GALLUP v. CLARION SINTERED METALS, INC.
1:08-cv-00195
W.D. Pa.Sep 30, 2011Background
- Gallup filed a federal securities fraud action under §10(b) and Rule 10b-5, arising from Gallup’s 2006 sale of his Class A shares back to Clarion Sintered Metals (CSM).
- Defendants include CSM, Howard H. Peterson, and Benjamin F. Marzella, who allegedly controlled CSM and its related entity CSM Sales, Inc.
- Gallup alleged that CSM’s Condensed Financial Statements omitted disclosures about related-party transactions with CSM Sales and misrepresented GAAP compliance, masking funds diverted to the related party.
- The asserted scheme allegedly diverted millions from CSM to Peterson and Marzella via CSM Sales beginning in 1997, reducing reported book value of Class A shares.
- Gallup’s stock sale to CSM in April 2006 was for $59.79 per share, based on book value from Condensed Financial Statements he allegedly lacked access to, without recognizing related-party transactions.
- Defendants moved for summary judgment on all claims; the court granted summary judgment on the federal §10(b) claim and dismissed the state-law fiduciary-duty claims without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Gallup can prove §10(b) elements. | Gallup asserts fraud and omission of GAAP disclosures breached §10(b). | Defendants contend absence of transaction/loss causation and scienter defeats §10(b). | §10(b) claim granted to be dismissed; not proven. |
| Whether loss causation and transaction causation can be shown separately. | Gallup claims causation tying the misstatements to the loss in stock value. | Defendants argue failure to establish independent loss and transactional causation. | Loss and transaction causation not established; federal claim fails. |
| Whether the court should exercise supplemental jurisdiction over remaining state-law claims. | Plaintiff seeks resolution of fiduciary-duty claims in federal court. | Defendants urge dismissal to allow state-court handling. | District court declined supplemental jurisdiction; state-law claims dismissed without prejudice. |
Key Cases Cited
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (articulates six elements of a §10(b) claim)
- McCabe v. Ernst & Young, LLP, 494 F.3d 418 (3d Cir. 2007) (separates loss causation from transaction causation)
- In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256 (3d Cir. 2006) (discusses loss causation framework in §10(b) cases)
- Berckeley Inv. Group Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006) (loss causation requirement; separate from transaction causation)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (establishes components of private §10(b) action)
- McCabe v. Ernst & Young, LLP, 494 F.3d 418 (3d Cir. 2007) (emphasizes independent loss causation element)
- Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001) (loss causation considerations in fraud cases)