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FRAUD AND MANIPULATION-2dCir: Appellate Court Upholds Dismissal of Securities Act Claims

By Mark S. Nelson, J.D.

The U.S. Court of Appeals for the Second Circuit has affirmed the judgment of the federal court in New York City dismissing a Securities Act fraud complaint for failure to state a claim (Ahmed Arfa, et. al. v. Mecox Lane Limited, et. al., November 29, 2012). The appellate court's decision is a summary order and has no precedential effect. Plaintiffs Ahmed Arfa and Westend Group had alleged violations of Securities Act Section 11 against Mecox Lane Limited as the issuer, numerous individual defendants as signers of Mecox Lane's registration statement, and two underwriters. The plaintiffs also alleged controlling person violations under Securities Act Section 15.

In affirming the district court, the Second Circuit first held that plaintiffs' failed to show that Mecox Lane did not disclose known trends or uncertainties regarding material changes in the relationship between costs and revenues under Item 303(a)(3)(ii) of Regulation S-K or that Mecox Lane failed to make required disclosures under Securities Act Rule 408 to ensure that its offering statements were not misleading. This allegation could not withstand scrutiny because the relevant data had been disclosed in the registration statement and thus was not material because it could not alter the total mix of information available to investors. The court found no material relationship between allegedly misleading financial data and Mecox Lane's proprietary management system. Similarly, a published article describing Mecox Lane's online advertising methods did not contradict Mecox Lane's statements.

Additionally, the Second Circuit characterized as "false" an allegation that Mecox Lane's registration statement implied a strategy to add high margin, directly-operated stores. By contrast, the court found that the registration statement disclosed a strategy for total store growth that involved converting some directly-operated stores to franchises. These plans were depicted in a chart in the registration statement. The court also found insufficient a related allegation that the registration statement failed to disclose the departure of a Mecox Lane executive because the management change did not alter Mecox Lane's plans for its physical stores. Lastly, the court upheld the dismissal of controlling person claims because the complaint failed to state an underlying securities law violation.

The case is 12-1326-cv.

Kim E. Miller (Kahn Swick & Foti, LLC) and Jeremy A. Lieberman (Pomerantz HaudekGrossman & Gross LLP) for plaintiffs-appellants. Robert J. Malionek, Howard G. Baker, and John D. Castiglione (Latham & Watkins LLP) for defendants-appellees.

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