by T. GormanPosted on Posted in SECActions

Three key decisions by the Supreme Court are promising to redraw the contours of liability under the antifraud provisions of the federal securities law by defining three key elements of a private action for damages under Exchange Act Section 10(b) and Rule 10b-5.  One of those decisions was handed down two years ago, one will be issued by the end of the current term and one will be decided next term.

Today we will begin an occasional series reviewing the three cases:  (1) Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), decided two years, focused on loss causation;  (2) Tellabs, Inc. v. Makor Issues & Rights Ltd., No. 06-484 (S.Ct. 2006) which will be handed down this term and will define the requirements for pleading scienter; and (3) Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., No. 06-43 (S.Ct.) which will be decided next term and will define who is liable (i.e., what acts constitutes a primary violation of the securities laws).  Collectively, these decisions may well redraw the contours of liability in securities damage actions.

We will begin with Stoneridge because it focus on the scope of Section 10(b) liability and promises to be the most significant of the three.  The key question to be resolved there is who can be held liable in private securities fraud actions.  In practical terms every corporate director and officer, outside auditor and lawyer, as well as third-party vendors will be watching to see where the Court draws the line in deciding what must be pled and later proven to establish a primary violation.  Those inside the line drawn by the Court can potentially be named as defendants in securities class actions.  Those outside the line will not face potential actions which the Court has repeatedly referred to as burdensome and vexatious.  The decision in Stoneridge may be significantly impacted by whether the Court decides to hear the appeal in the Enron litigation from the Fifth Circuit Court of Appeals.  Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F. 3d 372 (5th Cir. 2007), pet. for cert. filed sub. nom, Regents of the Univ. of Calif. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 06-1341 (S.Ct. April 5, 2007).

In discussing the potential decision in Stoneridge, we will begin with a review of the Court’s decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), which decided that Section 10(b) does not cover aiding and abetting liability.  In subsequent installments of the series, we will discuss the struggle among the Circuit Courts to fashion a test of primary vs. secondary liability.  First, was the 9th Circuit’s “substantial participation” test.  That was followed by the so-called “bright line test first articulated by the 10th Circuit and later adopted by the second and other circuits.  Finally, there is the 9th Circuit’s version of the SEC’s “scheme liability” test.  We will conclude this segment of the series with a discussion of the key points before the Supreme Court in Stoneridge including the tension between the “catch-all” antifraud provision, and the Court’s search for a clear test for business organizations.  In subsequent installments of the series will review Tellabs and the impact of Dura.  We will conclude by looking at the collective impact of the decisions.  

by T. GormanPosted on Posted in SECActions

The deadline has passed for the SEC to file an amicus brief in support of the petition filed by Enron shareholders requesting that the Supreme Court hear their case. . No brief was filed. See, Regents of the University of California v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 06-2007 (S.Ct.)(the Circuit Court decision is reported at University of California v. Credit Suisse First Boston(USA), Inc, 2007 WL 816518 (5th Cir. Mar. 19, 2007). Apparently the Solicitor General decided not to file a brief despite a previous request from the SEC to do so in support of the shareholders. This inaction follows weeks of reported lobbying by counsel for the plaintiffs seeking support from the SEC.

According to an article in today’s Washington Post by Carrie Johnson, the inaction by the Solicitor General follows an interagency dispute on the key issue presented in the Merrill Lynch case. See “Investors Lose Key Advocate In Case on Financial Crimes,” Washington Post, June 12, 2007 at D 1. Apparently Treasury Department officials are not in agreement with the views the SEC sought to express. Treasury officials view such law suits as impeding U.S. competitiveness. That view may stem from the report of the so-called Paulson Committee (named after the Treasury secretary although he is not a member of the Committee) issued earlier. That report claimed that U.S. competitiveness is being hurt by private securities litigation.

The issue in Merrill Lynch may be the most significant question decided by the Supreme Court regarding private securities damage cases in years. Earlier this year the Court agreed to hear another case next term raising the same issue. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc et al., No. 06-43 (S.Ct.).

At stake in these cases is who can be held liable in securities fraud suits brought under antifraud provision Section 10(b) of the Exchange Act, the key provision in most securities class actions. The resolution of the issue will require the high court to draw a line between those who may be named as defendants and held liable in securities damage actions and those who can not. A host of parties will be watching the Court including corporate directors and officers, outside auditors, outside lawyers, vendors and others who deal with public companies. Depending on where the line is drawn all, some or none of these persons may face future liability.

In view of the significance of the issue in Merrill Lynch it is regrettable that the SEC will not be permitted to voice its views. Regardless of which side of this issue one takes, when a key question concerning the construction of the securities laws is being resolved, the high court should have the opportunity to hear all of the competition views before making its determination. This is particularly true with respect to the agency charged by congress with administering the statutes being construed — the Securities and Exchange Commission.

At this point it remains unclear whether the agency will be permitted to file an amicus brief on the merits in Stonebridge or, assuming the Court decides to hear Merrill Lynch/Enron, in both cases. Again, on an issue as important as the one presented by these cases, regardless of which side of the fence your views fall on, the Court should have the opportunity to hear the views of all sides. If the solicitor general does not want to file a brief then perhaps he should give the SEC permission to file a brief on its behalf rather than on behalf of the U.S. which as been done in the past.

We will explore the issues in these cases and other key Supreme Court cases dealing with private securities damage actions in an occasional series which will begin later this week.