Justia U.S. Supreme Court Opinion Summaries

Articles Posted in Securities Law
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Petitioners solicited foreign nationals to invest in a cancer-treatment center. A Securities and Exchange Commission investigation revealed they misappropriated the funds. The SEC may seek “equitable relief” in civil proceedings, 15 U.S.C. 78u(d)(5). The SEC brought a civil action for disgorgement equal to the amount raised from investors. Petitioners argued that the remedy failed to account for their legitimate business expenses. The Ninth Circuit affirmed an order holding Petitioners jointly and severally liable for the full amount. The Supreme Court vacated A disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief authorized under section 78u(d)(5). Equity practice has long authorized courts to strip wrongdoers of their ill-gotten gains; to avoid transforming that remedy into a punitive sanction, courts restrict it to an individual wrongdoer’s net profits to be awarded for victims. These long-standing equitable principles were incorporated into section 78u(d)(5). If on remand the court orders the deposit of the profits with the Treasury, the court should evaluate whether that order would be for the benefit of investors, consistent with equitable principles. Imposing disgorgement liability on a wrongdoer for benefits that accrue to his affiliates through joint-and-several liability runs against the rule in favor of holding defendants individually liable but the common law permitted liability for partners engaged in concerted wrongdoing. On remand, the court may determine whether Petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required. The court must deduct legitimate expenses before awarding disgorgement. View "Liu v. Securities and Exchange Commission" on Justia Law

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In 2014, the Supreme Court held that a claim for breach of the duty of prudence imposed on plan fiduciaries by the Employee Retirement Income Security Act (ERISA) on the basis of inside information, must plausibly allege an alternative action that would have been consistent with securities laws and that a prudent fiduciary would not have viewed as more likely to harm the fund than to help it. The ERISA duty of prudence does not require a fiduciary to break the law and cannot require the fiduciary of an Employee Stock Ownership Plan (ESOP) “to perform an action—such as divesting the fund’s holdings of the employer’s stock on the basis of inside information—that would violate the securities laws.” In 2018, the Second Circuit reinstated a claim for breach of fiduciary duty under ERISA brought by participants in IBM’s 401(k) plan who suffered losses from their investment in IBM stock. The Supreme Court vacated and remanded, characterizing the question as what it takes to plausibly allege an alternative action “that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it” and whether that pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” The Court concluded that the Second Circuit did not address those questions and noted that the views of the Securities and Exchange Commission might “well be relevant” to discerning the content of ERISA’s duty of prudence in this context. View "Retirement Plans Committee of IBM v. Jander" on Justia Law

Posted in: ERISA, Securities Law
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SEC Rule 10b–5 makes it unlawful to (a) “employ any device, scheme, or artifice to defraud,” (b) “make any untrue statement of a material fact,” or (c) “engage in any act, practice, or course of business” that “operates . . . as a fraud or deceit” in connection with the purchase or sale of securities. The Supreme Court has held that to be a “maker” of a statement under subsection (b), one must have “ultimate authority over the statement, including its content and whether and how to communicate it.” Lorenzo, a brokerage firm's director of investment banking, sent e-mails to prospective investors. The content, supplied by Lorenzo’s boss, described a potential investment in a company with “confirmed assets” of $10 million. Lorenzo knew that the company had recently disclosed that its total assets were worth less than $400,000. The SEC found that Lorenzo had violated Rule 10b–5, 17 CFR 240.10b–5; section 10(b) of the Exchange Act, 15 U.S.C. 78j(b); and section 17(a)(1) of the Securities Act, 15 U.S.C. 77q(a)(1). The Supreme Court affirmed the D.C. Circuit in holding that Lorenzo could not be held liable as a “maker” under Rule 10b-5(b) but affirmed with respect to subsections (a) and (c) and statutory sections 10(b) and 17(a)(1). Dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b–5(a) and (c), and the statutory provisions, even if the disseminator did not “make” the statements under Rule 10b–5(b). By sending e-mails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” under subsection (a) and section 17(a)(1); he “engage[d] in a[n] act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c). There is considerable overlap among the Rule's subsections and related statutory provisions. The "plainly fraudulent behavior" at issue might otherwise fall outside the Rule’s scope. The Court rejected Lorenzo’s claim that imposing primary liability upon his conduct would erase or weaken the distinction between primary and secondary liability under the statute’s “aiding and abetting” provision. View "Lorenzo v. Securities and Exchange Commission" on Justia Law

