[This story previously appeared in Securities Regulation Daily.]
By Matthew Garza, J.D.
A Ford investor was unable to convince a Third Circuit panel that the auto maker or an investment trust it created violated Exchange Act Rule 10b-17 through the timing of its announcement of payments to the trust (Gold v. Ford, August 15, 2014, Roth, J.).
Background. The plaintiff held over 21,000 of Ford trust preferred securities that were issued by the auto maker through a Delaware trust in 2002. The trust invested in Ford debt and received quarterly interest payments from Ford in return, which was then distributed to holders of the trust preferred securities. Ford could also suspend quarterly interest for a maximum of 20 quarters under the contract, which it did in April 2009.
Announcement of resumption of the payments took place on June 30, 2010. The plaintiff sold his shares on that day, after Ford’s distribution announcement, but before the New York Stock Exchange set the “ex-distribution date.” That date was set at July 1, meaning the plaintiff was not entitled to a cash distribution made by Ford on July 15, 2010.
Court’s determination. The court said that to show a violation of the Rule 10b-17, which requires issuers to give FINRA a 10-day advance notice of a cash distribution, a plaintiff must plead the 10(b) elements: (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation.
The court found that the plaintiff did not sufficiently plead scienter under the heightened PSLRA standard. The investor argued that Ford’s history of complying strictly with the 10b-17 notice requirement showed the company knew 10b-17 was a “bright line” rule, so deliberately disregarding it was a demonstration of scienter. The court said the assertion speaks too broadly about Rule 10b-17 and would mean that every violation of the notice requirement would establish scienter. “Simply put, missing a deadline is not scienter,” said the court.
The case is No. 13-2328.