The Supreme Court dismissed as improvidently granted the writ of certiorari in Emulex Corp. v. Varjabedian, No. 18-459. The question the Court agreed to hear was whether a cause of action for damages implied under Exchange Act Section 14(e) requires only proof of negligence in making a misstatement or omission in connection with a tender offer as held by the Ninth Circuit or of intentional conduct in accord with the decisions of five other circuits.

Oral argument in the action focused on the approach of the Court to its authority rather than the question accepted for review. At the outset the Justices debated whether there was a private right of action under Section 14(e), a question neither party challenged in the circuit court. Thus, Justice Ginsberg, addressing Petitioner’s counsel asked: “Mr. Garre, why should we consider that [that there is an implied cause of action for damages under Exchange Act Section 14(a)] when it wasn’t raised in this case until . . . the motion for rehearing in the court of appeals. I went through the trial court, court of appeals, not a word . . .” (Tr. 4). Petitioner tried to argue that presenting the question at the rehearing stage was sufficient but Justice Breyer was not inclined to agree, noting “You told the Ninth Circuit, I take it, quote that your client did not dispute that Section 14(e) provides for a private right of action” (Tr. 6). While Petitioner tried to stand his ground Justice Ginsberg seemed to close out the question stating: “ If you had [disputed the question of an implied cause of action] – if you had made it an explicit question, there’s no circuit split on the question is there? Mr. Garre: There’s not.”

The argument then focused on the only other question discussed – if there is in fact a private right of action. Justice Ginsburg again took the lead, noting that under Exchange Act Section 14(a) there is an implied cause of action. That was recognized by the Court in J. I. Case v. Borak, 377 U.S. 426 (1964)(holding that where a proxy statement was materially misleading – a fact that would not be apparent to the SEC until after the merger – “that under the circumstances here it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose”).

The Borak standard, however, has been supplanted by that of Alexander v. Sandoval, 532 U.S. 275 (2001)(Opinion per Scalia, J. using a multiprong test to assess congressional intent to assess if there is an implied cause of action). While application of the Sandoval test to Section 14(e) might not yield an implied cause of action, as Justice Kagan pointed out, other factors counsel such as result: “But Sandoval accepted the Cannon [Cannon v. University of Chicago, 441 U.S. 677 (1979] principle, right, which is that if Congress specifically takes language that’ s been held to create a private right of action, and replicates that language, then that counts as a pretty strong indicator that Congress has meant for the same result to obtain” (Tr. 18). (Tr. 15).

The Assistant to the Solicitor General, arguing for the Government and the SEC, adopted another approach. The Government argued that there is no private right of action under Section 14(e), but that the agency could bring an enforcement action based on a negligence standard. While the Government acknowledged that the language of Section 14(e) was comparable to that of Section 10(b) and Rule 10b-5 she claimed that sometimes the same words can have a different meaning. That theory faded following a statement by Justice Gorsuch: “I understand that Ernst [Ernst & Ernst v Hochfelder, 425 U.S. 185 (1976] came later, but normally we do read the same language to mean the same thing . . .” (Tr. 30).

Petitioner tried to refocus the argument on the intent standard of the cause of action to no avail, it quickly reverted to Borak and the question of an implied cause of action. As the argument moved forward the Justices seemed to agree that if Section 14(e) used the same language as Section 10(b) and Rule 10b-5 then Congress would have understood that by including it in the Section it would include an implied cause of action. Under those circumstances the Court would not reject the claim. As Chief Justice Roberts stated: “But it’s not just a question of Congress’ words or even Congress’ intent. It goes to the authority of the courts to engage in the sort of fundamental law-making enterprise that inferring a private cause of action involves. In other words, the reason we do it differently [from Borak] is not because we have any different view on the tools of congressional intent. It’s because we have a different view on the appropriate limits on our authority.”

Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).

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Suspicious trading cases typically center around large trades of stock or options timed to a significant corporate event such as an acquisition or takeover. Specifically, the trading frequently takes place shortly before the transaction is announced and often involves large positions. The traders are typically overseas, purchasing the securities through a local institution that has a U.S. affiliate or connection where the stock and cash is held. Once the transaction closes, the positions are closed, and the cash transferred out quickly – unless the SEC steps in with an action and secures a freeze order. When the agency is able to bring its action before the profits leave the U.S. the traders are often identified and charged – hiding overseas these days is not quite as effective as the bank robbers who quickly rode out of town in the late 1800s and hid in the hills.

The Commission’s latest action in this area focuses on the proposed acquisition of Anadarko Petroleum Corporation by Chevron Corporation. SEC v. One or More Unknown Traders, Civil Action No. 1:19-cv-03785 (S.D.N.Y. Filed April 29, 2019). The shares of both firms are listed on the NYSE. The proposed deal price is set at $65 per share, a 38% premium to market over the April 11, 2019 closing price. Trades in Anadarko shares were placed through two foreign institutions. One is Cowen International Ltd., a boutique investment bank based in London, England. Clearing was done by Pershing, LLC. The second is Renaissance Securities Ltd., an investment banking and securities brokerage services firm in Cyprus. Clearing was done by Interactive Brokers, LLC. None of the traders have been identified.

The trading through the two international accounts closely tracts the transaction:

Deal: February 6, 2019: Chevron’s CEO delivers a letter to Anadarko’s CEO with an acquisition proposal.

Trades: February 8, 2019 and April 1, 2019: Defendants purchase a total of 1,650 calls for Anadarko, almost half of which are out of the money.

Deal: March 22, 2019: CEO of Occidental told the CEO of Anadarko that Occidental would send a competing offer. On March 23, 2019 the officer was received; Chevron was informed that Anadarko would consider the competiting proposals.

Trades: March 22, 2019: One account at Cowen purchased 500 out-of-the money calls with a strike price of $45. On March 25 ,2019 the other account purchased 250 calls with a strike price of $45. On April 1, 2019 the Renaissance account purchased 650 calls with a strike price of $50.

Deal: On April 6, 2019 discussions between Chevron and Anadarko which had halted on March 24, 2019, resumed and ran parallel to Anadarko’s discussions with Occidental. On April 11, 2019 Anadarko and Chevron publicly announced an agreement for Chevron to acquire all of the outstanding shares of Anadarko through a tender offer. The price was $65 per share in cash and stock. The share price for Anadarko closed on April 12, 2019 at $61.78, up 32%. On April 24, Occidental issued a press release announcing a competing proposal for Anadarko at $76 per share.

Trades: On April 16, 2019 one account at Cowen liquidated its positions, securing a profit of $824,5000. The same day the other account was liquidated, yielding a profit of about $419,250. The day before the Renaissance Account liquidated its positions, yielding a profit of $727,350. Overall the traders had profits of nearly $2 million for trading over a two-and-one-half month period.

The complaint alleges violations of Exchange Act Section 10(b). The Court entered a freeze order nine business days after the accounts were liquidated when the Commission filed its complaint and made the request for the freeze order. See Lit. Rel. No. 24462 (April 29, 2019).

Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).

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