Tuesday, June 26, 2018

October 2017 term winds down with three securities-related denials of certiorari

By Rodney F. Tonkovic, J.D.

As the 2017 term nears its end, the Supreme Court has denied certiorari in three more securities-related cases. Two of the petitions sought an answer to the same question: Does the HERA extender statute displace statutes of repose? The third asked the Court to address the materiality need for a conviction under Section 10(b).

HERA extender. The petitions in Findlay v. FHFA (17-1300) and Nomura Securities International, Inc. v. FHFA (17-1302) argue that the extender provision in the Housing and Economic Recovery Act of 2008 (HERA) does not displace federal and state statutes of repose as well as statutes of limitations. The petitioners were defendants in an action by the Federal Housing Finance Agency (FHFA) as conservator to recover losses by Fannie Mae and Freddie Mac from their purchase of residential mortgage-backed securities (RMBS) that went bad during the 2007-8 financial crisis. The Second Circuit held that HERA replaced the statutes of repose in the Securities Act and the Virginia and D.C. blue sky laws. As a result, the extender provision allowed FHFA to bring any "tort claim" within three years and any "contract claim" within six years of its appointment as conservator on September 6, 2008.

The petitions argued that the HERA extender provision applies only to statutes of limitations, not repose. The HERA statute, the petitioners noted, never refers to statutes of repose, while referring three times to "statute of limitations" and several times to concepts relevant only to statutes of limitations. The Second Circuit's decision, the petitioners asserted, "flouted" the Supreme Court's decisions in CTS Corp. v. Waldburger and Cal. Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc.

As an independent basis for certiorari, the petitioners also argued that the Second Circuit erred in holding that Section 12(a)(2) claims are categorically equitable, not common-law, and so do not trigger a Seventh Amendment right to trial by jury.

Safe harbor. The petitioners in Ellison v. U.S. (17-1134), were convicted of violations of Rule 10b-5(c) and took issue with the district court's instructions to the jury concerning materiality and the mens rea requirement for convictions under statutes requiring willfulness. Here, the district court instructed the jury that the government needed to prove that the defendants willfully engaged in fraud, noting further that acting "willfully" does not require knowledge that the conduct was unlawful. The court also issued an instruction on materiality that omitted a proposed instruction that facts must be evaluated in light of the "total mix" of available information; the petitioners argued that this omission was crucial to their convictions.

The petitioners maintained that the Ninth Circuit decision affirming their conviction allows a defendant to be convicted based on an alleged act that had no potential to mislead investors. Other circuits expressly require juries to apply the "total mix" standard and, in those circuits, the petitioners' convictions would have been overturned.

The petition also argues that criminal convictions under Section 10(b) and Rule 10b-5 must require some level of mens rea with respect to the illegality of the underlying conduct. The Ninth Circuit's holding, the petition said, conflicts with the standards in the First and Third circuits and, in principle, with several analogous Supreme Court decisions. At least two other circuits, however, do not impose a mens rea requirement in the Rule 10b-5 context.

Other news. The Court recently issued an opinion in Lucia v. SEC, holding that the SEC’s administrative law judges are inferior officers of the U.S. government for purposes of the U.S. Constitution’s Appointments Clause. As a result, Raymond Lucia is entitled to a new hearing before a different ALJ or before the Commission itself. The decision in Lucia is consistent with the Tenth Circuit's opinion in Bandimere v. SEC (17-475). The petition in Bandimere presents the same question posed by Lucia, but the Court has yet to act on it.

Besides Bandimere, one other case remains on the docket for this term: Quality Systems, Inc. v. City of Miami Fire Fighters' and Police Officers' Retirement Trust (17-1056). This petition asks the Court to address whether, or in what circumstances, a defendant seeking PSLRA safe harbor protection for forward-looking statements must admit that non-forward-looking statements are false or misleading. This petition has been relisted several times and was most recently distributed for the conference of June 21, 2018.