favorable view of the drug. An even greater percentage of Americans want to see it approved for medical uses. States have also taken a markedly different approach. Once viewed with contempt, marijuana is now looked upon as a fresh tax revenue source. Revenue generated from taxing marijuana is being used to support jobs, maintain in-state infrastructure, and even support education.

The first state to officially begin selling recreation-legal marijuana was Colorado in the beginning of 2014. Colorado hit a marijuana milestone in August 2015. According to the Denver Post, August represented the first month in its short history of recreational marijuana sales that total monthly combined sales of recreational and medical marijuana topped the $100 million mark. In August, $59.2 million was sold in recreational marijuana, and another $41.3 million came from medical marijuana. In Colorado, the three taxes associated with marijuana have raised an impressive $86.7 million through just the first eight months of 2015. With $639.4 million in combined marijuana sales through August in Colorado, and Washington and Oregon both ramping up their sales, the legal marijuana business will likely total more than $1 billion in 2015 for the first time ever.

However, federal law still views marijuana as a Schedule 1 Drug. Therefore, according to federal law, it is still illegal.

This thriving industry, its tax consequences, and the resulting conflict of laws have presented our state with a unique set of challenges, which will be discussed by some of the most influential voices in the Colorado marijuana industry on November 5 at Colorado CLE’s seminar,“The Colorado Marijuana Industry – Legal and Accounting Advice and Compliance.” Barbara Brohl, the Executive Director of Colorado Department of Revenue, will give the regulatory perspective on these complex issues. Professor Sam Kamin, one of the nation’s leading experts on the regulation of marijuana, will analyze the lawsuits that have been brought against Colorado by surrounding states. Mark Mason and Deirdre O’Gorman will be at the seminar to give us the latest information about The Fourth Corner Credit Union, the only credit union constructed to serve the interests of the legalized cannabis and hemp industries and their supporters. John Walsh, the United States Attorney for the District of Colorado, will give us the federal perspective on marijuana enforcement priorities and their interaction with state priorities.

Don’t miss the panel presentation about the challenges and opportunities of owning and operating a marijuana business. Christian Sederberg, a leading practitioner in the industry, has not only represented clients, but he and his firm have helped shape the marijuana and cannabis laws and regulations. Christian will give us an update on the law. Ron Seigneur, the Program Moderator, who has over 25 years of business valuation experience and is known nationally for his expertise, will talk about investing in a cannabis business and attendant ownership and valuation issues.

CLE Program: Colorado Marijuana Industry — Legal and Accounting Advice and Compliance

This CLE presentation will take place Thursday, November 5, 2015, in the CLE Large Classroom. Click here to register for the live program and click here to register for the webcast, or call (303) 860-0608.

Can’t make the live program? Order the homestudy here: CDMP3 audioVideo OnDemand.

Colorado Court of Appeals: Evidence of Intent to Distribute Marijuana Sufficient Despite Medical Use

The Colorado Court of Appeals issued its opinion in People v. Douglas on Thursday, October 22, 2015.

Marijuana Possession and Intent to Distribute—Sufficiency of Evidence—Medical Marijuana Affirmative Defense—Expert Testimony From Lay Witnesses.

Common law spouses Crawford and Douglas were the subject of a drug activity investigation. On a tip, officers searched trash from the property and found marijuana leaves. A police SWAT team then executed a search warrant on the home, where they found 28 marijuana plants, a safe with four firearms, $1,000 in cash, drying marijuana and bags with smaller amounts of marijuana, and medical marijuana application forms.

Each spouse was charged with one count of possession with intent to manufacture or distribute less than five pounds of marijuana and one special offender count based on the firearms. They were tried jointly, and each asserted an affirmative defense under sections 14(2)(a) and 14(4)(b) of the Medical Marijuana Amendment. Each was convicted on the possession with intent to manufacture or distribute charge but acquitted of the special offender charge. Douglas was sentenced to two years’ intensive supervision probation.

On appeal, Douglas argued that the evidence was insufficient to prove that she possessed or attempted to possess with intent to manufacture or distribute marijuana. The Court of Appeals disagreed. Prosecution’s theory was that the spouses were fraudulently using their medical marijuana licenses to illegally distribute marijuana. They based the theory on the amount of marijuana found at the residence, the sophistication of the grow operation, and the presence of guns and cash at the residence. Although the evidence was not overwhelming, it was sufficient to support the convictions.

