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An update from New York

While press attention has been focused on the more politically charged issues currently before the U.S. Supreme Court, over the last several weeks the justices have issued three less widely publicized decisions that are of significance to financial institutions, one of which came out in favor of defendants, the other two against.

In Gabelli, decided in February 2013, the Supreme Court held that the Securities and Exchange Commission's (SEC) five-year limitation period to bring civil penalty claims runs from the commission of a fraud, not, as the SEC had argued, from the time the SEC discovers the wrongdoing. Distinguishing the SEC from private plaintiffs, who cannot be expected to live in a "constant state of investigation," and who may, therefore, benefit from the "discovery" rule of the kind the SEC was seeking, the court found that the SEC is a "different kind of plaintiff," with a statutory mission to root out fraud and with extensive investigative authority to do just that.

Another case decided the same day as Gabelli came out against defendants, making it easier for private plaintiffs to obtain certification of investor classes for securities fraud claims. Those claims have long been considered appropriate for class treatment under the so-called "fraud-on-the-market theory," which presumes that publicly disclosed information is reflected in a company's share price, obviating the need for individual investors to prove their reliance on a misrepresentation. In Amgen, the court held that a plaintiff does not need to prove that the misrepresentation was material in order to invoke the presumption and secure class certification. This is a significant decision because the specter of liability to a class of shareholders can give cases a settlement value out of all proportion to their actual merits. It is notable, though, that several dissenting justices suggested that the fraud-on-the-market theory itself is flawed, inviting a challenge in a future case.

Finally, in a relatively little-reported decision in March 2013, the justices declined to hear an appeal from a decision that expanded liability in the RMBS arena. Often, a class representative will have bought only a particular tranche of RMBS notes in a particular offering. The question arises whether that plaintiff can sue on behalf of investors in different offerings made under the same shelf registration statement. A number of lower courts had taken a narrow view, but the Second Circuit Court of Appeals held last year that a plaintiff can represent investors in other tranches of the same offering and even in other offerings, as long as all the claims implicate "the same set of concerns". Based on the Circuit's ruling, that criterion appears to be satisfied when all the offerings are backed by mortgages created by the same originators, but the contours of this remain quite unclear. Suffice to say that several courts have already reinstated claims they had previously dismissed, and the ruling, which now stands as a result of the Supreme Court's refusal to intervene, expands the settlement value of these cases.

So, in summary, these decisions will tend to increase the settlement value of at least some securities class actions, while offering some temporal limitation on regulatory exposure to SEC civil penalty actions. As so often happens in life, what is given with one hand is taken away with the other.

Legal and Regulatory Risk Note
United States