October 03, 2010
Supreme Court docket on corporate, securities, financial regulation cases
Posted by Erik Gerding

The first Monday in October is upon us. Looking ahead to the upcoming Supreme Court term, the pickings of corporate, securities, and financial regulation cases at first blush seem slim. We were spoiled last term by an amazingly rich set of cases in these fields, with Citizens United headlining. We are likely at least two terms away from seeing any Dodd-Frank related litigation on the Supreme Court docket.

The corporate/securities/financial cases generally look to be fairly specific to the industries involved. But, when you are dealing with the Supremes, you can never tell; the Court can unexpectedly uncork a broad, sweeping ruling. Moreover, thanks to the unceasing creativity of lawyers, even stray language in an opinion can have unintended ripple effects

Consider what the docket (so far) does offer. First, there are two securities litigation cases. The first, Matrixx Initiatives, will examine whether drug companies have to disclose “adverse event” reports, even when those reports are not statistically significant. A broad statistical significance bar on 10b-5 claims could conceivably have implications far beyond the pharmaceutical industry. Consider the range of disclosures that financial institutions must make on the financial risk in their portfolios. Or the risk of product liability suits for an automaker. Ultimately, any sophisticated risk management and disclosure is going to involve statistics and perhaps modeling too. So the case could have broad implications for the materiality threshold of risk disclosure (and possibly the scienter element of 10b-5 claims, as well). Or maybe the case will be limited solely to the drug industry and this specific type of report.

Similarly, the second securities litigation case, Janus Capital Group, could just implicate the narrow industry of mutual funds. Or the Supreme Court could look to use the case to add a few more broad brush strokes to its Central Bank/Stoneridge case law limiting liability for Section 10/Rule 10b-5. If the Court frames the question in this case the way the question currently appears on the Court website (see the bottom of this post), a retreat from Stoneridge and a broadening of liability looks less likely. (The court calls an investment adviser to a mutual fund a “service provider” and then asks whether the “service provider” could be primarily liable.)

There are a number of consumer financial protection cases that may affect the landscape that Elizabeth Warren & the Consumer Financial Protection face as they set up shop.  (More after the break...)

Notably, in Chase Bank USA v. McCoy, the Court will address whether Regulation Z under the Truth in Lending Act requires that credit card lenders issue a change of terms notice to customers when the interest rate on the account changes (because of a floating rate) Again, if the Court frames the question the same way it appears on its web site (see below), don’t bet on a ruling in this case that requires more credit card disclosure.

Here are synopses of the cases from the Supreme Court web site (check out Scotusblog and scotuswiki for more):

Matrixx Initiatives, Inc. v. Siracusano (09-1156)(Argument not yet scheduled)

Background: Respondents filed suit under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, alleging that petitioners committed securities fraud by failing to disclose "adverse event" reports-i.e., reports by users of a drug that they experienced an adverse event after using the drug. The First, Second, and Third Circuits have held that drug companies have no duty to disclose adverse event reports until the reports provide statistically significant evidence that the adverse events may be caused by, and are not simply randomly associated with, a drug's use. Expressly disagreeing with those decisions, the Ninth Circuit below rejected a statistical significance standard and allowed the case to proceed despite the lack of any allegation that the undisclosed adverse event reports were statistically significant.

The question presented is: Whether a plaintiff can state a claim under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.

Janus Capital Group, Inc. v. First Derivative Traders (09-525)(Argument scheduled for Dec. 7)

Background: There is no aiding-and-abetting liability in private actions brought under Section 10(b) of the Securities Exchange Act of 1934. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). Thus, a service provider who provides assistance to a company that makes a public misstatement cannot be held liable in a private securities-fraud action. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008). In the decision below, however, the Fourth Circuit held that an investment adviser who allegedly "helped draft the misleading prospectuses" of a different company, ''by participating in the writing and dissemination of [those] prospectuses," can be held liable in a private action "even if the statement on its face is not directly attributed to the [adviser]." App., infra, 17a-18a, 24a (emphases added).

The questions presented are:

1. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Fifth, Sixth, and Eighth Circuits-that a service provider can be held primarily liable in a private securities fraud action for "help[ing]" or "participating in" another company's misstatements.

2. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Second, Tenth, and Eleventh Circuits-that a service provider can be held primarily liable in a private securities-fraud action for statements that were not directly and contemporaneously attributed to the service provider.

Chase Bank USA, N.A., v. McCoy (09-329) (Argument scheduled for Dec.8)

Background: The Federal Reserve Board's Regulation Z, which implements the Truth in Lending Act, requires creditors to provide an initial disclosure statement, before any transaction on an open-end credit plan takes place, containing "each periodic rate that may be used to compute the finance charge." 12 C.F.R. § 226.6(a)(2). Regulation Z also requires that when a creditor later changes any term that it was required to disclose in the initial disclosure statement, the creditor must "mail or deliver written notice" of that change in terms before the effective date of the change. 12 C.F.R. § 226.9(c). Credit card issuing banks generally provide the requisite initial disclosures in or with the contract document that governs the credit card account. Such cardholder agreements commonly specify a standard periodic rate of interest and also that, if the cardholder defaults in a certain manner, then the creditor may increase the periodic rate on the account up to an identified default rate.

The question presented is: When a creditor increases the periodic rate on a credit card account in response to a cardholder default, pursuant to a default rate term that was disclosed in the contract governing the account, does Regulation Z, 12 C.F.R. § 226.9(c), require the creditor to provide the cardholder with a change-in-terms notice even though the contractual terms governing the account have not changed?

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