Posted in: Securities Law
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The Securities and Exchange Commission (SEC) has authority to enforce securities laws by instituting an administrative proceeding against an alleged wrongdoer, typically overseen by an administrative law judge (ALJ). Other staff members, rather than the Commission, selected all of the five current ALJs, who have “authority to do all things necessary and appropriate” to ensure a “fair and orderly” adversarial proceeding, 17 CFR 201.111, 200.14(a). After a hearing, the ALJ issues an initial decision. The Commission can review that decision, but if it opts against review, it issues an order that the initial decision is “deemed the action of the Commission,” 15 U.S.C. 78d–1(c). The SEC charged Lucia and assigned ALJ Elliot to adjudicate the case. Following a hearing, Elliot issued an initial decision concluding that Lucia had violated the law and imposing sanctions. Lucia argued that the proceeding was invalid because SEC ALJs are “Officers of the United States,” subject to the Appointments Clause. Under that Clause, only the President, “Courts of Law,” or “Heads of Departments” can appoint “Officers.” The SEC and the D. C. Circuit rejected Lucia’s argument. The Supreme Court reversed. SEC ALJs are subject to the Appointments Clause. To qualify as an officer, rather than an employee, an individual must occupy a “continuing” position established by law, and must “exercis[e] significant authority pursuant to the laws of the United States,” SEC ALJs hold a continuing office established 5 U.S.C. 556–557, 5372, 3105, and exercise “significant discretion." The ALJs have nearly all the tools of federal trial judges: they take testimony, conduct trials, rule on the admissibility of evidence, can enforce compliance with discovery orders, and prepare proposed findings and an opinion including remedies. Judge Elliot heard and decided Lucia’s case without a constitutional appointment. View "Lucia v. Securities and Exchange Commission" on Justia Law

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The Securities Act of 1933 creates private rights of action pertaining to securities offerings, grants both federal and state courts jurisdiction over those suits, and bars their removal from state to federal court. The 1995 Private Securities Litigation Reform Act includes substantive reforms, applicable in all courts, and procedural reforms, applicable only in federal court. To avoid the new obstacles, plaintiffs began filing securities class actions under state law. The 1998 Securities Litigation Uniform Standards Act (SLUSA), 15 U.S.C. 77p, disallows, in state and federal courts, “covered class actions,” in which damages are sought under state law on behalf of more than 50 persons,” alleging dishonest practices in the purchase or sale of a "covered security,” listed on a national stock exchange. Section 77v(a) (the “except clause”) now provides that state and federal courts shall have concurrent jurisdiction over 1933 Act cases, “except as provided in section 77p . . . with respect to covered class actions.” Investors brought a class action in state court, alleging 1933 Act violations. A unanimous Supreme Court affirmed the denial of a motion to dismiss, rejecting arguments that SLUSA’s “except clause” stripped state courts of jurisdiction over 1933 Act claims in “covered class actions.” The “except clause” ensures that in any case in which sections 77v(a) and 77p conflict, 77p controls. Section 77p bars certain state law securities class actions but does not deprive state courts of jurisdiction over federal law class actions. The alternative construction would prevent state courts from deciding any 1933 Act large class suits, even suits raising no particular national interest, which would be inconsistent with SLUSA’s "purpose to preclude certain vexing state-law class actions.” Wherever 1933 Act class suits proceed, the substantive protections necessarily apply. SLUSA does not permit defendants to remove class actions alleging only 1933 Act claims from state to federal court. View "Cyan, Inc. v. Beaver County Employees Retirement Fund" on Justia Law

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In 2007-2008, Lehman Brothers raised capital through public securities offerings. Petitioner, the largest public pension fund in the country, purchased some of those securities. A 2008 putative class action claimed that financial firms were liable under the Securities Act of 1933, 15 U.S.C. 77k(a), for their participation as underwriters in the transactions, alleging that certain registration statements for Lehman’s offerings included material misstatements or omissions. More than three years after the relevant offerings, petitioner filed a separate complaint with the same allegations. A proposed settlement was reached in the putative class action, but petitioner opted out. The Second Circuit affirmed dismissal of the individual suit, citing the three-year bar in Section 13 of the Act. The Supreme Court affirmed. Section 13’s first sentence states a one-year limitations period; the three-year time limit is a statute of repose, not subject to equitable tolling. Its instruction that “[i]n no event” shall an action be brought more than three years after the relevant securities offering admits of no exception. The statute runs from the defendant’s last culpable act (the securities offering), not from the accrual of the claim (the plaintiff’s discovery of the defect). Tolling is permissible only where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances. The timely filing of a class-action complaint does not fulfill the purposes of a statutory time limit for later-filed suits by individual class members. View "California Public Employees’ Retirement System v. ANZ Securities, Inc." on Justia Law

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Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5 prohibit undisclosed trading on inside corporate information by persons bound by a duty not to exploit that information for their personal advantage. These persons are also forbidden from tipping inside information to others for trading. The Supreme Court has held (Dirks) that tippee liability hinges on whether the tipper disclosed the information for a personal benefit; personal benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” Salman was convicted for trading on inside information he received from Kara, who had received the information from his brother, Maher, a former investment banker at Citigroup. Maher testified that he expected his brother to trade on the information. Kara testified that Salman knew the information was from Maher. While Salman’s appeal was pending, the Second Circuit decided that personal benefit to the tipper may not be inferred from a gift of confidential information to a trading relative or friend, unless there is “proof of a meaningfully close personal relationship … that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” The Ninth Circuit declined to follow the Second Circuit. A unanimous Supreme Court affirmed. When an insider gives a trading relative or friend confidential information, the situation resembles trading by the insider himself followed by a gift of the profits to the recipient. Maher breached his duty to Citigroup and its clients—a duty acquired and breached by Salman when he traded on the information, knowing that it had been improperly disclosed. View "Salman v. United States" on Justia Law

