Tag: Supreme Court


2015 Year-End Securities Litigation Update

Jonathan C. Dickey is partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication.

The year was yet another eventful one in securities litigation, from the Supreme Court’s game-changing opinion in Omnicare regarding liability for opinion statements, to several significant opinions out of the Delaware courts regarding, among other things, financial advisor liability and the apparent end to disclosure-only settlements. This post highlights what you most need to know in securities litigation developments and trends for the last half of 2015:

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Scope of Insider-Trading “Tippee” Liability

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese and George T. Conway III.

In an insider-trading case that will be closely watched until it is decided before the end of June, the U.S. Supreme Court granted certiorari yesterday to decide critical open questions about what is required to establish insider trading by a remote “tippee”—specifically, what kind of personal benefit must a “tipper” receive, and what knowledge of that benefit must the “tippee” have, for a conviction or sanction to stand.

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19 Law Professors Submit Amicus Brief in Union Political Spending Case

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to a brief submitted by 19 law professors, led by Professor Coates, in the case of Friedrichs v. California Teachers Association. The amicus brief is available here.

In 2010, the Supreme Court ruled in Citizens United v. Federal Election Commission that under the First Amendment, the government could not restrict a corporation’s independent political spending, even in the interest of aligning corporate expression with shareholders’ views. In contrast, an earlier Court case, Abood v. Detroit of Board of Education, conditioned the ability of unions to use fees from non-members for political spending on a mechanism for non-members to opt out of fees not directly used in collective bargaining. In Friedrichs v. California Teachers Associationcurrently awaiting oral argument in the Court’s October Term 2015—again deals with speech by labor unions, which the Supreme Court has compared to speech by corporations.

Presently, California requires that public schoolteachers either join the California Teachers Union or pay “agency fees” to compensate the union for its efforts on their behalf. Plaintiffs, a group of teachers, argue that these fees constitute forced subsidization of the union’s speech. Pinning their claim to the First Amendment, plaintiffs are seeking to invalidate agency fees altogether, or else require non-union members to affirmatively consent to subsidizing the union’s speech. In effect, plaintiffs are seeking to overturn Abood, converting an opt-out to an opt-in. The CTU, on the other hand, argues that the opt-out already required by Abood means that non-union teachers are not forced to pay for union speech at all.

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Corporate Power Ratchet

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Corporate Power Ratchet: The Courts’ Role in Eroding “We the People’s” Ability to Constrain Our Corporate Creations forthcoming in the Harvard Civil Rights-Civil Liberties Law Review and issued earlier as a working paper of the Harvard Law School Program on Corporate Governance. Related research on corporate political spending from the Program on Corporate Governance includes Originalist or Original: The Difficulties of Reconciling Citizens United with Corporate Law History, and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United, both by Leo Strine and Nicholas Walter (discussed on the Forum here and here), and Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

Leo Strine, Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Harvard Civil Rights-Civil Liberties Law Review. The essay, titled Corporate Power Ratchet: The Courts’ Role in Eroding “We the People’s” Ability to Constrain Our Corporate Creations, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

At the beginning of our nation and throughout much of our history, corporations, as the creation of society, were seen as distinctive from human citizens. Human beings were born with certain inalienable rights that government could not take away. By contrast, corporations were the opposite of Lockean-Jeffersonian citizens, in the sense that they had only such rights as society gave them. Under this understanding, society could charter corporations and benefit from their wealth-creating potential while reserving for itself the right to limit corporate activities through externality-reducing legislation and other means so as to protect the public interest.

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SCOTUS Declines Petition on Insider Trading Ruling

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

Today [October 5, 2015], the United States Supreme Court declined to hear the petition for a writ of certiorari (the “Petition”) filed by the United States Department of Justice (“DOJ”) in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the Petition, the Supreme Court ensured that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country.

As we explain below, two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in United States v. Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”

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Court Rules on Halliburton II

Jonathan C. Dickey is partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

On July 27, 2015, the U.S. District Court for the Northern District of Texas issued its anticipated decision on remand from Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II“), where the United States Supreme Court held that a defendant in a securities fraud class action could introduce evidence of a lack of price impact at the class certification stage to show the absence of predominance. Although the case involved facts that arguably are unique to Halliburton’s particular public disclosures, the plaintiffs’ bar may look to the decision as a roadmap for how to meet the Supreme Court’s price impact test in future cases.

