ABSTRACT:The purpose of this case-law study is to introduce the reader to some of the most significant recent developments in US Supreme Court litigation related to securities law in the context of the recent credit crisis. Using critical legal analysis, with the help of scholarly writings, the following US Supreme Court cases will be examined one-by-one in turn:
• Morrison et al. v. National Australia Bank Ltd et al. (Morrison);
• Merck & Co., Inc., et. al. v. Reynolds et. al. (Merck);
• SEC v. Edwards.
A deep and thorough analysis of the cases allows one to draw a general conclusion as to the ideas usually present in the securities’ law cases brought before the US Supreme Court. The ever present and evident concept uniting the three cases is that of information asymmetry as identified and analysed by George Akerlof. The article concludes with a general discussion of information asymmetry being an ever-present issue in securities litigation in front of the US Supreme Court.
* This article is largely based on a paper written to fulfill the coursework requirement of the author's International Corporate Governance: Managing Global Risks, Ethics and Cultures module, University of Westminster, from where he graduated in the LLM Corporate Finance Law (with Distinction) in November 2011.
** LLM, Vilnius University, Lithuania; LLM University of Westminster, UK. Associate, bnt attorneys-at-law, Vilnius, Lithuania; Visiting fellow in Theory of Law, Kazimieras Simonavicius University, Vilnius, Lithuania; email:, [email protected], [email protected].
The author would like to thank Prof. Joseph Tanega and Rezarte Vukatana for their constructive and supportive comments, special thanks to Prof. Gerard H. Kelly, Candemir Baltali and Pravin Jeyaraj for their helpful insights and assistance.
1 Chief advisor to China Banking Regulatory Commission, Board Member of the Qatar Financial Centre Regulatory Authority, adjunct Professor at the Graduate School of Economics and Management, Tsinghua University, Beijing and the University of Malaya, Kuala Lumpur.
This particular quote has been taken from an interview with Andrew Sheng in Charles Ferguson's 2010 award-winning documentary on the financial crisis 'The Inside Job'.
2 Alexis de Tocqueville, Democracy in America (George Lawrence tr, J.P. Mayer ed, Garden City, N.Y.: Doubleday 1969), p. 149.
3 Richard J. Lazarus, Jeffrey L. Fisher, 'Specializing in the Supreme Court' (The New York Times, 10 October 2010)
4 Adam Liptak, 'Specialists' Help fat Court Can Come With a Catch' The New York Times (New York, 9 October 2010)
5 Morrison et al. v. National Australia Bank Ltd., 561 U. S. (2010).
6 Luke Green, 'Morrison Overturned? What Dodd Act Means For Securities Class Actions' (RiskMetrics Group, 26 July 2010)
7 Merck & Co., Inc., et. al. v. Reynolds et. al., 559 U. S. (2010).
8 SEC v. Edwards, 540 U.S. (2004)
9 Luke Green, 'Morrison v. National Australia Bank - The Dawn of a New Age?' (RiskMetrics Group, 25 July 2010)
10 Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh, 'Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High' (NERA Economic Consulting, July 2010), p. 4.
11 Securities Exchange Act of 1934, 15 U.S.C. § 78a., as amended,
12 SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, as amended,
The rule prohibits any act or omission that results in fraud in connection with any kind of securities trading.
13 Federal Rules of Civil Procedure (FRCP) - govern civil procedure in the US.
15 For a matter of additional clarity, a word on US court system is necessary. District courts are courts of first instance, Circuit courts - appellate courts and Supreme Court is the highest court.
16 Morrison et al. v. National Australia Bank Ltd., No. 08-1991, 2010 WL 2518523 (U.S. June 24, 2010), p.1
See also
'United States Supreme Court to Hear Case Concerning the Extraterritorial Application of U.S. Securities Laws-Morrison v. National Australia Bank' (Davis Polk Client Memorandum, 2 December 2009)
