Are Securities Lawyers Stuck in a Time Warp?

“[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person.”
—Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979).

In June 2008, I posted a short piece on this website entitled A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)? In that posting, I questioned whether, after Alexander v. Sandoval, 532 U.S. 275 (2001), a private right of action existed to enforce the Williams Act, in that case, section 13(d) of the 1934 Securities and Exchange Act. It drew a grand total of zero comments.

Let’s fast forward to the lawsuit du jour. Allergan and one of its employees who was a shareholder that sold some shares while Bill Ackman was buying and before Valeant announced its intent to acquire Allergan have sued Ackman in the United States District Court for the Central District of California for allegedly violating Rule 14e-3. Judge David O. Carter concluded that Allergan did not have standing to sue Ackman but that that a selling shareholder did have standing and that there were “serious questions” that need to be decided by a jury to determine whether Ackman violated Rule 14e-3. A number of respected commentators have weighed in on the merits of the case and about a potential class action lawsuit to recoup Ackman’s “illegal” profits.

What the securities bar, Ackman’s lawyers, and Judge Carter all seem to have missed is that there is no private right of action whatsoever to enforce Section 14e or Rule 14e-3!

As far as I can tell, Ackman’s lawyers never raised the issue in the full day hearing held on October 28, 2014. After hours of listening to technical arguments about the meaning of ambiguous terms relating to Rule 14a-3, Judge Carter concluded by saying: “The number of areas I am still struggling with, one of those is standing. That is why I repeatedly asked you to address that particular area. There is not a lot of law that supports either position, frankly.”

Judge Carter was wrong but given the lack of guidance from Ackman’s lawyers, he at least attempted, via a lengthy footnote in his ruling of November 4, 2014, to examine whether “a private right of action exists under Rule 14e-3.” Citing only so-called “ancien regime” pre-Sandoval cases, he concluded that a “contemporaneous” seller like the Allergan employee had standing to sue an alleged violator of Rule 14e-3.

However, in Sandoval, the Supreme Court stated that, absent evidence of a congressional intent to create a private cause of action to enforce a statute or rule, no court may do so “no matter how desirable . . . as a policy matter, or how compatible with the statute.” In a subsequent decision, Gonzaga Univ. v. Doe, 536 U.S. 273 (2002), the Court was emphatic: (“[C]lear and unambiguous terms” are “required for Congress to create new rights enforceable under an implied private right of action.”).

Here is the text of Section 14(e), the basis for Rule 14e-3:

It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.

In short, the Supreme Court has ruled that there is no private right to sue to enforce a rule if none of the following exists.

• 1. The applicable statutory provision expressly authorizes private parties to sue.
• 2. The provision contains “rights-creating” language, i.e., the focus of the provision is on the class of persons whose welfare Congress intended to further (rather than on the regulated entity).
• 3. There are no other provisions in the statute that expressly provide for a private right of action (because, if there are such provisions, that would indicate an intent by Congress to foreclose a private right of action to enforce a provision lacking such language).
• 4. The provision would otherwise be unenforceable.

It does not take a Harvard Law School degree to see that none of these conditions exists with respect to Section 14(e). Also, it is not hard to find plenty of post-Sandoval opinions in which these standards were applied. Here are three relevant opinions issued by the Ninth Circuit Court of Appeals:

• 1. Northstar Financial Advisors, Inc. v. Schwab Investments. 615 F.3d 1106, (2010); (no private cause of action under § 13(a) of the Investment Company Act of 1940)
• 2. In re Digimarc Corp. Derivative Litigation, 549 F.3d 1223 (2008); (no private cause of action under § 304 of the Sarbanes-Oxley Act)
• 3. Logan v. U.S. Bank National Association, 722 F.3d 1163 (2013); (no private cause of action under § 702(a) of the Protecting Tenants at Foreclosure Act)

I defy anyone to distinguish between these cases and Allergan Inc. v. Valeant Pharmaceuticals. Maybe I am off base but it seems that every securities lawyer either (a) believes the securities laws are exempt from Supreme Court precedent, or (2) is stuck in an ancien regime pre-Sandoval time warp where a private right of action is liberally granted by courts.

The bottom line is that only the SEC can sue Ackman to enforce Rule 14e-3. But, someone with a law degree has to say it to Judge Carter. (Whether the SEC would actually sue Ackman is doubtful but I will leave that question for another day.)