October 16, 2013
The Supreme Court And Securities Litigation
Posted by David Zaring

This will be an outsource - first, to Steve Davidoff's column on the Company That Would End Fraud On The Market (it is Haliburton, with advice from Wachtell Lipton):

The company has petitioned the Supreme Court to overturn the decision in the Basic case, arguing that its standard should never have been adopted. A group of former commissioners at the Securities and Exchange Commission and law professors represented by the New York law firm Wachtell, Lipton, Rosen & Katz have also taken up the cause. In an amicus brief, the group argues that, in practice, the Basic case has effectively ended the reliance requirement intended by the statute, something that is not justified.

They rely on a forthcoming law review article by an influential professor, Joseph A. Grundfest of Stanford Law School. Professor Grundfest argues that the statute on which most securities fraud is based — Section 10(b) of the Exchange Act — was intended by Congress to mean actual reliance because the statute is similar to another one in the Exchange Act that does specifically state such reliance is required.

Professor Grundfest’s argument is a novel one and is likely to be disputed by the pro-securities litigation forces, but the question probably comes down to whether there are five justices who want to put a stake through the heart of securities fraud cases.

And then, to Jim Hamilton and Allen Ferrell, via Scotusblog, for a recap of the oral argument in Chadbourne and Park v. Troice.  Here's Allen:

The specter of Bernie Madoff hovered over oral arguments Monday.  This was appropriate to the occasion, as the Court was preoccupied with metaphysics:  What does it mean for a misrepresentation to be “in connection with” a purchase or sale?  The question that came up repeatedly was essentially, whether the lawyers arguing on both sides “agree that Madoff committed Rule 10b-5 securities fraud when he represented that he was purchasing securities on behalf of investors when in fact he purchased nothing.”  According to at least one reading of the plaintiffs’ allegations, Stanford Investment Bank arguably acted like Madoff.  The bank falsely represented to investors that they were buying an instrument (certificates of deposit) that were in some sense backed by securities — securities that did not exist (like Madoff’s securities purchases that never happened).  The answer to this question is critical because if the answer is yes – Madoff did commit Rule 10b-5 securities fraud – and, yes – the alleged facts here are analogous to the Madoff situation – then it follows that the Securities Litigation Uniform Standards Act (SLUSA) precludes the state actions.

And here's Jim:

Mr. Clement said that the whole point of this fraud was to take a non-covered security and to imbue it with some of the positive qualities of a covered security, the most important of which being liquidity. And if you look at sort of the underlying brochures here that were used to market this, he continued, that is really what this fraud was all about. These CDs were offered as being better than normal CDs because we can get you your money whenever you need it.


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