Tuesday, September 22, 2020

Remembering Justice Ginsburg’s impact on securities law

By Mark S. Nelson, J.D.

Justice Ruth Bader Ginsburg already had had an iconic career in the law before she was nominated by President Bill Clinton in 1993 to be only the second woman to serve as a justice on the U.S. Supreme Court. Many years later, a once-obscure Internet post would famously turn Justice Ginsburg into the "Notorious RBG," a moniker derived from the name of a rap musician with a similar name, and from then on she would become known to a much wider audience for her taxing exercise routine, her love of opera, her odd-couple friendship with the late Justice Antonin Scalia, Kate McKinnon's comic portrayal of her on NBC’s late-night show "Saturday Night Live," and her perseverance through multiple serious illnesses, including pancreatic cancer, from which she died of complications on Friday September 18, 2020 at age 87 according to a Supreme Court press release. Those stories will be told many times over by other publications. Today, Securities Regulation Daily takes a look back at several of Justice Ginsburg’s lesser known, but also significant, opinions that impact securities law.

Response to passing of Justice Ginsburg. All five SEC commissioners paused to remark on Justice Ginsburg’s role in the evolution of securities law. "Justice Ginsburg's powerful intellect and determination shaped decisions that had meaningful impacts for all Americans, including our nation's investors. She inspired many, and her trailblazing career will serve as a model of public service and dedication to our country for generations to come," said a public statement.

Supreme Court Chief Justice John Roberts also recalled Justice Ginsburg’s career: "Our Nation has lost a jurist of historic stature. We at the Supreme Court have lost a cherished colleague. Today we mourn, but with confidence that future generations will remember Ruth Bader Ginsburg as we knew her -- a tireless and resolute champion of justice." The Supreme Court also has announced that Justice Ginsburg will lie in repose at the Supreme Court on September 23 and 24 atop the steps under the front portico for outdoor public viewing. House Speaker Nancy Pelosi (D-Cal) has also announced that Justice Ginsburg will lie in state in the U.S. Capitol on September 25.

President Donald Trump called Justice Ginsburg a "titan of the law" and remarked that she was "[r]enowned for her brilliant mind and her powerful dissents." Vice President Michael Pence stated: "As an advocate and an Associate Justice of the Supreme Court, she was a champion for women whose tireless determination reshaped our national life."

It has been widely reported that President Trump intends to nominate a woman to replace Justice Ginsburg as early as Friday or Saturday (September 25 or 26). Media have focused attention on two potential nominees, Amy Coney Barrett, currently a judge on the U.S. Court of Appeals for the Seventh Circuit, and Barbara Lagoa, a judge on the U.S. Court of Appeals for the Eleventh Circuit.

Previously, President Trump has issued lists of potential Supreme Court nominees, including Judge Lagoa, that also include several names familiar to securities practitioners. For example, a recent list adds former Solicitor General Noel Francisco, who oversaw the government’s changed position in a brief that conceded that SEC administrative law judges are officers of the U.S. and not mere employees for Appointments Clause purposes. That same list includes Paul Clement, another former Solicitor General and currently a partner at Kirkland & Ellis LLP, who has argued numerous securities cases before the Court and who recently was appointed amicus curiae to argue in favor of the judgment below in a case regarding the Consumer Financial Protection Bureau’s single-director structure.

With respect to what comes next, both Democrat and Republican leaders have spoken. House Majority Leader Steny Hoyer (D-Md) noted in his statement on Justice Ginsburg that she had expressed the view that she should not be replaced until the winner of the 2020 presidential election has been sworn in. Senate Majority Leader Mitch McConnell (R-Ky) issued a statement in which he sought to distinguish his refusal to give President Barack Obama’s last Supreme Court nominee, Judge Merrick Garland, a Senate floor vote during an election year and his pledge that Justice Ginsburg’s replacement will get such a vote.

Class actions. The first stop on a review of Justice Ginsburg’s Supreme Court opinions focuses on a case in which her brief concurrence may have spoken more loudly than the majority’s opinion and, depending on her replacement, may have consequences for another related opinion in which Justice Ginsburg wrote for a court majority. In the 2014 case of Halliburton II, the Supreme Court re-affirmed the Basic v. Levinson presumption of reliance without modifying or overruling it. Basic concluded that the price of a stock traded in an efficient market will incorporate all public information about the stock and, thus, a class action plaintiff may be presumed to rely on that information by purchasing the stock rather than having to establish their direct reliance by, for example, reading the offering materials.

However, the Halliburton II Court also concluded that, in order to align the Basic presumption with FRCP 23, defendants in securities class actions should be given the opportunity at the class certification stage to rebut the presumption by showing there was a lack of price impact. The Court also grappled with the implicit issue of how much of the merits of a case should be before a court at the class certification stage and concluded that affording defendants an additional procedural device would not bring too much of the merits into play too early.