17 EEOC v. Arabian American Oil Co., 499 U.S. (1991).
18 Smith v. United States, 507 U.S. (1993).
19 EEOC v. Arabian American Oil Co., 499 U.S. (1991).
20 'U.S. Supreme Court Significantly Limits Jurisdictional Reach of Antifraud Provisions of U.S. Securities Laws' (Bingham, 28 June 2010)
21 Kevin M. LaCroix, 'Supreme Court Limits Foreign Investors' Access to U.S. Courts' (D&O Diary, 24 June 2010)
22 Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh, 'Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High' (NERA Economic Consulting, July 2010)
23 Kevin M. LaCroix 'More Thoughts About Morrison v. National Australia Bank' (D&O Diary, 28 June 2010)
See also
Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh, 'Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High' (NERA Economic Consulting, July 2010)
24 Blue Chip Stamps v. Manor Drug Stores 421 U.S. (1975)
25 Securities Exchange Act of 1934, Section 10(b), 15 U.S.C. § 78a., as amended,
26 'Supreme Court Protects Foreign Issuers from Securities Class Actions' (Securities Litigation Alert; Akin Gump Strauss Hauer & Feld LLP, 28 June 2010)
27 'What to Watch Now in the World of D&O' (Oakbridge InSights Vol. V Issue Three October/November 2010),
28 Amicus brief is an opinion submitted to the court by a volunteer, not a party to a case, to offer information to assist a court in deciding a matter before it. The decision on whether to admit the brief lies at the discretion of the court.
29 Brief for the United States as Amicus Curiae Supporting Respondents in Morrison et al. v. National Australia Bank Ltd. No. 08-1991, February 2010,
30 'Supreme Court Protects Foreign Issuers from Securities Class Actions' (Securities Litigation Alert; Akin Gump Strauss Hauer & Feld LLP, 28 June 2010)
31 In re Vivendi Universal, S.A. Sec. Litigation, 02 Civ. 5571 (RJH/HBP)(S.D.N.Y.)
See also
'Vivendi Universal, S.A; Plaintiffs Win Jury Verdict in Securities Fraud Class Action Against Vivendi' (Abbey Spanier Rodd & Abrams, LLP, January 2010)
See also
'Vivendi Universal Securities Class Action'
32 Parks v. Fairfax Financial Holdings, Ltd., et al., 06 Civ. 2820 (S.D.N.Y.)
See also
'Fairfax Financial Holdings Limited: Settled and/or Concluded Case' (Class Action World, April 2010)
33 Copeland v. Fortis, et al., 08 Civ. 09060 (S.D.N.Y.)
See also
Kevin M. LaCroix, 'Global Bailouts, U.S. Lawsuits?' (D&O Diary, 22 October 2008)
34 In re Royal Dutch/Shell Transport Securities Litigation, No. 04-374 (D.N.J.)
See also
'Bernstein Liebhard LLP Announces Final Approval of Royal Dutch Shell Securities Class Action Settlement' (Bernstein Liebhard LLP, 10 October 2008)
35 In re Bayer AG Securities Litigation, No. 03-1546 (S.D.N.Y.)
36 U.S. v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Filed Dec. 15, 2008)
See also
SEC v. Siemens Aktiengesellschaft, No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008)
37 Ambreen Delawalla, 'Supreme Court Narrows Possible Securities Fraud Claims Against Foreign Issuers' (Securities Litigation blog; Alston Bird LLP, 14 July 2010)
38 I.e. a company may wish not to list on a US exchange for the sole reason of being exposed to the US-based litigation and rather decide to list elsewhere, also because of how developed is the private enforcement of securities regulations through litigation in the US.
Please also see
Kevin M. LaCroix, 'Supreme Court Limits Foreign Investors' Access to U.S. Courts' (D&O Diary, 24 June 2010)
See also, by the same author
'More Thoughts About Morrison v. National Australia Bank' (D&O Diary, 28 June 2010)
See also
Luke Green, 'Morrison v. National Australia Bank - The Dawn of a New Age?' (RiskMetrics Group, 25 July 2010)
39 Kevin M. LaCroix, 'More Thoughts About Morrison v. National Australia Bank' (D&O Diary, 28 June 2010)
See also
'Securities Litigation Remains Escalated; An Advisen Quarterly Report - Q3 2010' (Advisen, October 2010)
40 'Update: U.S. Supreme Court Limits Extraterritorial Application of U.S. Securities Laws-Morrison v. National Australia Bank' (Davis Polk; Client Newsflash, 28 June 2010)
41 Luke Green, 'Morrison Overturned? What Dodd Act Means For Securities Class Actions' (RiskMetrics Group, 26 July 2010)
42 Dodd-Frank Wall Street Reform and Consumer Protection Act. H. R. 4173, especially Title IX - Investor Protections and Improvements to the Regulation of Securities, Subtitle B-Increasing Regulatory Enforcement and Remedies. For example, Section 929P(b) authorizes an action brought by the SEC based on a statutorily defined conduct and effects test. Section 929Y directs the Commission to study whether private rights of action should be allowed on the same basis as authorized for the Commission in 929P(b).
