Bernstein Shur Business and Commercial Litigation Newsletter #77
September 2017 | Issue 77
Our September recap highlights significant fines levied against Morgan Stanley by FINRA, a data breach at the SEC, litigation involving and other news that will have an impact on business and litigation.
FINRA, the self-regulatory body for the securities industry, ordered Morgan Stanley to pay restitution and fines of $13 million based on its inadequate supervision of its brokers.
The penalties levied against Morgan Stanley were addressed to sales practices related to thousands of short-term trades involving unit investment trusts. The unit trusts at issue terminated on specific maturity dates, usually spanning no more than two years. Upon maturity, the unit trusts were subject to a significant “deferred sales charge” and a “development fee.” FINRA alleged that thousands of Morgan Stanley sales agents executed short-term trades to roll over unit trusts, resulting in customers being charged fees at least twice. In general, brokers-dealers providing personalized investments recommendations must have reasonable basis that a transaction or strategy is “suitable” for a particular customer based on the customer’s investment profile. According to FINRA, Morgan Stanley’s practice of recommending premature sale of and reinvestment in new unit trusts implicated serious concerns addressed to excessive fees and FINRA’s suitability rules. Morgan Stanley has denied any wrongdoing, but will pay restitution to clients and fines.
The data systems of the U.S. Securities and Exchange Commission have been compromised by hackers.
The breach, which took place in 2016, affected the SEC’s EDGAR portal, which is used by corporations to file financial reports and information. News of the breach has not been formally acknowledged by the SEC, but media sources have confirmed that the FBI and U.S. Secret Service have commenced an investigation. Sources also stated that the SEC could not confirm improper retrieval of data, despite the hack. Based on an internal memo describing the hack, it is understood that it was routed through computer systems located in Eastern Europe. In recent years, the agency has come under fire for inadequate computer safeguards. Earlier this year, the U.S. Department of Homeland Security identified numerous critical vulnerabilities in need of correction after scanning a representative sample of computers and systems.
A California federal judge has ruled that a lawsuit filed by the creators of the movie This Is Spinal Tap may go forward.
The lawsuit seeks $400 million in damages from French entertainment company Vivendi S.A. It was brought by co-creators and co-stars Christopher Guest (who played fictional lead guitarist Nigel Tufnel), Harry Shearer (who played bassist Derek Smalls), Michael McKean (who played lead singer David St. Hubbins), and Rob Reiner (who played director Marty Di Bergi). The plaintiffs claim that they are entitled to a portion This Is Spinal Tap merchandise and music sales from Vivendi. Despite the movie’s success since its release in 1984, the plaintiffs assert that Vivendi has paid them a total of only $81.00 in merchandising income between 1984 and 2013, and $98.00 in music sales. On a motion to dismiss brought by Vivendi, U.S. District Court Judge Dolly Gee permitted Guest’s claim to go forward, but dismissed those of Shearer, McKean, and Reiner, as they were brought in the name of those individuals’ “loan out” companies—wholly owned corporations through which they conducted business—which the court found were not parties to the contract with Vivendi. The court also dismissed the plaintiffs’ fraud claim, finding it was not plead with sufficient detail. However, the court granted leave to amend the complaint for the purpose of asserting individual claims and additional details on the fraud claim.
A federal court has ruled that the pharmaceutical company founded by Martin Shkreli does not have to pay Impax Laboratories $43 million.
The dispute arose from the controversial decision by Vyera Pharmaceuticals, formerly known as Turing Pharmaceuticals, to raise the price of the anti-infection drug Daraprim from $17.63 per pill to $750 per pill. Impax sold Daraprim to Turing in 2015, and claimed that, as a result of the price increase, state Medicaid agencies sought millions of dollars in rebates from Impax. Impax asserted that Turing was contractually obligated to reimburse Impax for the rebate amounts, which are calculated in part based upon a drug’s price. Turing counterclaimed, arguing that Impax breached the same contract by providing faulty pricing data to the federal agency that administers the Medicaid program, and by refusing to provide corrected information. The U.S. District Court agreed with Turing, and found that Impax’s own failure to comply with its contractual obligations prevented it from recovering from Turing.