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.

by T. GormanPosted on Posted in SECActions

The SEC is very good at announcing its court cases – at least when they are filed, they win or the case settles.  Just check the web site and all those suits, settlements and victories are listed there.  Then look for the losses. They can be somewhat harder to find.  There may be good reason. 

Consider the recent court ruling in SEC v. Todd, Civil Action No. 03 CV 2230 (S.D. Cal.) on May 30, 2007.  There, the Court granted most of the post-trial motions made by two former Gateway executives charged with securities fraud and aiding and abetting filing violations.  This is not the first such ruling in this case.  Last May, the Court granted summary judgment to another former Gateway executive charged in the same case by the SEC.  Perhaps there is a reason the SEC does not want to publish these rulings. 

Consider the comments of the Court in its rulings.  Repeatedly throughout the opinion, the Court noted that either the evidence was not what the SEC claimed or there simply was no evidence.  For example, the Court notes that the SEC claimed Mr. Todd violated antifraud Section 17(a) in connection with a prospectus supplement filed with the Commission in September 2000 which incorporated a second quarter 2000 Form 10Q by reference.  In throwing out this claim, the Court noted: “In its Memorandum of Points and Authorities in Support of Motion for Partial Summary Judgment, the SEC stated that ‘there is no dispute that Todd signed a prospectus offering Gateways securities for sale,’ a statement which the Court unfortunately and mistakenly accepted as true when it denied Todd summary judgment on the Section 17(a) claim.  The evidence at trial showed that the prospectus supplement was unsigned.  The SEC presented no other evidence connecting Todd to the supplement.”  Slip opinion at 2.  

Despite the obvious flaw in its proof, the SEC persisted.  According to the Court, the SEC shifted its theory to argue that Mr. Todd signed the second quarter 2000 Form 10Q which was incorporated by reference into the prospectus supplement and that he thus “indirectly” made a false representation within the meaning of Section 17(a).  Quite aside from whether this claim is supported by the law, the Court found that: “There was no evidence presented at trial that Todd had ever seen the prospectus supplement before, let along been involved with its preparation.” 

In other portions in the opinion, the Court repeatedly noted that the SEC offered no or virtually no evidence.  On many claims, for example, the Court noted that the SEC called an expert witness.  Yet, the expert did not testify on the key point and failed to establish the claim.  

No doubt litigants have bad days in court.  No doubt there are times when the proof does not come in the way it was planned.  This is not the case here.  The SEC should be able to tell if a party signed a document.  The SEC should know if it does not have proof on a claim.  And, if the SEC’s own expert did not testify to support key points, the only thing that can be inferred is that again the agency knew it did not have the necessary evidence. 

There is no excuse for the SEC here.  The agency has vast investigative powers to assemble evidence long before it files a complaint.  If that is not enough, it can conduct discovery, although one wonders why the agency needs much if any discovery in view of its investigative powers.  This, there is no excuse for bringing claims such as those brought here.  This is particularly true in view of the harm a mere accusation of wrongdoing by the SEC can cause.  Accusations by the SEC can severely harm companies and end the careers of executives and professionals long before any court even calls on the agency to submit proof for its claims.  In view of this fact, the SEC, like any prosecutor, should exercise special care before making an accusation of wrong doing.  Indeed, the SEC, like any prosecutor, has an ethical obligation to do so if for no other reason than the harm its accusations cause can never be undone – even when those wrongly accused win in court.