March 7, 2014 4th Circuit published opinion

Yates v Municipal Mortgage & Equity, LLC

Yates and other sued Municipal under the Securities Act of 1933 and the Securities and Exchange Act of 1934 alleging securities fraud stemming from a change in accounting standards and eth lengthy process to restate the financial statements for the affected years. The district court dismissed ruling the complaint failed to plead scienter (intent to deceive) and the statue of repose had run. The panel affirmed. It held the facts plead did not give rise to a strong inference of intent to deceive because the confidential witness testimony only painted a picture of negligence and honest disagreement with an outside auditor as to how to comply with the requirement not a plot to deceive; the accounting errors, multiple restatements and multiple chief financial officers did not give rise to an inference of intent to deceive as these facts are more consistent with an honest effort to comply with the new requirements; the stock sales of Municipal’s officers were spread over a long time, were not suspicious and were done according to a nondiscretionary plan field with the Securities and Exchange Commission; and Municipal made several disclosers during eh period in question noting the problems in the financial statements and the rising costs associated with getting eh problems resolved. The panel concluded the facts supported only n inference of negligence and dismissal of the 1934 Act claims was thus correct. As to the 1934 Act claims, the panel adopted the majority rule and held that Act’s three year statute of repose runs from the effective date of the prospectus registration as this best effectuates congressional intent and is most consistent with the purposes of repose statutes generally. It rejected Yates’ argument that dialyzing actual offering should delay the repose period’s commencement as this has been rejected by other courts, the delay between effective date and commencement of sales is allowed under applicable regulations. As suit was filed two weeks late, dismissal was proper. The panel finally held that one plaintiff lacked standing to bring a different 1934 Act claim as there was insufficient allegations that he purchased the stock in questions directly from Municipal instead of on the open market.

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