Tuesday, October 02, 2018

In new term, High Court drops petition on corrective disclosures, will hear Janus question

By Rodney F. Tonkovic, J.D.

The Supreme Court started its October 2018 term with a denial of certiorari for a case asking whether the filing of civil complaint can be a corrective disclosure. During this term the Court, currently with eight members, will also hear a petition from a case involving scheme liability in which the nominee for the vacancy, Judge Brett Kavanaugh, wrote a dissenting opinion. Finally, pending petitions ask the Court to consider aiding and abetting liability and loss causation.

Corrective disclosures. The Court denied certiorari in Community Health Systems, Inc. v. New York City Employees' Retirement System (17-1453). The petition asked whether the filing of a complaint in a different suit may constitute a corrective disclosure. In this case, the Sixth Circuit flatly rejected a categorical rule, adopted by many district courts, that the filing of a civil complaint is not a corrective disclosure. The petition argued that the Sixth Circuit's case-by-case approach is deeply flawed and ignores the fact that allegations are nothing more than untested claims. The petition also asked the court to address the relation back of otherwise time-barred claims asserted in an amended complaint by new plaintiffs.

In this case, the complaint pegged loss causation on a stock price drop after the filing of a lawsuit. The petition first argued that the lower courts are divided over the legal sufficiency of mere allegations of fraud. Here, the Sixth Circuit found that it was plausible that the allegations from the other suit constituted corrective disclosures. According to the petitioners, the Sixth Circuit's holding suggests that every putative disclosure of new information, from any source, must be evaluated to see if the market could perceive it to be true. The Sixth Circuit's case-by-case approach, the petition asserted, conflicts with decisions by the Ninth and Eleventh Circuits holding categorically that the filing of a civil suit does not establish liability and thus cannot constitute a corrective disclosure.

The Sixth Circuit also held that new claims in an amendment to the complaint upon which this case was based related back to the original. The court admitted that the amended complaint expanded the class definition, but this was permissible because it "conformed" the class membership to the scope of the fraud as originally alleged. The petition said that there is a circuit split with at least three different approaches over the proper test for determining relation back under FRCP Rule 15(c). Most circuits would agree that the Sixth Circuit's more lenient approach is incorrect, the petition contended.

Looking ahead. This term, the Court has agreed to hear Lorenzo v. SEC (17-1077), which asks whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim. This petition was brought by a broker who was found to have defrauded two clients even though, he argues, he did not "make" false statements and sent the emails at issue on the orders of his supervisor. In a 2-1 decision, the D.C. Circuit overturned the SEC's finding that Lorenzo violated Rule 10b-5(b), but upheld the remainder of the violations, noting that Rules 10b-5(a) and (c) and Securities Act Section 17(a)(1) do not speak in terms of an individual's "making" a false statement, which was the critical language construed in Janus. While not a "maker," Lorenzo played an active role in producing and sending the emails, which constituted employing a deceptive "device," "act," or "artifice to defraud" for purposes of liability under those provisions.

The dissenting judge took the majority to task for finding that Lorenzo acted with scienter and for creating a circuit split by holding that mere misstatements may constitute the basis for scheme liability. Running with this argument, the petition maintains that the D.C. Circuit's decision allows plaintiffs to sidestep Janus by repackaging a fraudulent statement claim as a fraudulent scheme claim. Only the D.C. Circuit and the Eleventh Circuit have held that a misstatement standing alone can be the basis of a fraudulent scheme claim, the petition says, while the Second, Eighth, and Ninth Circuits have held that scheme liability requires something more than just deceptive statements.

Supreme Court nominee Judge Brett Kavanaugh was the dissenting judge on the D.C. Circuit panel that heard Lorenzo. If confirmed to the Supreme Court, Judge Kavanaugh likely would have to grapple with recusing himself because of his participation in deciding the case below.

Pending. The Court will also consider the following securities-related petitions:
  • Bats Global Markets, Inc. v. City of Providence (18-210): Whether a private plaintiff states a valid securities-fraud claim by pleading that the defendant enabled a third party to commit the acts that caused the allegedly fraudulent harm, where the primary violator undisputedly exercised an independent choice to commit those acts. 
  • First Solar, Inc. v. Mineworkers' Pension Scheme (18-164): Whether a private securities-fraud plaintiff may establish the critical element of loss causation based on a decline in the market price of a security where the event or disclosure that triggered the decline did not reveal the fraud on which the plaintiff’s claim is based.
  • Quality Systems, Inc. v. City of Miami Fire Fighters' and Police Officers' Retirement Trust (17-1056): Whether or in what circumstances a defendant must admit that non-forward-looking statements are false or misleading, in order to be protected by the PSLRA safe harbor for forward-looking statements. Due to settlement proceedings in the district court, the parties have requested that the Court defer action on this petition until the December 7, 2018 conference.
  • Petroleo Brasileiro S.A. - Petrobras v. Universities Superannuation Scheme Limited (17-664): This petition concerns the level of proof needed to invoke the Basic presumption of reliance. Post-settlement, the parties have indicated that they will move to dismiss the petition for certiorari. 
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 Securities Regulation Daily. Cases are listed separately, along with a brief summary of the questions raised and the status of the appeal.