Investor Fraud Claims Against Prescott City, AZ are Dismissed by District Court

In the wake of the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders, the U.S. District Court for the District of Arizona is now saying that investors did not succeed in stating a securities fraud claim against Prescott City, Arizona related to the $35 million in revenue bond sales that paid for the construction of a 5,000 seat event center. The case is Allstate Life Insurance Co. Litigation, D. Ariz.

Allstate Life Insurance Co. and other investors had bought the bonds in accordance with the offering documents. Because the official statements failed to include key information that only the defendants knew, the plaintiffs contend that these omissions made parts of what was stated misleading and false. As a result, they are claiming that the defendants violated Section 10(b) of the 1934 Securities Exchange Act.

The district court, in a 2010 order, had said that case law indicates that a party could be held liable under Section 10(b) for “making” a statement that was untrue. Liability could also be held under this section of the Act if a party was involved in “substantially” taking part in preparing, creating, editing, or drafting a statement that was materially false or misleading even without saying or signing the statement in question. However, in the wake of the US Supreme Court’s Janus decision last June that rejected the “substantial participation” approach and found that under Role 10b-5, the statement’s maker is the one with the final authority over the statement, the defendants asked the district court to reconsider.

Now, after Janus, the district court is saying that the plaintiffs have failed to make valid Section 10(b) claims against Prescott City and the securities fraud claims against the town are therefore dismissed. Per the court, the plaintiffs did not allege any facts to make it plausible that Prescott City is the one that made the misleading statements or any of the alleged misrepresentations in the official statements.

Commenting on the district court’s May 24 ruling, Institutional investor securities lawyer William Shepherd said: “The Janus case and this one demonstrate further erosion of the liability standards for investors’ claims. Almost 20 years ago, courts decided that Wall Street and other defendants cannot be held liable for ‘aiding and abetting’ in federal securities fraud cases. (Those who assist in other kinds of wrongdoing are not granted this kind of get-out-of-jail-free card.) Because of this free pass, most of those that assisted Enron in defrauding the public were not held liable for their actions. The Janus case is proving to be yet another case of ‘judicial activism’ to help big shots escape responsibility for their misdeeds and omissions.”

Janus Capital Group Inc. v. First Derivative Traders

Prescott Valley loses motion to dismiss investor lawsuit against events center, The Daily Courier, October 26, 2011

More Blog Posts:
Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 20, 2010

Morgan Stanley Sued by MetLife for Securities Fraud Over $757 Million in Residential Mortgage-Backed Securities, Institutional Investor Securities Fraud, April 28, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Fraud, February 22, 2012

Our institutional investor securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represent clients throughout the US.