Tuesday, October 05, 2021

Back from recess, High Court drops BofI cert petition on loss causation

By Rodney F. Tonkovic, J.D.

The Justices are back in the courtroom for the first time in close to two years, and the Supreme Court has commenced its 2022 Term with a lengthy list of orders from the long conference. As with nearly every term, breathless headlines look forward to blockbuster high-profile cases in other areas of the law. This is not so in the securities arena, however, and the term is off to a quiet start. In its first order list of the term, the Court has denied certiorari for a petition concerning the Basic presumption, and only one other securities-related case remains pending.

Suggestion to overrule Basic rejected. The Court denied certiorari for a petition asking it to address the Ninth Circuit's acceptance of "truth" entering the market through unsubstantiated allegations. In this case, the Ninth Circuit held that a whistleblower complaint served as a corrective disclosure where the market perceived the allegations as credible. The petitioner in BofI Holding, Inc. v. Houston Municipal Employees Pension System argued that the court should have demanded additional confirmation before allowing this claim to proceed, especially where, as in this case, the whistleblower's allegations did not pan out.

The petition took further issue with the Ninth Circuit's use of the market reaction to infer that the truth became known, which, the petitioner maintained, misapplies Dura and conflicts with Basic. Since the loss causation theory in this case rested on the efficient capital markets hypothesis endorsed in Basic, the petition asked the Court to consider whether it should overrule Basic to the extent it recognizes that hypothesis, because it sows confusion in the lower courts with respect to the proper analysis of loss causation.

The petition also noted the shift toward "informationless" passive investing seen in indexes and ETFs as well as the recent GameStop trading, which had little or nothing to do with the company's expected economic performance. As well as being anachronistic, the petition argued, the Basic presumption allows "event-driven" litigation and other abusive trends. In its brief in opposition, the respondent avers that this argument was considered and rejected in Halliburton II, so there is no need to reconsider this recently-reaffirmed precedent. In its reply brief, the petitioner briefly argued that stare decisis would not limit the Court's discretion to grant review for the purpose of assessing Basic's continuing validity.

"Gotcha game." The petition for certiorari in Alpine Securities Corporation v. SEC argues that the SEC unlawfully exercises Bank Secrecy Act enforcement powers that do not belong to it. In this case, Alpine had been charged with failing to file, or filing deficient, Suspicious Activity Reports. The district court imposed a permanent injunction and $12 million civil penalty, finding that the Commission met its burden of showing over 2,700 separate violations. The SEC had sought a Tier 1 penalty of $22.7 million but, taking Alpine's financial condition into account, the district court essentially cut the SEC's request in half.

On appeal before the Second Circuit, Alpine argued that the SEC had no authority to enforce the SAR provisions of the BSA via Exchange Act Rule 17a-8. According to Alpine, Congress expressly delegated the power to administer and enforce the BSA to the Department of the Treasury as delegated to FinCEN. While this case was nominally brought under Rule 17a-8, the claims were predicated solely on violations of the BSA, Alpine, said. The panel upheld the district court judgment, stating, among other findings, that while Rule 17a-8 requires adherence to the dictates of the BSA in order to comply with the recordkeeping and reporting requirements under the Exchange Act, it does not constitute SEC enforcement of the BSA.

The petition's central point is that the SEC has engineered a power grab from Treasury and FinCEN that has created a tilted playing field. The SEC has turned SAR enforcement into an unforgiving "gotcha game," Alpine says, by taking a much more rigid view than FinCEN about what is an actionable violation and then bringing actions under the Exchange Act's harsher penalty regime. A special area of concern is the interaction between FinCEN and the SEC because the former is an executive agency and is more directly accountable to the president than is the SEC (whose members can be removed for-cause). The petition also cites a string of Supreme Court precedents discussing the scenario in which one agency enforces laws governing another agency.

Both FinCEN and the Cato Institute have filed amicus briefs in support of Alpine's position. The brief by two former FinCEN officials argued that the Second Circuit's misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA. FinCEN enforces Congress's carefully crafted anti-money laundering framework, and the Second Circuit failed to appreciate FinCEN's expertise and central role in the BSA statutory regime, the officials assert. Cato's brief posits that the SEC is "flexing its ever-expanding prosecutorial muscle to enforce what are, in substance, the rules of another agency." When the SEC adopted Rule 17a-8, it also incorporated by reference future FinCEN rules in the BSA area, leading to a "circular redelegation" that raises obvious accountability problems, Cato says.

A brief from the SEC is due on October 20, 2021.

Pivotal to settle. Finally, the sole granted petition has been removed from the argument calendar after the parties agreed to settle the case. The petitioners in Pivotal Software, Inc. v. Superior Court of California, City and County of San Francisco asked the Court to address whether the PSLRA stays discovery in Securities Act cases brought in state court, or only those brought in federal court. The petition argued that the plain language of the provision applies to any private action, no matter if brought in state or federal court, but the state trial courts are split on the issue. The issue, however, has consistently evaded appellate review since it arises during a stage not reviewable after final judgment.

The court granted certiorari in its final order list of the October 2020 term on July 2, 2021. In late August, the parties had reached a settlement in principle and requested the court to remove the case from the oral argument calendar and hold further proceedings in abeyance while the parties seek approval of the settlement by the Superior Court of California, where the underlying litigation is pending. The petition was accordingly removed from the November 2021 argument calendar.

Oral arguments in the Courtroom. In other news, the Court building remains closed to the public. Oral arguments scheduled through December will be heard in the Courtroom, but access will be limited and a live audio feed will be provided. For now, Justice Kavanaugh, who tested positive for COVID-19 in late September, will be participating in oral arguments remotely; all of the other Justices, who are tested regularly, tested negative. Earlier orders concerning filings and filing deadlines issued in light of public health concerns related to COVID-19 have been rescinded.

Read the Docket. These cases, and others before the Court may be referenced in the latest version of the Supreme Court Docket, a regular feature 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.