The Court also rejected Douglas’s contention that the prosecution’s evidence was insufficient to disprove her medical marijuana affirmative defense beyond a reasonable doubt. It was uncontested at the time of the offense that defendants possessed more plants than permitted by the terms of their medical certifications.

The Court agreed with Douglas that the trial court erred in admitting, as lay opinion testimony, what was actually expert testimony from two police officers who were not properly qualified under CRE 702. However, because the issues were not properly preserved for appeal, the Court reviewed for plain error, and concluded that the error did not meet this standard. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Retrospective Competency Evaluation Showed Defendant’s Plea Knowing, Intelligent, and Voluntary

The Colorado Court of Appeals issued its opinion in People v. Pendleton on Thursday, October 22, 2015.

Retrospective Competency Determination—Ineffective Assistance of Counsel.

Defendant gave birth in a public restroom and discarded her newborn son in the trash, where he was later found dead. In exchange for accepting a plea to the child abuse charge, the prosecution dismissed the murder charge and agreed to a sentencing range of between 16 and 40 years in prison. The trial court accepted the agreement and sentenced defendant to 40 years in prison. Almost three years later, defendant filed a motion for post-conviction relief under Crim.P.35(c), seeking to withdraw her plea. The motion was denied.

On appeal, defendant claimed that the post-conviction court erred when it retrospectively determined that she was competent at the time she entered her guilty plea. The Court of Appeals disagreed, finding that (1) the nature of defendant’s post-conviction claims made it necessary for the post-conviction court to evaluate defendant’s competency at the time of her plea; (2) the court had enough information to make a retrospective competency determination; and (3) the record supported the finding that defendant was competent. The Court also rejected defendant’s argument that her guilty plea was not knowing, voluntary, and intelligent, because this claim hinged on defendant’s contention that she was not competent when she entered her plea.

Defendant also argued that the post-conviction court erred when it denied her motion for post-conviction relief on the ground that her plea counsel was ineffective. Defendant’s claim failed because she did not show both deficient performance and prejudice. Counsel’s advice to defendant to abandon her insanity defense in favor of the plea offer, as well as decisions counsel made regarding investigation of the case and defenses, did not fall outside the wide range of reasonable professional assistance. Further, counsel argued effectively on defendant’s behalf at the sentencing hearing. The order was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Court of Appeals: District Court Reasonably Relied on Appellate Ruling in Applying Extraordinary Risk Enhancer

The Colorado Court of Appeals issued its opinion in People v. Baca on Thursday, October 22, 2015.

Reasonable Doubt—Voir Dire—Due Process—Burden of Proof—Admission of Evidence—Extraordinary Risk—Sentencing.

Griego attempted to rob a liquor store at gunpoint. After exchanging gunfire with the store’s clerk, Griego was shot while fleeing the store. He was then transported to the hospital and arrested. Months later, Griego and his attorney met with authorities and told them that defendant had put him up to the robbery as part of a gang initiation. Defendant was convicted of attempted second-degree murder, conspiracy to commit second-degree murder, attempted aggravated robbery, and conspiracy to commit aggravated robbery for his role in planning and encouraging Griego’s commission of the offense.

On appeal, defendant contended that the court’s reasonable doubt analogy during the court’s voir direviolated his due process rights by lowering the prosecution’s burden of proof and allowing the jury to convict on something less than proof beyond a reasonable doubt. However, the court twice read the proper reasonable doubt instruction to the jury and provided it with a written copy. Even assuming the court committed error in its voir dire, the jury was adequately informed of the law, and it is presumed that the jury followed these instructions. Therefore, the court’s comments on reasonable doubt do not require reversal.

Defendant also contended that the court abused its discretion in refusing to admit the telephone call between Griego and his mother during which Griego admitted that he had “done his dirt” to become a Blood. However, the court never ruled on whether defense counsel could impeach Griego with the recorded call, and defense counsel failed to pursue admission of the evidence. Further, the defense investigator could not present the proper foundation for admission of the call because he was not a party to the call, present during the call, or familiar with the recording process. Therefore, the trial court did not err in excluding this evidence.

Finally, because defendant was not convicted of a crime of violence as defined in CRS § 18-1.3-406, the district court erred in applying the extraordinary risk sentencing provision to defendant’s attempted second-degree murder and conspiracy to commit second-degree murder convictions. However, the error was not obvious. The judgment and sentence were affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.