Tuesday, October 03, 2017

High Court drops two SLUSA cases, but will hear another this term

By Rodney F. Tonkovic, J.D.

The Supreme Court has issued its first order list for the October Term 2017. In this list, the Court has denied certiorari for two securities-related cases asking the court to consider the application of the Securities Litigation Uniform Standards Act to state law contract and breach of fiduciary duty claims. Looking ahead to the first full term with Justice Gorsuch, the court will hear three securities cases involving Regulation S-K disclosures, Dodd-Frank's whistleblower provisions, and the SLUSA.

Cert denied. On September 25, 2017, the court held its first conference after its summer recess. In a voluminous order list, the court denied certiorari in two securities-related cases from the Seventh Circuit: Holtz v. JPMorgan Chase Bank, N.A. and Goldberg v. Bank of America N.A.

In Holtz (16-1536), the petitioner asked the court to address when a party is properly held to be "alleging" a "misrepresentation or omission of a material fact" within the meaning of 15 U.S.C. § 78bb(f)(1)(A). In this case, investors claimed that they were led to believe that a bank was acting in their best interests, but it failed to disclose a bias toward recommending its own funds. Seeking to avoid invoking federal law, the investors framed their claims under state contract and fiduciary principles. The district court threw the case out under the SLUSA, concluding that the class action claims rested on the "omission of a material fact." A Seventh Circuit panel agreed.

The petition argued that the issue of whether a party has alleged a misrepresentation or omission under the SLUSA has led to at least a three-way circuit split. The majority approach, as applied in the Second, Third, and Ninth Circuits, asks whether plaintiffs can prevail without proving that the defendants engaged in deceptive misrepresentations or omissions. In contrast, the petition asserts, the Seventh Circuit stands alone in holding that a suit is barred whenever an omission is even implicitly alleged and when it is likely that a fraud issue will arise in the course of the litigation. This position effectively eliminates most contract and fiduciary duty claims, "regardless of what the complaint actually alleges."

In Goldberg (16-1541), decided on the same day as Holtz, a divided Seventh Circuit panel sided with the lower court and Bank of America in holding that certain banking fees charged, but not disclosed, amounted to an omission of material fact. As a consequence, Goldberg's state law claims for breach of contract and fiduciary duty were preempted by the SLUSA and must be brought in federal court. Here, the Seventh Circuit affirmed the district court's dismissal, concluding that the complaint depended on the omission of a material fact in connection with a covered security.

The petition asked the court to address whether the SLUSA requires dismissing with prejudice a class action complaint for breach of contract and breach of fiduciary duty under state law when the plaintiff's claims are not predicated on a misrepresentation or omission of material fact. According to the petition, the Seventh Circuit's interpretation of the SLUSA places serious restrictions on the enforcement of state laws governing contractual and fiduciary relationships, effectively nullifying Illinois contract law in situations in which a federal fraud claim "could be imagined." As in Holtz, the decision conflicts with holdings of the Second, Third, and Ninth Circuits focusing on whether a plaintiff's claim is predicated on a misrepresentation or omission.

Granted petitions. The court has also agreed to hear three securities cases in this term:
  • Cyan, Inc. v. Beaver County Employees Retirement Fund (15-1439): Whether state courts lack subject matter jurisdiction over covered class actions that allege only Securities Act claims.
  • Digital Realty Trust, Inc. v. Somers (16-1276): Whether the anti-retaliation provision for "whistleblowers" in the Dodd-Frank Act extends to individuals who have not reported alleged misconduct to the SEC and thus fall outside the Act's definition of a "whistleblower."
  • Leidos, Inc. v. Indiana Public Retirement System (16-581): Whether the Second Circuit erred in holding that Item 303 of Regulation S-K creates a duty to disclose that is actionable under Exchange Act Section 10(b) and Rule 10b-5.
Pending. There are currently five pending petitions on securities-related matters:
  • Bandimere v. SEC (17-475): Whether administrative law judges of the SEC, who act as hearing officers in administrative proceedings, are inferior officers under the Appointments Clause.
  • China Agritech, Inc. v. Resh (17-432): Whether the American Pipe rule tolls statutes of limitations to permit a previously absent class member to bring a subsequent class action outside the applicable limitations period. 
  • Veleron Holding, B.V. v. Morgan Stanley (17-363): 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.
  • Lucia v. SEC (17-130): Whether administrative law judges of the SEC are Officers of the United States within the meaning of the Appointments Clause.
  • Credit Suisse First Boston Mortgage Securities Corp. v. FDIC (17-10): Whether the court of appeals erred in construing the FIRREA Extender Statute to impliedly displace the three-year statute of repose in Securities Act Section 13.