One year before Halliburton II, the Supreme Court held in Amgen, an opinion written by Justice Ginsburg, that there was no need to prove the merits of a securities class action at the class certification stage. In Halliburton II, an opinion written by Chief Justice Roberts, Justice Ginsburg wrote a one paragraph concurrence in which she explained that she agreed with the Court based on the "understanding" that a defendant must show the absence of price impact and that a plaintiff’s "tenable claims" would be capable of proceeding.

There remain several justices on the Court who believe that judicially created causes of action, such as the private securities class action, should be curtailed or even eliminated. For example, Justices Thomas, Scalia, and Alito in Halliburton II would have overruled Basic.

The majority in Halliburton II strongly emphasized stare decisis as the reason for upholding Basic. In recent Supreme Court terms, there have been several cases that suggest that some justices may view stare decisis as a more malleable concept (see, e.g., Knick v. Township of Scott, Pennsylvania ; Gamble v. U.S.; Franchise Tax Board of California v. Hyatt ; Janus v. American Federation of State County And Municipal Employees Council 31 ), although some cases suggest that stare decisis remains a strong, albeit sometimes messy, concept for the Roberts court (see, e.g., June Medical Services L.L.C. v. Russo and Ramos v. Louisiana ; Trump v. Hawaii (Japanese internment camp case Korematsu "overruled in the court of history")).

As a result, it seems unlikely that Basic would be in serious trouble of being overruled in the near term, but it is at least plausible that a conservative replacement for Justice Ginsburg could help shift the Court’s thinking in favor of expanding upon Halliburton II’s rebuttal procedure afforded to securities class action defendants by chipping away at Amgen and allowing more of the merits of a securities class action to be addressed at the class certification stage. In fact, a pending petition for certiorari from the Second Circuit in a case involving Goldman Sachs could provide such a vehicle.

Insider trading and other criminal cases. In 1997, Justice Ginsburg wrote for the majority in U.S. v. O’Hagan. The Court first held that a person who trades in securities for personal profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, can be guilty of violating Exchange Act Section 10(b) and Rule 10b-5. Second, the Court held that the Commission did not exceed its rulemaking authority by adopting Exchange Act Rule 14e-3(a) to bar trading on undisclosed information in tender offers, even in the absence of a duty to disclose.

It is the first question in O’Hagan that has likely drawn the most commentary. O’Hagan’s conception of a person being liable for insider trading based on her breach of a fiduciary duty owed to the source of the information brought about the era of insider trading premised on misappropriation theory. This advancement of the law of insider trading provided a new theory of liability in addition to the long-standing classical theory of insider trading, which is premised on a person trading in the securities of her own company by breaching a duty of trust and confidence to the company and its shareholders.

Insider trading has taken on increased importance in recent years as the Supreme Court has reaffirmed key principles announced in Dirks (see, e.g., Salman ) and Congress has introduced several bills seeking to statutorily define insider trading. Recent events linked to the ongoing COVID-19 pandemic regarding stock trading by members of Congress and by Kodak executives have kept the problem of insider trading alive.

However, a new twist on insider trading may take headlines going forward. For example, an amendment to the Sarbanes-Oxley Act created a type of insider trading liability under Title 18 of the U.S. Code that does not appear to depend on proof of a personal benefit, as does the judge-made insider trading theory in Title 15-based violations.

Prosecutors have thus far sparingly used this new theory of insider trading but a recent petition for certiorari asks the justices to mull the Second Circuit’s interpretation of the Title 18 version of insider trading. The Second Circuit majority affirmed convictions under Title 18 and, after considering the differing goals of Title 15 and 18, concluded: "Given that Section 1348 was intended to provide prosecutors with a different – and broader – enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions, we decline to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud."

In the 2010 opinion in Skilling v. U.S., Justice Ginsburg wrote for fractured majorities on two questions: (1) Did pre-trial publicity deprive the defendant of a fair trial? and (2) Whether 18 U.S.C. §1346’s prohibition on honest services fraud reached alleged wrongdoing beyond bribery and kickback schemes. Defendant Jeffrey Skilling was a long-time executive at Enron Corporation who had eventually become the company’s CEO, but he abruptly resigned after holding the CEO position for just six months. Enron then fell precipitously into bankruptcy and charges swirled of securities fraud, insider trading, and of executives enriching themselves at the expense of the company and its shareholders.

