June 23, 2018

Split Decision in the U.S. Supreme Court

BNHoffmanBy Brian Neil Hoffman

The U.S. Supreme Court recently issued two much-anticipated decisions on securities law matters: One on the statute of limitations applicable in SEC enforcement matters in Gabelli et al. v. Securities and Exchange Commission, No. 11-1274 (Feb. 27, 2013) and another on class certification standards in private securities class actions in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013). The rulings together present a “you win some, you lose some” outcome for securities law litigants.

In the Gabelli case, the Supreme Court unanimously ruled that the SEC’s five-year time limit to recover civil penalties (contained in 28 U.S.C. § 2462) begins to run when the alleged fraud occurs, not when it is later discovered. The Court rejected the SEC’s attempt to graft a “discovery rule” onto the statutory limitations period. Unlike private plaintiffs, the Court reasoned, part of the SEC’s very mission is to ferret out potential securities law violations. The SEC has a plethora of tools available to aid in the effort — including examination and subpoena powers, the ability to pay whistleblower incentive awards, and cooperation agreements. As such, the Court found that the agency should not benefit from a presumption allowing further delays.

The ruling is bound to set the SEC scrambling to assess its current case load and prioritizations. Indeed, we may see a push to bring, or close, more dated cases, and a new urgency in cases approaching the five year mark. Importantly, the decision leaves untouched the SEC’s authority to seek a civil injunction, cease-and-desist order, and disgorgement at any point – even more than five years after the misconduct. Yet the staff may be reluctant to seek these remedies unaccompanied by claims for a civil penalty. Moreover, the Court did not address whether the SEC could rely on equitable tolling (that is, when a defendant takes steps – independent from the fraud itself – to conceal his or her actions) to seek penalties after the five year period. Nor did the Court address whether the ruling applies to other punishments that the SEC could seek: officer-and-director or securities industry collateral bars. Despite these uncertainties, registered entities, public companies, auditors, and other market participants can breathe a small, brief sigh of relief that there is now at least some certainty about how long a potential SEC enforcement action may be afoot.

The Amgen decision, however, is less defendant-friendly. In this 6-3 ruling, the majority held that private securities class action plaintiffs do not need to prove that the alleged misrepresentations or omissions were material at the class certification stage. Class action plaintiffs seeking class certification frequently rely on the “fraud-on-the-market” presumption to overcome a need to prove reliance by each individual class member. The presumption allows a court to presume that the price of a security in an efficient market reflects all publicly-available material information, which a buyer presumptively relied upon when purchasing the security. Although the efficiency of the market for Amgen’s securities was not in question, Amgen challenged the materiality of the challenged misrepresentations or omissions and, thus, the appropriateness of using the fraud-on-the-market presumption to overcome individual reliance issues. The Supreme Court majority rejected this argument. Rather, it held that materiality is evaluated on an objective standard, and thus raised a question common to all class members.

The Amgen decision is a disappointment to entities and individuals named as defendants in securities class actions. Rulings on class certification are important mileposts in a private securities lawsuit, often significantly affecting damages and sometimes dictating whether a case even proceeds at all. Yet decreasing plaintiffs’ burden at this stage, as the Amgen decision does, only increases the pressure on defendants to try and resolve or narrow claims at other stages of the case. The Amgen case is not a total loss for defendants, though. Justice Alito’s short concurrence noted that “more recent evidence suggests that the [entire fraud-on-the-market] presumption may rest on a faulty economic premise.” Time will tell the uses to which lower courts and the defense bar put this missive.

For litigants, the effects of the Supreme Court’s decisions in Gabelli and Amgen are both immediate and concrete. Both decisions, albeit in different contexts, ultimately address whether and how a securities case will proceed. And both decisions significantly affect the remedies that may be awarded in those cases. Yet perhaps most importantly, both decisions — whether viewed favorably or unfavorably — provide some degree of certainty in a previously uncertain area.

Brian Neil Hoffman is Of Counsel in Morrison & Foerster’s Securities Litigation, Enforcement, and White-Collar Defense Group. He recently served as a Senior Attorney in the SEC’s Division of Enforcement. He now represents entities and individuals in government and self-regulatory organization investigations and proceedings; conducts corporate internal investigations; and defends shareholder class action and derivative lawsuits. He can be contacted at bhoffman@mofo.com and (303) 592-2227.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

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