Supreme Court Hears Oral Argument in Halliburton II

On March 5, 2014, the Supreme Court heard oral argument in Halliburton v. Erica P. John Fund, No. 13-317 (Halliburton II). As we discussed in our Year-in-Review, the latest issue to be considered in this series of cases is whether or not the "fraud-on-the-market" presumption of reliance in federal securities fraud class actions continues to be valid. Based on the reaction of observers present for oral argument, the tentative consensus prediction is that the Court will not discard the fraud-on-the-market presumption in its entirety, but instead will allow defendants to take some action—often called the "middle ground" approach —to rebut the presumption at the class certification stage. Currently, the Second Circuit is the only jurisdiction that has a significant body of caselaw addressing this "middle ground" approach. See, e.g., George v. China Automotive Systems, Inc., 2013 U.S. Dist. LEXIS 93698 (S.D.N.Y. July 3, 2013). What seemed to be of interest to the Supreme Court is the fact that most securities class actions are certified without a true challenge to the applicability of the fraud-on-the-market presumption to a given case, and many have observed that the justices seemed interested in providing defendants with the opportunity to rebut the presumption by introducing evidence of a lack of "price impact." 

Supreme Court Grants Certiorari in Omnicare Decision

The Supreme Court recently granted certiorari in Indiana State District Council of Laborers v. Omnicare, which held that the strict liability provisions of Section 11 of the 1933 Act apply to statements that traditionally constituted "soft" information, such as statements of opinion. The outcome should impact companies, corporate officers, directors, underwriters and auditors involved in such filings. At issue is whether or not a plaintiff may survive a motion to dismiss by alleging that a statement of opinion contained in a registration statement was "objectively false" — that is, merely inaccurate — or whether the plaintiff must go further and allege facts showing that the opinion was "subjectively false" — meaning that the defendant did not believe the statement at the time it was made.

Joe Crace and Brant Phillips co-authored a piece for InsideCounsel discussing the Omnicare case in detail, which was published on March 24, 2014. The full article is available here.

Supreme Court Issues Decision in Chadbourne & Parke, LLC v. Troice

On February 26, 2014, the Supreme Court issued its decision in Chadbourne & Parke, LLC v. Troice. The Court held that state law fraud claims against various law firms and brokerage firms were not precluded by SLUSA and, thus, could proceed even though the claims in question were based on the theory that investors had been fraudulently induced to purchase Certificates of Deposit (CDs) based on representations that the proceeds from the sale of the CDs would be invested in SLUSA-covered securities. The Court found that SLUSA did not apply because "there is not the necessary 'connection' between the materiality of the misstatement and the statutorily required 'purchase or sale of a covered security.'" The Court focused on the fact that the transaction in question—the sale of CDs—was not a transaction in covered securities and rejected what it viewed as efforts to stretch SLUSA's preclusive effect beyond Congress' clear intent in enacting the statute.

A copy of the decision can be found here.

How the Supreme Court's Decision in Gabelli Might Influence the SEC's Enforcement Policies

Brant Phillips and Britt Latham co-authored an article titled, "Supreme Court Gabelli Decision Will Continue to Bring Changes to SEC Enforcement Policy," that was published by Inside Counsel on February 26, 2014. The article outlines how the decision issued in February 2013 by the U.S. Supreme Court in Gabelli v. Securities & Exchange Commission may indicate potential changes to the SEC's enforcement policies.