On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts. In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.
Posts by: Katie Lieberg Stowe
On December 1, 2015, the Supreme Court heard argument in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning. In that case, the Court will resolve the split in the Circuits as to whether Section 27 of the Securities Exchange Act of 1934 (“the ’34 Act”) provides federal jurisdiction over claims that are asserted under state law but are based on violations of regulations adopted under the ’34 Act.
On Monday, November 9, 2015, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) released results from its evaluation of investment adviser firms’ use of third parties for compliance functions, including outsourced chief compliance officers (“CCO”). Outside CCOs often perform important compliance responsibilities, including updating firm policies and procedures, preparing regulatory filings, and conducting annual compliance reviews. Despite the importance of these functions, the Risk Alert (“Risk Alert” or “Alert”) indicated that several of the outsourced CCOs examined had not implemented effective compliance programs. The Alert, available here, sends a cautionary signal to investment adviser firms considering outsourcing compliance functions. This warning is particularly timely since government agencies, including the SEC, have increased their focus on financial firms’ compliance programs, and on CCOs in particular.
Malfeasance by a corporate insider against his company has the potential to leave a gaping wound. Facing a securities lawsuit due to that malfeasance is like salt in that wound. Corporations targeted with such lawsuits have turned to the adverse interest exception to try to protect themselves from further liability stemming from the rogue executive’s wrongdoing. But on October 23, the U.S. Court of Appeals for the Ninth Circuit issued a precedent-setting decision rendering that salve unavailable. In In re ChinaCast Education Corp. Securities Litigation, the court held that under the federal securities laws, an executive’s scienter is imputed to the corporation where he “acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.” Slip op. at 4.
The past decade has seen an incredible rise in M&A litigation. According to Cornerstone, in 2014, a whopping 93% of announced mergers valued over $100 million were subject to litigation, up from 44% in 2007. As Delaware Supreme Court Chief Justice Leo Strine explained several years ago, “the reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement.” These lawyer-driven class action suits, which typically allege breaches of fiduciary duty by directors and insufficient disclosures, overwhelmingly end in settlement, with corporate defendants agreeing to provide additional disclosures in exchange for a broad release, and plaintiffs’ counsel walking away with attorneys’ fees for the theoretical “benefit” they conferred upon the class.
On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+. The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia. The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”
In United States v. Salman, the Ninth Circuit recently held that a remote tippee could be liable for insider trading in the absence of any “personal benefit” to the insider/tipper where the insider had a close personal relationship with the tippee. This opinion is significant in that it appears at first glance to conflict with the Second Circuit’s decision last year in United States v. Newman, in which the court overturned the conviction of two remote tippees on the grounds that the government failed to establish first, that the insider who disclosed confidential information in that case did so in exchange for a personal benefit, and second, that the remote tippees were aware that the information had come from insiders. READ MORE
In an interesting and uncommon intersection between securities law, curbing human rights abuses and freedom of speech under the First Amendment, the United States Court of Appeals for the District of Columbia recently agreed to re-consider whether the SEC can require companies to disclose whether their products contain “conflict minerals.” The term “Conflict Minerals” is defined in Section 1502(e)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and refers to certain minerals originating from the Democratic Republic of the Congo (“DRC”), or an adjoining country, that have been used by armed groups to help finance violent conflicts and human rights abuses in those countries. These minerals currently include gold, tin, tatalum, tungsten, and may include any other mineral the Secretary of State determines is being used to finance conflict in the DRC or an adjoining country.
Corporate merger negotiations are typically conducted under a veil of secrecy, with public disclosure withheld until the end when a definitive agreement has been signed. The fear is that premature disclosure of preliminary merger talks will negatively impact the deal. For example, early disclosure might encourage speculative investment in the target company’s stock, driving up the price and diminishing shareholders’ perception of the offered premium, or even cause potential bidders to be reluctant to make an offer in the first place. In light of these problematic scenarios, courts widely recognize that typically there is no duty to disclose merger negotiations prior to the execution of a definitive merger agreement. See, e.g., Thesling v. Bioenvision, Inc., 374 F. App’x 141, 143 (2d Cir. 2010) (there is “no express duty [that] requires the disclosure of merger negotiations, as opposed to a definitive merger agreement”); Williams v. Dresser Indus., Inc., 120 F.3d 1163, 1174 (11th Cir. 1997) (“In the context of sales of stock while negotiations for merger or acquisitions were pending, courts have found no duty to disclose the negotiations”). READ MORE
Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.
The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. READ MORE