Isquith v. Caremark International
United States Court of Appeals for the Seventh Circuit
136 F.3d 531 (1998)
- Written by Heather Whittemore, JD
Facts
Caremark was a wholly owned subsidiary of Baxter International (Baxter) (defendant). In 1991 the federal government began investigating Caremark for suspected fraud. In response, Baxter spun off Caremark, transferring ownership to Baxter’s shareholders. Each Baxter shareholder received a number of Caremark shares proportional to the number of Baxter shares they owned. To avoid having to register the Caremark shares, Baxter acquired a no-action letter from the Securities and Exchange Commission (SEC). Baxter told the SEC that it was spinning off Caremark to avoid competition between Caremark and its other subsidiaries and did not mention the government’s fraud investigation into Caremark. In 1995 Caremark pleaded guilty to fraud and paid the government $160 million. A class of shareholders (the plaintiff shareholders) (plaintiffs) who owned Baxter stock at the time of the spin-off filed a lawsuit against Baxter in federal district court, arguing that Baxter violated several antifraud provisions of federal securities laws by submitting a fraudulent statement to the SEC to obtain the no-action letter. Baxter moved to dismiss the case, arguing that there was no securities fraud because there was no purchase or sale of securities involved in the spin-off. The district court granted the motion and dismissed the case. The plaintiff shareholders appealed.
Rule of Law
Issue
Holding and Reasoning (Posner, C.J.)
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