Articles Posted in US Supreme Court

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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

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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