On July 7, 2022, Winget Spadafora & Schwartzberg, LLP successfully secured the dismissal of a securities fraud lawsuit filed against the firm’s client, a national brokerage firm, in the United States District Court, Southern District of New York. The plaintiff in the lawsuit alleged that the firm breached Rule 10b-5 of the Securities and Exchange Act of 1934 when it initiated an electronic transfer of securities on behalf of its client, pursuant to an allegedly improper warrant exercise.

The plaintiff in this suit had entered a Cashless Exercise Warrant with the Brokerage Firm’s client to obtain equity shares in the plaintiff’s company. In March 2021, the client exercised its warrant, and instructed the Brokerage Firm to initiate an electronic transfer of the securities. Plaintiff alleged that it rejected the warrant exercise and notified the parties of that rejection. Nevertheless, at the client’s direction, the brokerage firm re-initiated the transfer request. Plaintiff’s Transfer Agent then approved the request, and the shares were transferred into the client’s account. At Plaintiff’s insistence, the shares were returned within hours.

Plaintiff alleged that the Brokerage Firm violated securities laws by initiating the transfer request when it knew the warrant exercise had been rejected.  However, WSS was able to demonstrate that plaintiff failed to state a claim under Rule 10b-5 because  plaintiff did not, and could not,  allege that the defendant made a material misrepresentation with an intent to mislead, or that the plaintiff reasonably relied on that misrepresentation to their detriment. And under the Private Securities Litigation Reform Act of 1995 (“PLSRA”) and Federal Rule of Civil Procedure 9(b), plaintiffs’  fraud allegations must also meet high standards of specificity in their complaint. In granting the firm’s motion to dismiss, the District Court Judge agreed with WSS that an electronic transfer request did not qualify as a misrepresentation of material fact. The Court dismissed the claims against the client with prejudice, holding that the plaintiff fell far short of its heightened pleading burden due to its failure to specifically identify any actionable representations, or to otherwise plead the necessary elements of intent or reliance.

Garry Stevens, a partner in WSSLLP’s New York and Chicago Offices, handled the motion practice.