43 'Securities Litigation Remains Escalated; An Advisen Quarterly Report - Q3 2010' (Advisen, October 2010)
44 Luke Green, 'Morrison Overturned? What Dodd Act Means For Securities Class Actions' (RiskMetrics Group, 26 July 2010)
45 U.S. Code Title 28 - Judiciary and Judicial Procedure, 28 U. S. C. §1658(b) provides "a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c (a)(47)), may be brought not later than the earlier of-
2 years after the discovery of the facts constituting the violation; or
5 years after such violation."
46 The naproxen hypothesis implied that the results of the study were caused by the absence of a benefit conferred by naproxen rather than a harm caused by Vioxx. Merck & Co. v. Reynolds, No. 08-905, p. 7
47 FDA - Food and Drug Administration, an authority of the USA Department of Health and Human Services, responsible for protecting and promoting public health by regulation and supervision of food safety, tabacco, drugs, etc.
48 FDA warning letter - a correspondence open to the public, that notifies the industry of violations that FDA has discovered during inspection.
49 Scienter - legal term that referring to intent or knowledge of wrongdoing.
50 In the United States, in order to prevail in a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must prove that the defendant acted with scienter. The meaning of scienter under this law has been highly controversial since the enactment of the Private Securities Litigation Reform Act of 1995. In 2007, the United States Supreme Court issued a decision in which it clarified what was to be understood as a "strong inference". In Tellabs, Inc. v. Makor Issues & Rights, LTD (21 June 2007), by an 8-1 ruling, the Court defined the standard that the plaintiff should meet in order to proceed with a securities fraud litigation: a complaint must show "cogent and compelling evidence" of scienter.
Thomas O. Gorman, 'Tellabs, Inc. v. Makor Issues & Rights, LTD; Pleading a Strong Inference of a Scienter' (2007) Securities Litigation & Enforcement Institute
'Split Widens on Scienter Pleading Standard Under the PSLRA' (Cadwalader, Wickersham & Taft LLP, September 1999)
51 Merck & Co. v. Reynolds, No. 08-905, p. 23
52 'Securities Litigation Update - Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)' (Milbank, Tweed, Hadley & McCloy LLP; Litigation Client Alert, 3 May 2010)
53 I.e. Franze v. Equitable Assurance, 296 F.3d 1250 (11th Cir. 2002); Theoharous v. Fong, 256 F.3d 1219 (11th Cir 2001); Fujisawa Pharmaceutical Co. v. Kapoor, 115 F.3d 1332 (7th Cir. 1997); Great Rivers Cooperative of Southeastern Iowa v. Farmland Industries, Inc., 120 F.3d 893 (8th Cir. 1997); Dodds v. Cigna Securities, Inc., 12 F.3d 346 (2d Cir. 1993), all cited in Merck.
54 Merck & Co. v. Reynolds, No. 08-905,
55 'Securities Litigation Update - Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)' (Milbank, Tweed, Hadley & McCloy LLP; Litigation Client Alert, 3 May 2010)
See also
Sheppard Mullin, 'United States Supreme Court Clarifies Statute Of Limitations For Private Securities Actions' (Corporate And Securities Law Blog, 7 May 2010)
56 'Securities Litigation Update - Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)' (Milbank, Tweed, Hadley & McCloy LLP; Litigation Client Alert, 3 May 2010)
57 'Merck & Co. v. Reynolds: Supreme Court Clarifies Statute of Limitations in Securities Fraud Cases' (Stradley Ronon Securities Litigation Alert, May 2010)
58 'Court Adopts Relaxed Time Limits On Securities Fraud Lawsuits (Merck & Co. v. Reynolds, No. 08-905)' (Washington Legal Foundation Litigation Update, 27 April 2010)
59 'What to Watch Now in the World of D&O' (Oakbridge InSights Vol. V Issue Three October/November 2010)
60 SEC v. Howey Co., 328 U.S. (1946)
61 SEC v. Edwards, 540 U.S. 389.
See also
'The Oyez Project, SEC v. Edwards , 540 U.S. 389 (2004)'
62 SEC v. Edwards, 540 U.S. 389.
See also
'The Oyez Project, SEC v. Edwards, 540 U.S. 389 (2004)'
63 The example to be mentioned is Smith v. Gross, 604 F.2d 639 (9th Cir. 1979), in which an investment in a worm farm was deemed to be an investment contract.
