by T. GormanPosted on Posted in SECActions

For years, the SEC has been dogged by claims that it would not take on the Wall Street giants. In SEC v. Goldman Sachs, discussed here, it did.

Rather than applaud however, the critics now claim foul and the agency finds itself embroiled in controversy about the enforcement action. The Wall Street Journal has argued the suit should never have been brought, discussed here. On Capital Hill, hearings have been held with Senators rushing to question Goldman executives. Charges that the suit was timed to help the administration win passage of its financial reform legislation have been raised by a number of lawmakers. Chairman Schapiro had vehemently denied the claim. Yet, the SEC’s Inspector General has opened an investigation despite that fact that the inquiry will focus on an existing, and on-going, enforcement action – a decision which, at best, seems questionable.

Now eight Republican Congressmen from the Committee on Oversight and Government Reform have sent a letter to Chairman Schapiro demanding information regarding the Goldman suit. Specifically, an April 20, 2010 letter from Representative Darrell Issa and seven of his collogues states in part that the case “has created serious questions about the Commission’s independence and impartiality . . . events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate’s consideration of financial regulatory legislation . . .”

After reciting what are claimed to be a number of information leaks, the letter requests documents and information including:

• A statement as to whether the Commission or its employees gave advance notice to the White House, the Democratic National Committee or Democratic members of Congress;

• All communications between the Commission and news outlets about the matter; and

• All records regarding any such communications.

It seems somewhat ironic that, after months of criticism from Capital Hill, the media and the public as the Commission worked to reorganize and rejuvenate its enforcement program, the filing of a high profile case has garnered such dismay. At the same time, if the agency did not bring significant cases tied to the causes of the market crisis – and the Goldman case clear goes to the root of much of what caused that crisis – the critics would no doubt be howling. As all the controversy swirls everyone seems to have lost sight of the fact that the function of the federal courts is to provide a forum for resolving the very questions that surround this case – either the SEC is right or Goldman is right. One of the parties will prevail. Everyone would do well be patient and let the court system do its job.

by T. GormanPosted on Posted in SECActions

In a result joined by all of the justices, the Supreme Court affirmed the decision of the Third Circuit, concluding that plaintiffs’ had timely filed a securities fraud suit against Merck & Co. Merck & Co. v. Reynolds, Case No. 08-905 S.Ct. (April 27, 2010).

The case centers on alleged fraud in connection with the sale of pain killing drug Vioxx. The question in the case turned on when the two year limitation period of 28 U.S.C. § 1658(b) for securities fraud suits begins to run. The high court concluded that such a cause of action accrues when the plaintiff in fact discovers, or with reasonable diligence would have discovered, the facts constituting a violation, whichever comes first.

The case centers on a claim that Merck knowingly misrepresented the risks of heart attacks accompanying the use of Vioxx. An investor group brought suit against the firm claiming fraud in violation of Section 10(b). Under Section 1658(b), the complaint had to be filed within two years “after the discovery of the facts constituting the violation” or 5 years after such a violation. The background of plaintiffs’ fraud complaint, filed on November 6, 2003, traces to 1999 when the FDA initially approved the use of the drug. By March 2000, the company announced the results of a study which showed that the drug had minimal gastrointestinal side effects, but an increased incident of heart attack compared to similar drugs. The company offered a plausible theory regarding the increased incident of heart attack.

Public debate about the company’s theory for the increased incident of heart attack continued. In February 2001, the FDA requested that the Vioxx label be changed to reflect the positive gastrointestinal findings. Two months later, products liability suits were filed against the company because of the side effects. Later the same year, an article in the AMA Journal reported that the increased incident of heart attack constitutes a red flag. Bloomberg News, however, quoted a Merck scientist noting that additional data was reassuring. Nevertheless, in October 2001, the FDA warned Merck that its adverting about the drug was false and misleading, although the agency conceded that the company’s theory about the difficulties of the drug was plausible. More product liability suits followed while a New York Times story reported that there was no evidence of increased heart difficulties from the drug.

Subsequently, in October 2003, the Wall Street Journal published the results of a company funded study which reported an increase incident of heart attacks from the drug. About one year later, the company withdrew the drug from the market. The next month the Wall Street Journal reported on internal Merck e-mails and other information which demonstrated that the company fought for years to suppress adverse news about the drug.

The court’s decision is predicated largely on a close reading of the statutory language and long established precedent regarding the application of the statute of limitations. At the outset the court concluded that the word “discovery” in Section 1685(b)(1) referred not just to the actual discovery of certain facts by the plaintiff, but also to those which could have been discovered with reasonable diligence. The court based this conclusion on an analysis of decisions regarding the application of the statute of limitations in fraud cases. It buttressed the determination by noting that after its decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), applying a limitations period borrowed from express securities causes of action to Section 10(b) claims, every court of appeals which considered the issue concluded that the concept of “discovery of facts” included a hypothetical reasonably diligent plaintiff. Against this backdrop, the court concluded Congress must have included the concept in the statute at issue here.

The court then addressed the arguments raised by Merck. First, the company claimed that the statute did not require the plaintiffs to discovery scienter-related facts. Since the question under the statute, however, is when plaintiff discovered a violation and scienter is a key part of a claim, the court rejected Merck’s argument. At the same time, the court did not determine whether facts supporting all the elements of a claim had to be discovered. A citation to the Amicus Curiae brief of the U.S. with a parenthetical noting that facts regarding the common law elements of a Section 10(b) claim regarding reliance, loss and loss causation at least suggests that the answer to this question is no.

The court also rejected Merck’s contention that the discovery of false statements is sufficient. Those facts do not necessarily establish scienter, which is a key element. Likewise, Merck’s claim that “inquiry notice” was sufficient to trigger the running of the statute is wrong the court held. That concept means that there are enough facts to investigate. At that point however, there may not be enough facts to establish a violation. Accordingly, Merck’s claim would mean that the statute would begin to run before the plaintiff had discovered a violation, which is contrary to the plain language of the section. Rather, the court held that the “limitations period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered ‘the facts constituting the violation,’ including scienter—irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” On this record, the court held the court of appeals had correctly concluded that the action was not time barred.