Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

In a per curiam Opinion issued this morning, the Ohio Supreme Court ruled that the beneficiaries of life insurance policies purchased by Roy Dillabaugh, who operated a Ponzi scheme, did not have standing to appeal a trial court's order which ruled that that the Director of the Ohio Department of Commerce ("the Director") was entitled to seek recovery of the insurance premiums paid for life insurance policies, but not the entire amount paid out under the policy. Significantly, the Supreme Court vacated the portion of the ruling of an intermediate appellate court that the Director lacked the authority to sue third-parties, such as the beneficiaries of the policy, and that the Director lacked the authority to seek an injunction against them to prevent them from disposing of the proceeds of the insurance policy. In short, because the trial court had not ordered any relief imposed on the beneficiaries, they lacked standing to appeal and therefore the subsequent intermediate decision never should have occurred and was vacated.

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On November 1, 2011, the Ohio Supreme Court is scheduled to hear oral argument in an unusual case where the Director of the Ohio Department of Commerce has sued to recover the proceeds of insurance policies from the family of Roy Dillabaugh, who operated a Ponzi scheme. The Second District Court of Appeals for Montgomery County previously held (in an Opinion available here) that the Director cannot seek to recover the proceeds, but a court-appointed Receiver has the authority to file such a suit (although the Court did not address any potential limits to the Receiver's authority on the grounds that the issue was not ripe for decision).

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In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board's decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.

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Ohio Attorney General Mark Dann has criticized US Solicitor General Paul Clement for filing an amicus brief with the US Supreme Court that argues against liability for certain forms of securities fraud. As mentioned here, Dann filed an amicus brief earlier this year along with 31 other state AGs arguing the opposite position. The SEC had asked the federal government to take the position of the state AGs in support of the defrauded investors but the Bush administration demurred.

At the heart of the case is Section 10(b) of the Securities Exchange Act which essentially prohibits the use of any manipulative or deceptive device in connection with the purchase or sale of a security. The Eighth Circuit has held that fraud is not deceptive under Section 10(b) unless the defrauding party made a misstatement or failed to disclose information despite a duty to disclose. Defrauded investors argue that such a ruling protects accountants, lawyers, banks, and other third parties who perpetuate fraud but who don’t actually make misleading statements to investors. Oral argument is set for this fall. 

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Last week the N.Y. Times reported here that Ohio Attorney General Marc Dann is bringing Ohio to the national stage regarding securities law enforcement and responsible corporate governance.

Since taking office in January, Mr. Dann has received national attention for persuading 23 state attorneys general to join in an amicus brief opposing the SEC’s position in a case before the U.S. Supreme Court about the Private Securities Litigation Reform Act of 1995. When enacted, the law created stricter standards for bringing private securities litigation against issuers of securities. Mr. Dann opposes the SEC’s contention that investor-plaintiffs should have to show “a high likelihood” that the defendant intended to violate the law.

The amicus brief—combined with Mr. Dann’s focus on stock option backdating by Ohio executives, state antitrust laws, and the obligations owed by directors to investors—has the N.Y. Times suggesting that Mr. Dann is emulating former New York Attorney General Eliot Spitzer.

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