Eleventh Circuit Court Grants Rare Reversal, Appellate Victory in Municipal
Bond Case
ATLANTA, Sept. 20 /PRNewswire/ -- Powell Goldstein LLP's Securities,
Corporate and Fiduciary Litigation Group announced a major appellate
victory this week. In a rare reversal of a 2006 decision, the Eleventh
Circuit Court of Appeals granted rehearing and ruled in favor of Powell
Goldstein's client Stephens Inc., an Arkansas investment banking firm. The
case involves claims by a municipal bond insurer against a securities
underwriter under the federal securities laws and has been closely followed
by industry organizations and publications. Powell Goldstein attorneys Tom
Richey and Stacey Evans comprised the winning appellate team.
In 1998 Financial Security Assurance Inc. ("FSA"), now the largest U.S.
bond insurer, agreed to insure $69 million in bonds issued by the Solid
Waste Management Authority of Crisp County, Georgia. Stephens Inc. served
as the underwriter on the bond issue. After the Authority defaulted,
triggering FSA's obligation as insurer, FSA filed suit in 2000, asserting
claims for federal securities fraud under SEC Rule 10b-5 and common law
claims for fraud and negligent misrepresentation. In its complaint, FSA
attempted to shift its entire insurance obligation to pay the bonds to
Stephens. FSA claimed damages in excess of $100,000,000. Stephens denied
FSA's allegations and contested the legal validity of its claims.
The district court granted Stephens' motion to dismiss the Rule 10b-5
claim in 2001, agreeing with Stephens' argument that FSA was not a
purchaser or seller of securities, a requirement to sue under Rule 10b-5.
After discovery, Stephens obtained summary judgment in 2004 on FSA's state
law claims for fraud and negligent misrepresentation. The district court
held, among other things, that Stephens did not misrepresent facts to FSA
and that FSA's claims were barred by its failure to conduct adequate due
diligence before insuring the bonds.
FSA appealed to the Eleventh Circuit Court of Appeals. Stephens' and
FSA's positions were supported by amicus curiae briefs from The Bond Market
Association and the Association of Financial Guaranty Insurers,
respectively. On May 31, 2006, the Eleventh Circuit upheld summary judgment
on FSA's state law fraud and negligent misrepresentation claims based on
FSA's failure to conduct due diligence, but reversed the district court's
dismissal of the Rule 10b-5 claim.
Stephens filed a petition for rehearing on the Court's ruling that FSA
could sue under Rule 10b-5. Among other arguments, Powell Goldstein
contended that FSA could not be regarded as an investor in the bonds under
Rule 10b-5 since it would only acquire the bonds on their default, it would
then be both payor and payee, and its right to acquire the bonds on payment
was similar to a borrower taking possession of a promissory note after
paying it. The Securities Industry Association and The Bond Market
Association filed an amicus brief in support of Stephens; the Association
of Financial Guaranty Insurers supported FSA's opposition to the petition.
On September 18, 2007, the same Eleventh Circuit panel that upheld
FSA's Rule 10b-5 claim a year earlier reversed itself, granting Stephens'
petition for rehearing, vacating its prior opinion and issuing a substitute
opinion that affirmed the district court's dismissal of FSA's Rule 10b-5
claim. The Court ruled, among other things, that the bonds were discharged
to the extent of FSA's payment and that the interest that FSA acquired in
the bonds was accordingly not a security under the federal securities laws.
The panel also confirmed its prior affirmance of summary judgment on the
common law claims, granting a complete victory for Stephens.
Powell Goldstein LLP was established in 1909 and has nearly 300
attorneys who provide legal counsel to clients in a wide variety of
practices from offices in Atlanta, Washington, D.C. and Dallas. For more
information, visit http://www.pogolaw.com or call 404.572.6613.
SOURCE Powell Goldstein LLP
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CONTACT:
CONTACT: Erin Meszaros of Powell Goldstein
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