On April 20, 2018, Judge William H. Pauley III of the United
States District Court for the Southern District of New York
dismissed a class action against defendants GFI Group, Inc.
("GFI") and certain executives of GFI, alleging
securities fraud claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 ("Exchange Act") and Rule
10b-5. Gross v. GFI Group, Inc. et al., No.
1:14-cv-09438 (S.D.N.Y. Apr. 20, 2018). Plaintiffs alleged
that the defendants deceived shareholders by falsely representing
in a press release that a takeover bid by CME Group
("CME") was a "singular and unique" opportunity
and implying that the CME deal was the best possible deal for GFI
shareholders when it knew there were alternative potential
bidders. In fact, another bidder later waged a hostile
takeover, which led GFI's stock price to surge after plaintiffs
sold their stock. The Court granted defendants' motion
for summary judgment, holding that a proxy statement related to the
proposed CME deal defeated plaintiffs' ability to prove
scienter.
GFI had an inter-dealer brokerage business ("IBD") and a
software unit. In a board meeting, senior executives
recommended that GFI consider selling its software unit to
CME. Under the proposal, the executive chairman would
purchase back the IBD business from CME at a substantial
discount. BGC Partners ("BGC"), another
inter-dealer broker, expressed interest in purchasing GFI, but the
chairman rejected its proposal. A special committee was
appointed to evaluate the proposed CME deal and explore
alternatives. Three months later, however, the chairman,
GFI's then-largest shareholder, indicated he would vote against
any other transaction, and the special committee approved the CME
deal. At a subsequent GFI Board meeting, the chairman
disclosed that BGC offered to acquire GFI at a price per share
substantially exceeding its current trading price, but he refused
to support a deal with BGC. The board then approved the CME
deal. In a joint press release announcing the proposed merger
on July 30, 2014, the chairman stated that optimizing GFI's
value for stockholders had always been a goal of management and
that the transaction represented a singular and unique opportunity
to return value to stockholders. BCG then purchased millions
of GFI shares, and on September 9, 2014, announced it would make an
all-cash tender offer for GFI for a higher price per share than
that offered by CME. GFI's share price rose from
$5.03/share to $6.02/share. On January 30, 2015, GFI's
shareholders rejected CME's deal, and BGC obtained a
controlling interest in GFI through the tender offer.
Plaintiffs included a class of investors who sold their GFI stock
after the joint press release but before BGC announced its tender
offer.
Although the Court held that it could not resolve on summary
judgment whether the chairman's statements were misleading or
material, the Court granted summary judgment on the element of
scienter. Specifically, the Court found that although
plaintiffs could prove defendants had a motive to commit
fraud because of their financial interest in the transaction, they
could not prove defendants had an opportunity to commit
fraud because (i) the joint press release noted that the proposed
CME deal could not close without the majority of GFI's
shareholders' approval, and (ii) the shareholder vote could not
occur until proxy materials were distributed. The proxy
statement then disclosed that a financial advisor retained by the
special committee identified 22 third-parties that might be
interested in acquiring GFI, and also disclosed the chairman's
intention to vote against any transaction other than the proposed
CME deal. As such, the Court found that the public, including
shareholders and analysts, had information that conflicted with the
chairman's statement prior to voting, and defendants therefore
had no opportunity to commit fraud. The Court also held that
plaintiffs could not prove loss causation because BGC's
superior offer was only part of a "mix of new
information" that likely led to the surge in GFI's share
price.
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