Based on the expert evidence presented on remand, the District Court granted the Plaintiffs’ motion for class certification as to one alleged corrective disclosure but denied the motion as to the other five alleged corrective disclosures. Erica P. John Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, slip op. at 1 (N.D. Tex. July 25, 2015). And as to that one disclosure, the court declined to entertain at the class certification stage Halliburton’s argument that the disclosure was not corrective of the alleged misrepresentation. While there may be continued debate regarding certain of the court’s legal conclusions—including whether a court may properly consider at class certification whether a disclosure was even corrective—the opinion demonstrates what most defendants argue Halliburton II requires: a careful and thorough analysis of defendant’s evidence of a lack of price impact. Beyond that, the court’s ruling may raise more questions than it answered.

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Supreme Court: Fiduciaries Must Monitor Offered 401(k) Investment Alternatives

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert.

On May 18, 2015, the U.S. Supreme Court unanimously held in Tibble v. Edison International that fiduciaries of 401(k) retirement plans have a continuing duty under the Employee Retirement Income Security Act of 1974 (ERISA) to monitor an investment alternative offered under a 401(k) plan after it is selected. In monitoring an investment alternative, the fiduciaries must engage in a prudent process. [1]

Although the principle described in Tibble was well understood by many 401(k) plan fiduciaries, the decision nonetheless serves as an important reminder that it is necessary for 401(k) plan fiduciaries to implement a due diligence process that will withstand scrutiny from the federal courts and the U.S. Department of Labor upon review.

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Implications of the Supreme Court Omnicare Decision

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert authored by Mr. Feldman, Robert G. Day, Catherine Moreno, and Michael Nordtvedt.

On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.

Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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Supreme Court’s Omnicare Decision Muddies Section 11 Opinion Liability Standards

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

The Supreme Court has a long history of rejecting expansive interpretations of implied private rights of action under Section 10(b) of the Securities Exchange Act. Most notably, since 1975, it rejected the argument that mere holders, rather than only purchasers and sellers, may bring private damage actions under Section 10(b), rejected the argument that Section 10(b) liability may be imposed based on negligence rather than scienter, rejected the argument that Section 10(b) may be applied to “unfair” as opposed to fraudulent conduct, rejected the argument that purchase price inflation is enough to show damages under Section 10(b), rejected the argument that Section 10(b) reaches aiders and abettors rather than only primary violators, and rejected efforts to muddy the distinction between primary and secondary liability under Section 10(b).

The Court, however, has barely even mentioned Section 11 of the Securities Act in its opinions, much less interpreted it. Section 11, unlike Section 10(b), 1) provides an express private right of action, 2) is limited to misrepresentations and omissions in a registration statement, and 3) requires no proof of culpability although defendants other than an issuer have due diligence affirmative defenses. The Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, is the Court’s first meaningful foray into Section 11. Unfortunately, the decision, which addresses opinion liability under Section 11, provides an amorphous standard that is likely to lead to unpredictable results. It should provide little comfort to plaintiffs or defendants and should make defendants more cautious about including unnecessary opinions in registration statements and, where appropriate, should lead them to carefully qualify opinions that they do include.

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Perez v. Mortgage Bankers Association

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Brent J. McIntosh, Theodore O. Rogers, and Jeffrey B. Wall; the complete publication, including footnotes, is available here.

The U.S. Supreme Court held on March 9, 2015 that agencies are not required to follow notice-and-comment rulemaking procedures when amending or repealing their interpretations of existing regulations. The Court ruled that the D.C. Circuit’s longstanding Paralyzed Veterans doctrine, which required agencies to follow notice-and-comment procedures when changing interpretive rules, was contrary to the text of the Administrative Procedure Act and exceeded the scope of judicial review authorized by Congress. The Court suggested, however, that changed interpretations should be subject to more searching review by courts, especially when regulated entities have extensively relied on the prior interpretation, and may face limitations in retroactive application. Three Justices wrote separately to question the fundamental appropriateness of judicial deference to agencies’ interpretations of their own regulations. Though the Court directed that an agency will need to provide a more substantial justification for its new interpretation if the new interpretation unsettles serious reliance interests or if it is based on factual findings contrary to prior findings, yesterday’s decision may make it easier for an agency to modify or even reverse its interpretation of existing regulations.

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