The U.S. Court of Appeals for the Third Circuit found that two founders of a metal components business were not liable in a securities fraud lawsuit although both had improperly looted millions of dollars of corporate assets. See Gallup v. Clarion Sintered Metals Inc., 3d Cir., No. 11-4004, 7/26/12, and http://federal-circuits.vlex.com/vid/paul-gallup-clarion-sintered-metals-390620030.
Essentially, the investors had not shown reliance to prove their Securities Exchange Act of 1934 Section 10(b) claim. However, the court did allow them to continue — albeit in state court– with their other claims after documenting a pretty elaborate scheme to depress the price of the stock and cover-up their fraud. Interestingly, the court did indicate that the plaintiffs had not read any of the financial statements the company issued. Thus, although they may have a claim for breach of fiduciary duty or improper management, those claims are not sounded in federal securities law.
Consequently, the moral of the story, if you want to sue, at the very least, keep up-to-date with the company’s newsletters and financials!!