See
'SEC v. Edwards: Supreme Court on Investment Contracts' (ProfessorBainbridge.com, 13 January 2004)
64 Louis J. Rogers, 'SEC v. Edwards: Traditional Investment Contract Analysis Applied By Supreme Court
To Payphones Sold And Leased Back With A Fixed Return' (2004 TIC Real Estate Symposium; Regulation D Securities Workshop, 3 March 2004)
65 'SEC v. Edwards: An Opportunity to Knock On the Viability of the Howey Test as the Gatekeeper for the Federal Securities Laws' (2 November 2005) Oklahoma City University Law Review, Forthcoming.
66 Blue sky law - state law in the US regulating the offering and sale of securities to protect the public from fraud.
67 Darlene S. Wood, 'Lease-back Arrangements are Investment Contracts and Therefore Securities Under the Securities Acts: SEC v. Edwards' (Spring 2005) 7 Duquesne Business Law Journal, 135-150, p. 139.
68 George A. Akerlof, 'The Market for "Lemons": Quality Uncertainty and the Market Mechanism', (1970) 84/3 Quarterly Journal of Economics, 488-500. Since the seminal aforementioned lemons paper by Akerlof (1970), the effects of informational asymmetries in financial intermediation and security design have been examined in numerous studies, including Leland and Pyle (1977), Gorton and Pennacchi (1990), and more recently Kirabaeva (2010).
69 Please see, for example, sources mentioned in the footnote above.
70 Should the reader wish to learn more about the information asymmetry theory, it should go without saying, such endeavor should start with familiarizing oneself with the Akerlof's initial paper as cited above.
71 Securities Exchange Act of 1934, 15 U.S.C. § 78, as amended,
72 Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. H. R. 4173.
73 For example:
James Hamilton, 'SEC Seeks Comments in Aid of Dodd-Frank Mandated Study on Extraterritorial Reach of Federal Securities Laws' (WoltersKluwer Law & Business; CCH Financial Reform News Center, 27 October 2010)
Or
Mark A. Berube, 'Fraud international' (The Deal Magazine, 1 October 2010)
74 Securities Act of 1933, 15 U.S.C. § 77a.
75 Securities Exchange Act of 1934, 15 U.S.C. § 78.
76 Investment Company Act of 1940, 15 U.S.C. § 80a-1.
77 Luke Green, 'Morrison Overturned? What Dodd Act Means For Securities Class Actions' (RiskMetrics Group, 26 July 2010)
78 Such a formula of a subtitle was inspired, following Akerlof's ideas, by the 'Are Cherries - Lemons?' article by Rosenman and Wilson (R. E. Rosenman & W. Wilson, 'Quality Differentials and Prices: Are Cherries Lemons?' (1991) 39 Journal of Industrial Economics 649) and more recently the lecture 'Are Lawyers - Lemons?' (J. Spigelman, 'Are Lawyers - Lemons?' Competition Principles and Professional Regulation (The 2002 Lawyer's Lecture, St. James Ethics Centre, Supreme Court of New South Wales, 29 October 2002) at
79 For lawyers - Are Lawyers - Lemons? see
J. Spigelman, 'Are Lawyers - Lemons?' Competition Principles and Professional Regulation (The 2002 Lawyer's Lecture, St. James Ethics Centre, Supreme Court of New South Wales, 29 October 2002) at
For Kodak Case see
Sahin Ardiyok, 'Aftermarket Theories in Competition Law and an Empirical Analysis of Regulation on Motor Vehicles' (ACT ECON, 6 August 2010), pp. 18, 39
80 Strong v. Repide, 213 U.S. 419 (1909).
81 Securities Act of 1933, 15 U.S.C. § 77a; Securities Exchange Act of 1934, 15 U.S.C. § 78.
82 For example, Dirks v. SEC, 463 U.S. 646, 658 n.16 (1983); Chiarella v. United States, 445 U.S. 222, 231-32 (1980) (rejecting notion that federal securities laws were intended to provide equal access to all information), also Lowe v. SEC 472 U.S. 181 (1985),
See
Antony Page & Katy Yang ,'Controlling Corporate Speech: Is Regulation Fair Disclosure Unconstitutional?' (2005) 39 U.C. Davis Law Review, pp. 10, 37.
'Diner for all' or: how to not compare apples and oranges
The Recent Securities Law Litigation in the US Supreme Court