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Manning held 2,000,000 shares of Escala stock. He claims that he lost most of his investment when its price plummeted after Merrill Lynch devalued Escala through “naked short sales.” Unlike a typical short sale, where a person borrows stock from a broker, sells it to a buyer on the open market, and later purchases the same number of shares to return to the broker, the seller in a “naked” short sale does not borrow the stock he puts on the market, and never delivers the promised shares to the buyer. Securities and Exchange Commission’s Regulation SHO prohibits short-sellers from intentionally failing to deliver securities. Manning claimed violation of New Jersey law, but referred explicitly to Regulation SHO, citing past accusations against Merrill Lynch and suggesting that the transactions at issue had again violated the regulation. Merrill Lynch removed the case, invoking general federal-question jurisdiction, 28 U. S. C. 1331, and the Securities Exchange Act of 1934, 15 U.S.C. 78aa(a). The Third Circuit ordered remand, holding that Manning’s claims did not necessarily raise any federal issues and that the Exchange Act covers only cases that would satisfy the “arising under” test for general federal jurisdiction. The Supreme Court affirmed. The jurisdictional test established by Section 27 is the same as Section 1331’s test for deciding if a case “arises under” a federal law. Section 27 confers federal jurisdiction over suits brought under the Exchange Act and the rare suit in which a state-law claim rises and falls on the plaintiff’s ability to prove the violation of a federal duty. View "Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning" on Justia Law

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The Securities Act of 1933 requires that a company issuing securities file a registration statement containing specified information, 15 U.S.C. 77aa. The statement may include other representations of fact or opinion. A purchaser of securities may sue an issuer if it either “contain[s] an untrue statement of a material fact” or “omit[s] to state a material fact . . . necessary to make the statements therein not misleading.” The buyer need not prove intent to deceive. Omnicare filed a registration statement for a public offering of common stock. In addition to required disclosures, the statement expressed the company’s opinion that it was in compliance with federal and state laws. After the government sued Omnicare for receiving kickbacks from pharmaceutical manufacturers, purchasers of Omnicare Funds sued, claiming that the legal-compliance statements constituted “untrue statement[s] of . . . material fact” and that Omnicare “omitted to state [material] facts necessary” to make those statements not misleading. The district court dismissed. The Sixth Circuit reversed, holding that subjective disbelief was not required. The Supreme Court vacated. A statement of opinion is not an “untrue statement of . . . fact” simply because that opinion ultimately proves incorrect. Opinions qualify as untrue statements of fact if the opinion was not sincerely held or if they contain embedded statements of untrue facts. Under section 11’s omissions clause, whether a statement is “misleading” is an objective inquiry based on a reasonable investor’s perspective. A reasonable investor may understand an opinion to convey facts about the speaker’s basis for holding that view; if the real facts are otherwise, but not provided, the opinion will mislead by omission. An opinion, however, is not misleading simply because the issuer knows, but fails to disclose, some fact cutting the other way. Section 11 creates liability only for the omission of material facts that cannot be squared with a fair reading of the registration as a whole. The case was remanded for determination of whether the complaint adequately alleged that Omnicare omitted some fact that would have been material to a reasonable investor. View "Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund" on Justia Law

Posted in: Securities Law
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Fifth Third maintains a defined-contribution retirement savings plan for its employees. Participants may direct their contributions into any of several investment options, including an “employee stock ownership plan” (ESOP), which invests primarily in Fifth Third stock. Former participants sued, alleging breach of the fiduciary duty of prudence imposed by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1104(a)(1)(B) in that the defendants should have known—on the basis of both public information and inside information available to Fifth Third officers—that the stock was overpriced and risky. The price of Fifth Third stock fell, reducing plaintiffs’ retirement savings. The district court dismissed; the Sixth Circuit reversed. A unanimous Supreme Court vacated. ESOP fiduciaries are not entitled to any special presumption of prudence, but are subject to the same duty that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets. There is no requirement that plaintiffs allege that the employer was, for example, on the “brink of collapse.” Where a stock is publicly traded, allegations that a fiduciary should have recognized, on the basis of publicly available information, that the market was over- or under-valuing the stock are generally implausible and insufficient to state a claim. To state a claim, a complaint must plausibly allege an alternative action that could have been taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. ERISA’s duty of prudence never requires a fiduciary to break the law, so a fiduciary cannot be imprudent for failing to buy or sell in violation of insider trading laws. An allegation that fiduciaries failed to decide, based on negative inside information, to refrain from making additional stock purchases or failed to publicly disclose that information so that the stock would no longer be overvalued, requires courts to consider possible conflicts with complex insider trading and corporate disclosure laws. Courts confronted with such claims must also consider whether the complaint has plausibly alleged that a prudent fiduciary in the same position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund. View "Fifth Third Bancorp v. Dudenhoeffer" on Justia Law