The Supreme Court is poised to tackle a variety of securities matters that range from technical issues involving state court jurisdiction and statutes of limitation, to substantive topics such as whistleblower protections and the status of Securities and Exchange Commission (“SEC”) administrative judges.
Deciphering SLUSA’s “Gibberish”
Even the most brilliant jurist can find securities laws confounding. This was highlighted on November 28, 2017, when the Court heard oral arguments in Cyan and Digital Realty Trust, two securities cases we have been following this term.
As a refresher, Cyan, Inc. v. Beaver County Employees’ Retirement Fund addresses whether class actions that allege only claims under the federal Securities Act of 1933 (“Securities Act”) claims may be maintained in state court, or whether the Securities Litigation Uniform Standards Act (“SLUSA”) completely eliminated state court jurisdiction.
Cyan, Inc., Beaver County Employees’ Retirement Fund, and the government each submitted briefs offering three distinct understandings of the statute. During oral argument, the Justices expressed their frustration with the statutory language, referring to it as “obtuse” and “gibberish.” Justice Alito lamented, “Is there a certain point at which we say this means nothing, we can’t figure out what it means, and therefore it has no effect, it means nothing?” While an opinion from the Supreme Court finding that the disputed provision of SLUSA “means nothing” seems unlikely, the exasperation expressed by the Justices portends that they may have a difficult time agreeing on a uniform reading of the law. A decision that eliminates state court jurisdiction, however, would limit the number of forums available to plaintiffs to bring Securities Act claims based on misrepresentations in offering documents.
Defining “Whistleblower”
Although not as perplexing, during oral argument in Digital Realty Trust, Inc. v. Somers, the Court grappled with the inconsistency between the Dodd-Frank Wall Street Reform and Consumer Protection Act’s intent to broadly protect employees who report wrongdoing and the narrow definition of a whistleblower in the law. Digital Realty considers whether the anti-retaliation provision in Dodd-Frank protects whistleblowers making reports to the SEC, or whether it also protects whistleblowers who report internally within their companies.
Digital Realty asserts that Dodd-Frank authorizes whistleblower protection only to people who report misconduct to the SEC. Despite the narrow definition in the law, the SEC has taken the position that the anti-retaliation provision of Dodd-Frank protects both whistleblowers who report internally and externally to the SEC. Lower courts are split on the issue.
Justice Kagan appreciated the contradiction between the law’s intent and the narrow definition contained within it, “It’s odd. It’s peculiar. It’s probably not what Congress meant. But what makes it the kind of thing where we can just say we’re going to ignore it?” Struggling, the Court appeared to be leaning toward a narrow definition of whistleblower. If the Court finds that internal corporate whistleblowers are not entitled to anti-retaliation protection, employees who report wrongdoing internally may have one less protection, unless they also file a tip with the SEC.
Timing is Everything
In December 2017, the Court agreed to hear China Agritech v. Resh, which considers whether the Supreme Court’s 1974 American Pipe v. Utah decision tolls the statute of limitations to permit an absent class member to bring a subsequent class action outside of the statute of limitations period. American Pipe holds that the filing of a class action complaint tolls the running of the statute of limitation for other class members who might want to file their own individual action or intervene in the class action.
It is curious that the Court has decided to take up yet another securities class action involving time limits for filing suit so soon after deciding CalPERS. Last year, the Court held in CalPERS v. ANZ Securities that filing a securities class action tolls the statute of limitations, but it does not toll the statute of repose. The difference between the statute of limitations and statute of repose is subtle – the limitations period is triggered by a plaintiff’s injury or discovery of an injury, while the repose period is triggered by a defendant’s last culpable act or omission. The statute of repose is the outer limit of the period within which a plaintiff may sue.
In China Agritech, shareholders sued a company in two successive putative class actions in 2011 and 2012, alleging various securities law violations against the company and several individual defendants. Class certification was denied in both cases.