Justice Ginsburg led five justices in concluding that Skilling had received a fair trial despite pre-trial publicity. According to the Court, Skilling did not establish a presumption of juror prejudice or actual prejudice. With respect to the honest services fraud question, Justice Ginsburg led six justices in concluding that 18 U.S.C. §1346 did not reach conduct beyond bribery and kickback schemes. The Court traced the origins of honest services fraud to court interpretations of the 1872 mail fraud statute which the Supreme Court would later curb as too far reaching in 1987 only to be legislatively reversed by the modern Congressional statute embodied in 18 U.S.C. §1346. Justice Ginsburg then construed (rather than invalidate) the "the intangible right of honest services" language contained in 18 U.S.C. §1346 to mean that phrase’s historical reach to bribery and kickback schemes; that is: "fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived." This more limited view of honest services fraud, the Court concluded, avoided the constitutional vagueness concerns raised by Skilling. As a result, Skilling’s honest services fraud conviction was vacated and remanded.

Lastly, Justice Ginsburg announced the judgment of the Court and issued an opinion for a plurality of the justices in what might be called the Yates "fish case." John Yates was a commercial fisherman in the Gulf of Mexico who was prosecuted for tossing allegedly undersized red grouper overboard after an encounter with wildlife conservation officials. Specifically, Yates was convicted of violating 18 U.S.C. §1519, an evidence spoliation provision added to the federal criminal laws by the Sarbanes-Oxley Act, which itself had as one of its main goals the restoration of public confidence in U.S. companies following the Enron scandal.

Under 18 U.S.C. §1519, a person can be penalized if they knowingly destroy a "tangible object" with the intent of obstructing a federal agency investigation. The question was whether a fish is a "tangible object." Justice Ginsburg answered that a fish, although it can be destroyed, is not the type of "tangible object" contemplated by the statute. Rather, she explained that a "tangible object" is an object that has ties to the purpose of the SOX provision, meaning that it is "used to record or preserve information." This interpretation, Justice Ginsburg further explained, would "match[]" SOX’s focus on "corporate and accounting deception and cover-ups." Justice Alito, emphasizing the "filekeeping" nature of "tangible object" ("How does one make a false entry in a fish?"), provided the necessary fifth vote via his concurrence to reverse and remand Yate’s conviction.

However, one of the enduring mysteries about Yates is why Justice Scalia, who often invoked the rule of lenity in criminal cases (Justice Ginsburg had invoked lenity as one argument in support of her opinion in Yates) joined Justice Kagan’s dissent emphasizing the literal meaning of "tangible object." Justice Kagan took the view that the words surrounding "tangible object" in the statute indicated Congressional intent for the statute to apply widely to all kinds of objects. According to Justice Kagan, the plurality were on a "fishing expedition" of their own; Justice Kagan instead concluded that "[a] fish is, of course, a discrete thing that possesses physical form [citation omitted]. So the ordinary meaning of the term ‘tangible object’ in §1519, as no one here disputes, covers fish (including too-small red grouper)." To make her point, Justice Kagan even cited the Dr. Seuss book "One Fish Two Fish Red Fish Blue Fish." With respect to lenity, Justice Kagan criticized the plurality’s emphasis on the "breadth" of the statute and supposed lack of notice to Yeats as justifying lenity; for Justice Kagan, however, "breadth" and "ambiguity," the traditional touchstone for lenity, are not the same.

Whistleblowers. Although the late Justice Scalia was better known as a textualist, Justice Ginsberg could sometimes focus closely on the letter of the law, a tendency possibly rooted in her role as the Court’s resident civil procedure expert. A prime example was her opinion for the Court in Somers, in which the Court held that the clear meaning of the Dodd-Frank Act’s SEC whistleblower provision required a person to report directly to the SEC in order to invoke the anti-retaliatory protections afforded by the Dodd-Frank Act.

The case arose when a prospective whistleblower sought to invoke the Dodd-Frank Act’s anti-retaliatory provisions, but without first reporting to the SEC; the whistleblower also had not followed the SOX procedures and was ineligible to pursue protections available under SOX. The Sarbanes-Oxley Act and the Dodd-Frank Act contain similar whistleblower provisions, although the Dodd-Frank Act provision potentially allows for larger whistleblower recoveries with similar anti-retaliatory protections but, unlike the SOX provision, has fewer administrative procedure requirements and defines "whistleblower" as a person who reports to the SEC.

Justice Ginsburg reasoned that the Dodd-Frank Act’s goal was to get whistleblowers to report to the SEC, while the SOX provision sought more broadly to break down the code of silence at many companies such that whistleblowers could report to the SEC or other government agencies, to Congress, or internally to company authorities. In adhering to the clear meaning of the statute in Somers, the Court similarly rejected the SEC’s contrary interpretation of the Dodd-Frank Act provision. Justice Ginsburg had opened the analysis section of the Court’s Somers opinion thus: "’When a statute includes an explicit definition, we must follow that definition,’ even if it varies from a term’s ordinary meaning. This principle resolves the question before us" (citation omitted).

