On February 29, 2016, the Supreme Court denied certification in Harman International Industries Inc. et al. v. Arkansas Public Employees Retirement System et al., thereby leaving unanswered a number of questions related to the Safe Harbor provision of the Private Securities Litigation Reform Act (PSLRA). The petitioners, defendant Harman International Industries Inc. (“Harman” or “the Company”) and related individual defendants, argued that the D.C. Circuit Court of Appeals erred when it reversed the district court’s decision granting Harman’s motion to dismiss. In declining to hear the case, the Supreme Court failed to resolve a circuit split concerning the relevance of state of mind to the efficacy of cautionary language.
Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory. In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities. Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.
Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company. The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. READ MORE
On February 26, 2014, the U. S. Supreme Court (“the Court”) held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not preclude Stanford Ponzi scheme plaintiffs’ state-law class action claims because the claims did not involve covered securities. The 7-2 majority opinion in Chadbourne & Parke, LLC v. Troice was written by Justice Breyer, joined by Justices Kagan, Sotomayor, Ginsburg, Scalia and Chief Justice Roberts. Justice Thomas concurred, and Justices Kennedy and Alito dissented.
The Court’s decision is significant because it resolves a long-standing circuit split over the interpretation of the “in connection with” requirement in SLUSA. As a result of the decision, plaintiffs may increasingly bring state law claims based on investment vehicles that are not covered securities themselves but whose performance implicates or is backed by covered securities. Investment managers and entities that market such investments, as well as lawyers and accountants, may face an increased risk of liability as a result of this decision. READ MORE
Agreeing to take up yet another securities case, the Supreme Court granted cert on January 18 in three related appeals arising out of the alleged multi-billion dollar Ponzi scheme involving R. Allen Stanford’s Stanford International Bank. The Court’s decision in this case will likely resolve a circuit split over the scope of the preclusion provision of the Securities Litigation Uniform Standards Act (SLUSA).
Congress passed SLUSA in 1998 because plaintiffs were bringing class actions in state court to get around the tough pleading standards and other limitations imposed by the Private Securities Litigation Reform Act of 1995. SLUSA precludes state law class actions involving misrepresentations made “in connection with” the purchase or sale of a security covered under SLUSA. Lower courts have struggled with the meaning of those three words: “in connection with.” If a state court case has anything at all to do with securities, will it fail?How closely must a claim relate to the sale of covered securities before SLUSA bars state law remedies? The Supreme Court is about to weigh in on these questions.
In the Stanford ponzi scheme cases, the plaintiffs are investors who purchased CDs issued by Stanford International Bank. The investors asserted claims against third-party advisors (including law firms and an insurance broker) under Texas and Louisiana law, alleging that the investors were duped into believing the CDs were backed by safe securities. Although the CDs themselves were not securities covered by SLUSA, the third-party advisors argued that SLUSA nevertheless barred the state law claims because the alleged misrepresentations related to the SLUSA-covered securities that purportedly backed the CDs. The district court agreed, dismissing the actions. But the Fifth Circuit reversed the district court, holding that the alleged fraudulent scheme was only “tangentially related” to the trading of securities covered by SLUSA. The Fifth Circuit agreed with the Ninth Circuit that misrepresentations are not made “in connection with” sales of SLUSA-covered securities when they are only “tangentially related” to those sales. This means the Fifth and Ninth Circuits are at odds with the Second, Sixth, and Eleventh Circuits, which have all adopted broader views of SLUSA’s preclusion provision.
The third-party advisor defendants asked the Supreme Court to resolve the split, and the Supreme Court agreed, given that the circuit split threatensinconsistent outcomes in some of the biggest, mostcomplex, and multi-layered securities cases. The Court’s resolution will likely go a long way towards defining the role of state courts in adjudicating important class actions relating to securities issues.