Shareholder Michael Resh brought a third putative class action against the company and individual defendants in 2014, alleging securities law violations arising from the same facts and circumstances as the first two cases. China Agritech moved to dismiss the complaint on the basis that the action had been filed after the two-year limitations period applicable under the Securities Exchange Act of 1934. Resh and the additional plaintiffs argued that under the American Pipe line of cases, the limitations period had been tolled on their claims during the pendency of the two prior class actions. The district court rejected this contention, finding that the limitations period was tolled as to individual class members under American Pipe, but that the Supreme Court had not decided whether an entirely new class action for a substantially identical class was subject to the same rule. The district court ruled that the limitations period was therefore tolled for the individual claims of the named plaintiffs, but not for those of the putative class.
The Ninth Circuit reversed, with a three-judge panel finding that the plaintiffs’ class action would not be time-barred where: (1) the named plaintiffs had been unnamed in the two prior suits, which were against many of the same defendants and involved the same underlying events; (2) the two prior cases were timely; (3) class certification was denied in the earlier actions; and (4) pursuant to American Pipe and its progeny, the named plaintiffs’ individual claims were tolled during the pendency of the two prior class actions. The panel explained that permitting such claims to go forward was consistent with the policy goals of tolling in general. The Sixth and Seventh Circuits have similarly held that American Pipe tolls the statute of limitations for absent class members not only to pursue their own individual claims, but also to pursue class action claims as well.
Depending on the scope of the Supreme Court’s ruling, this decision could impact both investors in securities class actions and plaintiffs in class actions generally. If the Court continues to limit the applicability of American Pipe tolling, absent class members will have to be active and attentive to ensure that the time limit does not expire on their class claims.
SEC Administrative Judges – Inferior Officers or Employees?
Lucia v. SEC, which will be heard by the Supreme Court this term, considers whether SEC administrative judges should be considered inferior officers who need to be appointed or merely hired employees. The matter arises from an SEC enforcement action brought in 2012 against Raymond Lucia, a nationally syndicated radio personality and financial advice author, for spreading misleading information about his “Buckets of Money” strategy at a series of investment seminars. The SEC alleged that Mr. Lucia and his company misled investors when he touted his wealth management strategy as empirically tested and evaluated when in fact it had not been. An SEC administrative law judge sided with the SEC, finding Lucia liable for fraud, banning him for life from investment-related work, and fining him $300,000. Mr. Lucia appealed to federal court claiming that the administrative law judge was improperly hired. Mr. Lucia argued that administrative judges are not employees, but are truly operating as inferior officers because they have significant decision-making powers. The D.C. Circuit disagreed, holding that SEC administrative judges were not inferior officers and their hiring was not in violation of the Constitution.
Meanwhile, in Bandimere v. SEC, the Tenth Circuit reached the opposition conclusion. The court invalidated a SEC’s administrative judge’s order, determining that the administrative judge held his position in violation of the Appointments Clause. Since May 2017, the SEC has suspended all pending administrative matters that could be appealed to the Tenth Circuit (Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming) until the issue is resolved.
The Justice Department has long held that SEC administrative judges are merely employees, because their decisions are not final and are subject to review. But on November 29, 2017, the U.S. Solicitor General filed a brief with the Supreme Court switching positions, arguing that the SEC’s administrative judges are officers subject to the Appointments Clause. The SEC swiftly issued an order ratifying the appointment of administrative judges on November 30, 2017.
In light of the conflicting opinions in the D.C. and Tenth Circuits, it is not surprising that the Supreme Court recently agreed to hear the matter. If the Supreme Court finds that the SEC administrative judges are inferior officers subject to the Appointments Clause, other government agencies that use the same procedure for hiring administrative judges could also be impacted and their authority and determinations could be called into question. Oral argument in the matter has not yet been scheduled.
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The securities cases on the Supreme Court’s docket show a Court motivated to resolve splits of authority and provide guidance on complex issues that have caused confusion in lower courts.