In an earlier case, Lawson, Justice Ginsburg wrote for the Court that the SOX whistleblower provision not only protected public company employees but also protected employees of privately held contractors and subcontractors who perform work for the public company.

Scienter. The element of scienter is often key to many securities fraud cases. As a general matter, scienter is the securities law equivalent of intent and often depends on evidence of a defendant’s knowledge of or reckless disregard of the truth. In Tellabs, Justice Ginsburg addressed the scope of the Private Securities Litigation Reform Act of 1995’s requirement that a private securities fraud plaintiff "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" (emphasis added).

The Court in Tellabs sought to resolve a circuit split and, in doing so, rejected the Seventh Circuit’s test, which focused on whether a reasonable person could infer the defendant’s liability-producing state of mind from the complaint. The Court instead re-cast the analysis of a "strong inference" of scienter as a "comparative evaluation" that instead states that the "inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent."

Significantly, Justice Ginsburg’s close friend on the Court, Justice Scalia, wrote a scathing concurrence in the judgement in Tellabs, in which he (predictably) rejected Justice Ginsburg’s analysis of legislative history, such that he would not join the Court’s opinion even if he agreed with the Court’s test of "strong." Justice Scalia opened his concurrence with an alternative test: "I fail to see how an inference that is merely ‘at least as compelling as any opposing inference,’ can conceivably be called what the statute here at issue requires: a ‘strong inference.’ If a jade falcon were stolen from a room to which only A and B had access, could it possibly be said there was a ‘strong inference’ that B was the thief? I think not, and I therefore think that the Court's test must fail. In my view, the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence."

Justice Ginsburg in dissent. Justice Ginsburg had at least some tendency to join other justice’s dissents in securities cases rather than writing her own. One example would be Lucia, in which she partially joined Justice Breyer’s concurring and dissenting opinion and in which she joined Justice Sotomayor dissent from the majority’s conclusion that SEC administrative law judges are officers of the U.S. for purpose of the Appointments Clause. A variant of the issue addressed in Lucia could reach the Court via a petition for certiorari asking if federal district courts have jurisdiction to hear constitutional challenges to the tenure protections of SEC ALJs.

However, Justice Ginsburg recently did write a dissent in the ANZ Securities case showcasing her previously-mentioned background in civil procedure. There, the Supreme Court held in a 5-4 opinion that American Pipe’s equitable tolling rule is unavailable to save an individual suit filed outside the three-year repose period contained in Securities Act Section 13. As the Court would explain in a case a year later, American Pipe held, subject to multiple clarifications by the Court, that the timely filing of a class action tolls the applicable statute of limitations for all persons encompassed by the class complaint.

In ANZ Securities, the majority reasoned that American Pipe’s reliance on federal courts’ equitable powers must yield to the statutory mandate contained in Securities Act Section 13. The case involved a timely filed class complaint from which an institutional plaintiff, who was a member of the class but not a named plaintiff, sought to opt out in the belief that it could obtain a greater recovery by filing its own claim than as a member of the class.

Justice Ginsburg argued in dissent that the filing of the class complaint had provided notice of claims and the identities of claimants within the repose period and that the plaintiff who opted out should have been allowed to pursue its claim. Said Justice Ginsburg of the import of the majority’s opinion: "The harshest consequences will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period. Absent a protective claim filed within that period, those members stand to forfeit their constitutionally shielded right to opt out of the class and thereby control the prosecution of their own claims for damages."

Justice Ginsburg also warned that securities fraud defendants will now "slow walk discovery" and that the increased number of protective filings and related expenses could make securities litigation even more costly. Justice Ginsburg also was concerned that district courts and class counsel should apprise class members about the need to make protective filings in advance of the expiration of the repose period.

A year after ANZ Securities, however, Justice Ginsburg would write for the Court in China Agritech that American Pipe tolling is inapplicable to the filing of a class action beyond the limitations period. In China Agritech, two prior timely class actions had been filed, denied class certification, and then settled. In the first class action the district court found the defendant company’s stock did not trade in an efficient market, so the Basic reliance presumption did not apply. Class counsel in the first suit had notified class members of their rights; "You must act yourself to protect your rights. You may protect your rights by joining in the current Action as a plaintiff or by filing your own action against China Agritech." In the second class action, the district court denied certification on grounds of typicality and adequacy.

In China Agritech, the Court concluded that a plaintiff who delays filing a class action until after expiration of the limitations period cannot "piggyback" on prior, timely-filed class actions. Said Justice Ginsburg for the Court: "The ‘efficiency and economy of litigation’ that support tolling of individual claims [citing American Pipe] do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification."