October 11, 2013

Chadbourne Argued

On Monday, the U.S. Supreme Court heard oral argument in three related cases - Chadbourne & Parke v. Samuel Troice, No. 12-79; Willis of Colorado v. Troice, No. 12-86; and Proskauer Rose v. Troice, No. 12-88 - raising the issue of the scope of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). SLUSA precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities ("covered securities").

Observers who were hoping for a lot of discussion about the meaning and import of SLUSA, however, were sorely dissapointed. Instead, oral argument focused on an issue that the Court has considered before: exactly what fact patterns does "in connection with the purchase or sale" (which is taken from Section 10(b) of the Securities Exchange Act of 1934) cover? The three cases related to the Stanford ponzi scheme, in which high-interest certificates of deposit (not covered securities) were sold to investors who were falsely told that the proceeds would be invested in liquid securities (at least some of which would be covered securities).

The justices appeared to struggle with idea that a false statement concerning whether securities have been purchased can satisfy the "in connection with" requirement. Almost immediately, Chief Justice Roberts asked counsel for the petitioners "if I'm trying to get a home loan and they ask you what assets you have and I list a couple of stocks and, in fact, it's fraudulent, I don't own them, that's a covered transaction, that's a 10(b)(5) violation?" When counsel responded that the scenario would appear to be missing any representation about a purchase or sale, Justice Kagan argued that the problem is "In all of our cases, there's been something to say when somebody can ask the question: How has this affected a potential purchaser or seller in the market for the relevant securities? And here there's nothing to say." For his part, Justice Scalia appeared willing to go even further, noting that the "purpose of the securities laws was to protect the purchasers and sellers of the covered securities. There is no purchaser [] or seller of a covered security involved here." Ultimately, counsel for the petitioners argued that the "in connection with" standard is satisfied "when there is a misrepresentation and a false promise to purchase covered securities for the benefit of the plaintiffs."

The government argued in favor of the petitioners' position, but also ran into stiff questioning, When the government suggested that Justice Kagan's "market effect" test was satisfied because the Stanford scheme would make investors less likely to trust the financial markets, Justice Kennedy responded that this argument was the equivalent of saying "if you went to church and heard a sermon that there are lots of people that are evil, maybe then you wouldn't invest."

Counsel for the respondents argued that the alleged scheme did not involve purchasing covered securities for the benefit of the plaintiffs. The seller of the C.D.'s "was only buying [covered securities] for itself. It did not pledge to sell the assets. It did not give the plaintiffs any interest in them." Moreover, what the Court's precedents "have said over and over and over and what has been the dividing line that has prevented 10(b)(5) from swallowing all fraud is these are misrepresentations that affect the regulated market negatively. This fraud did not do that."

The New York Times and Reuters have coverage of the oral argument.

Posted by Lyle Roberts at October 11, 2013 11:36 PM | TrackBack
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