Tuesday, January 09, 2018

Post-recess, Court strikes respondent brief and denies certiorari in two cases

By Rodney F. Tonkovic, J.D.

The Supreme Court has returned from its holiday recess with a lengthy order list that affects a trio of securities-related petitions. In a pending case, the Court granted the petitioners motion to strike the respondents’ supplemental brief. Also, certiorari was denied in two cases.

Motion to strike. In Cyan, Inc. v. Beaver County Employees Retirement Fund (15-1439), the Court granted the petitioner's motion to strike a supplemental brief filed by the respondents. The supplemental brief responded to several arguments made in the petitioners' reply brief. The short brief took issue with the petitioners' assertions that there has been a "dramatic" increase in class action filings in California under the Securities Act and that no such class actions had been filed in any state court until the passage of the PSLRA. The brief also stated that the petitioners' suggestion that they did not seek to remove this case from state to federal court due to fear of beings sanctions "cannot be accurate."

In response, the petitioners maintain that the respondents’ brief is "entirely inappropriate" and should be stricken as "manifestly improper." In a letter accompanying the brief, counsel for the petitioners notes that the Court has clear rules under what circumstances a party may file a supplemental brief and that the brief meets none of these. "The allowance for supplemental briefs is not a backdoor for parties to file surreplies," the letter says.

In the event the Court chose to consider the filing, the petitioners filed their own supplemental brief rebutting the respondent's arguments. Stating that each of the respondents’ assertions is misleading or false, the brief says that the increase in class actions filed in California is "not open to debate." The petitioner also stands by its statement that no class action stating only Securities Act claims was filed in state court prior to the PSLRA. Equally meritless, the petitioner says, is the assertion that there was no reason to fear sanctions for seeking removal, since defendants have, in fact, been sanctioned.

The petition in Cyan asks whether state courts lack subject matter jurisdiction over covered class actions that allege only Securities Act claims. Oral argument was heard on November 28, 2017.

Certiorari denied. The court also denied certiorari in two cases:
  • Knight v. SEC (17-734): This petition asked the Court to consider whether the SEC can choose, piecemeal, alleged actions in a continuous course of action so as to avoid prosecution being time-barred pursuant to 28 U.S.C. Code § 2462. In this case the petitioner claimed that the Commission's allegations were time-barred, but the Second Circuit disagreed, stating that the claims did not accrue until the earliest alleged violation in September 1999, and the Commission timely filed its action in September 2004. The petitioner argued that the appellate court failed to consider that the actions at issue were part of an alleged course of conduct that began years before the five-year statutory period and that the Commission commenced its action long after the limitations period had passed. This, the petition, stated, is a frequent tactic employed by the SEC to escape statutes of limitations, with dire consequences for Knight and "countless others."
  • Veleron Holding, B.V. v. Morgan Stanley (17-363): This petition asked whether a plaintiff prosecuting a misappropriation theory insider trading claim establishes scienter by proving that: (1) the defendant knowingly possessed material, nonpublic information; (2) the defendant owed a duty to keep such information confidential; and (3) the defendant breached its duty by trading on the basis of that information. And, whether the plaintiff must also prove that the defendant was aware of its duty at the time it traded. By requiring proof of an "awareness of a duty" in order to establish scienter, the petition argues, the Second Circuit impermissibly burdens a plaintiff with having to establish lack of good faith and limits the scope of liability by excluding recklessness and, in fact, compelling plaintiffs to prove a culpable state of mind that exceeds recklessness.
Remaining pending cases. There are currently four petitions still pending before the Court:
  • The Court has not yet taken action on the oldest securities-related cases before it: Lucia v. SEC and Bandimere v. SEC. Both petitions ask the Court to address whether SEC administrative law judges are inferior officers under the Appointments Clause. The cases were distributed for the January 5, 2018, conference.
  • Petroleo Brasileiro S.A. - Petrobras v. Universities Superannuation Scheme Limited has been rescheduled after a motion to defer consideration of the petition for writ of certiorari was jointly filed. The petition concerns the level of proof needed to invoke the Basic presumption of reliance.
  • The newest securities-related petition, ZPR Investment Management, Inc. v. SEC, was brought by an investment adviser charged with false advertising and asks whether a later disclosure can correct a previous false statement.
Read the docket. This case, and others pending before the Court, can be referenced in the latest version of the Supreme Court Docket, a regular feature of our daily reporting service, Securities Regulation Daily. Cases are listed separately, along with a brief summary of the questions raised and the status of the appeal.