Tuesday, October 08, 2019

Supreme Court returns, will hear Jander ESOP petition

By Rodney F. Tonkovic, J.D.

The Supreme Court started has started its October 2019 term by denying certiorari for two-securities-related cases, one concerning whistleblowers, and the other regarding misrepresentations that don't affect a security's value. The Court will also hear oral arguments in November in a case asking it to revisit an employee stock ownership plan fiduciary's duty of prudence under Fifth Third. Finally several petitions remain pending on a variety of subjects including the SLUSA "in connection with" requirement, the extraterritorial reach of the antifraud provisions, and limits on political contributions.

Certiorari denied. The Court denied certiorari in Wallace v. Andeavor Corporation (19-33), which asked whether the determination under § 1514A(a) as to whether an employee’s belief was objectively reasonable should be made by the trier of fact, or by the court. The Fifth Circuit (and one other) holds that this question should be resolved by a judge, while five other circuits take the contrary position. The petition asserted that the majority rule, that objective reasonableness is ordinarily a matter for the trier of fact, is the correct one and that the present circuit conflict encourages forum-shopping and gamesmanship.

Also denied was Hall v. SEC (18-1471), a case from the Eleventh Circuit asking if a misrepresentation which does not involve or affect the value or underlying substance of the securities transacted, can still be a violation of the anti-fraud provisions. The petitioner maintained that there is ambiguity over the extent to which misrepresentations must affect the value of a security in order to satisfy the "in connection with" requirement and support a violation of the antifraud provisions. The Eleventh Circuit has held that this requirement is broad and that a misrepresentation does not need to be explicitly directed at the investing public or occur during the transaction. The Second Circuit decision, in contrast, has concluded that where a misrepresentation involves a securities transaction but does not pertain to the security itself, there is no cause of action.

Looking ahead. The Court started the 2018 term with eight members, as Justice Kavanaugh was undergoing the confirmation process at the time. With a full complement of justices this tem, the court will hear Retirement Plans Committee of IBM v. Jander (18-1165), and oral argument is set for Wednesday, November 6, 2019. In this case, retirement plan fiduciaries have asked the Court to resolve a circuit split over the pleading requirements to state a claim for breach of the duty of prudence as set forth in Fifth Third Bancorp v. Dudenhoeffer (2014). The petition asks whether Fifth Third’s "more harm than good" pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.

Under a restrictive reading of Fifth Third, a plaintiff must plausibly allege an alternative action that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm than to help the fund. The Second Circuit determined that the plaintiffs met this threshold. According to the court, the respondents sufficiently pleaded that no prudent fiduciary could have concluded that earlier disclosure would do more harm than good. In this case, the court gave great weight to the allegation that disclosure of the alleged fraud was inevitable and that a prudent fiduciary would prefer to limit the effects through prompt disclosure.

The petitioners argue that the Second Circuit’s reliance on "generalized allegations" subverts Fifth Third and creates a circuit split that would make the Second Circuit the forum of choice for duty-of-prudence claims. According to the petition, the Second Circuit's approach directly conflicts with decisions of the Fifth and Sixth Circuits rejecting allegations derived from "general economic principles" that longer frauds mean harsher corrections. Significantly, this case and those from the Fifth and Sixth Circuits were filed by the same counsel and advanced very similar arguments. The Second Circuit's decision, the petition contends, places great weight on generic allegations that are present in any Fifth Third claim and opens the door to meritless litigation.

Pending. The Court will also consider the following securities-related petitions:
  • Northern Trust Corporation v. Banks (19-440): Whether, for purposes of SLUSA, a trust beneficiary alleges misconduct "in connection with" the purchase or sale of a covered security when the beneficiary alleges that the trustee used trust assets to buy and sell the trustee’s own proprietary securities rather than competitors’ securities and did so for the trustee’s own pecuniary gain.
  • New York Republican State Committee v. SEC (19-343): Whether FINRA Rule 2030 violates the First Amendment and whether the SEC has the authority to impose restrictions by regulation on the First Amendment rights of placement agents to make or solicit federal political contributions that are otherwise lawful.
  • Lampkin v. UBS Financial Services, Inc. (19-249): Whether the grant of an employee stock option is a “sale” of a security under the Securities Act of 1933.
  • Isaacson/Weaver Family Trust v. Fresno County Employees' Retirement Association (19-244): Whether the Court’s decisions defining “a reasonable attorney’s fee” in fee-shifting cases also constrain a district court’s discretion in awarding “reasonable attorneys’ fees” under FRCP 23(h) from a common-fund settlement.
  • Seila Law LLC v. CFPB (19-7): Whether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers.
  • Scoville v. SEC (18-1566): Whether Dodd-Frank Act Section 929P(b)’s jurisdictional amendments conferred substantive extraterritorial reach upon Sections 10(b) and 17(a) in SEC enforcement actions and in federal criminal prosecutions.
  • Liu v. SEC (18-1501): Whether the SEC may seek and obtain disgorgement from a court as “equitable relief” for a securities law violation even though the Court has determined that such disgorgement is a penalty. 
Read the Supreme Court Docket. This case, and selected others pending before the Court, can be referenced in the Supreme Court Docket, a feature available to subscribers of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.