In Re Interbank Funding Corp. SEC. Litigation
629 F.3d 213
| D.C. Cir. | 2010Background
- Belizan filed a securities fraud action against Radin Glass & Co., LLP (Radin) and others, alleging Radin aided Interbank’s Ponzi-like scheme through false GAAP-compliant statements.
- Radin repeatedly certified Interbank’s financial statements as GAAP-compliant, while allegedly omitting material facts about inter-fund transfers, loan losses, and related-party transactions.
- Interbank funded private placement notes; related-party transfers were used to pay early noteholders, masking the true financial condition.
- The District Court dismissed the claims with prejudice for futility; on remand, Belizan alleged Radin’s affirmative misrepresentations and omissions.
- The district court denied leave to amend, holding that the proposed amendment failed to plead reliance and was futile.
- Belizan appeals, arguing the Affiliated Ute presumption should apply or that other presumptions (fraud-created-the-market) relieve the reliance burden.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Affiliated Ute applies to omissions here | Belizan argues Omissions predominate; presumption should apply. | Radin contends Affiliated Ute does not apply to affirmative misrepresentations. | Affiliated Ute presumption inapplicable. |
| Whether amendment would survive Rule 12(b)(6) under futility | Amendment would plead sufficient reliance under theories. | Amendment futile; fails to plead reliance. | Amendment would be futile; district court affirmed. |
| Whether direct reliance is pled or required | Direct reliance pleaded through Radin’s affirmative statements. | Not contested; focus remains on presumption analysis. | Not dispositive; reliance issue addressed via Affiliated Ute analysis and affirmative misrepresentation framing. |
| Whether fraud-created-the-market applies | Deserves presumption if market relied on Radin’s misstatements. | Theory inapplicable where fraud connects to stated financials and marketability not shown. | District court’s rejection affirmed; theory not invoked. |
| What is the proper standard of review for Rule 15(a)(2) denial | De novo review should apply for futility determinations. | Review limited by abuse-of-discretion standard. | De novo review; standard applied. |
Key Cases Cited
- Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) (presumption for omissions; not prerequisite for affirmative misrepresentations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (strong inference of scienter must be cogent and at least as compelling as non-fraudulent inference)
- Belizan v. Hershon, 434 F.3d 579 (D.C. Cir. 2006) (vacates district court’s dismissal; remand for pleading after Tellabs guidance)
- Belizan v. Hershon, 495 F.3d 686 (D.C. Cir. 2007) (remands to evaluate pleading with Tellabs standard)
- Akin v. Q-L Investments, Inc., 959 F.2d 521 (5th Cir. 1992) (Affiliated Ute presumption for start-up vs. corporate balance sheets; not for all contexts)
- Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000) (presumption approach varies by circuit; omissions focus in some contexts)
- Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186 (3d Cir. 1990) (application of Affiliated Ute in investment research context)
- Emergent Capital Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (2d Cir. 2003) (fraud-on-market and reliance in securities fraud context)