The first Monday in October is right around the corner, which means the U.S. Supreme Court will be back in session. While the Court’s docket includes marquee cases on topics ranging from voter redistricting to racial preferences at the University of Texas, our focus is to hone in on the most important cases that could impact investors who seek to recover for alleged violations of the federal securities laws.
Campbell-Ewald Company v. Gomez, Case No. 14-857, raises issues around defendants attempting to avoid class-wide liability by settling out with only the named representatives. Specifically, in Campbell-Ewald, two of the three issues presented may change the contours of securities class action litigation – namely, (1) whether a case becomes moot, and thus beyond the judicial power of Article III of the United States Constitution, when the plaintiff receives an offer of complete relief on his claim; and (2) whether the answer to the first question is any different when the plaintiff has asserted a class claim under Federal Rule of Civil Procedure 23, but receives an offer of complete relief before any class is certified. An amicus curiae (“friend of the court”) brief submitted by NECA-IBEW Welfare Trust Fund (“NECA-IBEW”), which manages investments for workers, retirees and their dependents, argues that private securities class actions are critical to the enforcement of the federal securities laws. Supporting this premise, NECA-IBEW argues that, by enacting the lead plaintiff provisions of the Private Securities Litigation Reform Act of 1995, Congress’ specific intent would be undermined if security law violation defendants in class actions could “pick off” class members, moot the case, and/or defeat class certification by settling, or offering to settle, with class representatives or named plaintiffs before the case has been certified as a class action. Oral argument in Campbell-Ewald is set for October 14, 2015.
The Court’s decision in Tyson Foods v. Bouaphakeo, Case No. 14-1145, could affect whether a class action can be certified if the plaintiffs seek to use statistical evidence or sampling to prove that common, class-wide issues predominate, while potentially ignoring differences among individual class members relating to liability and damages. Numerous securities class actions have sought to establish that the case is suitable for class action certification based on the use of statistical evidence (invariably presented by expert witnesses) to demonstrate that common issues predominate – such as in proving damages suffered by the class. Statistical sampling to prove class-wide liability and/or damages has been employed in antitrust class actions as well. Consequently, this case could have far reaching implications.
A second issue presented in Tyson Foods is whether the plaintiffs must show that each class member has suffered damages in order to have standing to bring a class action suit. The petition filed by Tyson Foods asserts that the federal appellate courts are split as to whether plaintiffs, in order to have standing to sue, must show that all class members were injured or, alternatively, whether a class may be certified even if it includes members who were not injured. Most federal appellate courts have held that as long as one member of a class has suffered damages – such as the class representative – the requirement of standing is satisfied. In one case, however, the Second Circuit stated that no class may be certified if it contains members that lack standing under Article III of the Constitution. The Supreme Court’s resolution of this issue may affect whether a securities class action can be certified where certain members of the class did not suffer damages. The Court will hear oral argument in Tyson Foods on November 10, 2015.
Finally, in Merrill Lynch, Pierce, Fenner & Smith v. Manning, Case No. 14-1132, the issue presented is whether Section 27 of the Securities Exchange Act of 1934 provides federal jurisdiction over state law claims seeking to establish liability based on violations of the Securities Exchange Act or its regulations, or seeking to enforce duties created by the Act or its regulations. Section 27 of the Act provides that federal courts have exclusive jurisdiction over violation of the Securities Exchange Act and regulations promulgated under the Act, as well as overall suits brought to enforce any liability or duty created by the Securities Exchange Act or regulations enacted under that Act. Merrill Lynch argues that the Supreme Court’s guidance is needed because two federal appellate circuits – the Fifth and Ninth Circuits – have ruled that Section 27 allows only federal courts to hear state law claims that seek to establish liability based on violations of the Securities Exchange Act, whereas two other federal appellate courts – the Second and Third Circuits – have ruled that federal courts lack jurisdiction to consider such state law claims. Merrill Lynch further argues that the purpose of Section 27 is to subject securities transactions to a single, nationwide system of uniform regulation and that the Second and Third Circuit’s rulings would undermine that objective – and encourage “forum shopping” – by allowing 50 different state court systems to enforce and interpret the Securities Exchange Act and accompanying regulations. The respondents, shareholders of Escala Group, Inc., who sued Merrill Lynch and other financial institutions for allegedly engaging in naked short selling of Escala stock, argue that states have regulated the securities markets since their inception and that this dual state-federal regulatory scheme continues to this day. Depending on how the Supreme Court resolves this issue, the forums in which investors seek to vindicate their rights under the Securities Exchange Act may be circumscribed. The Court has not yet scheduled Merrill Lynch for argument.
The Supreme Court may agree to hear additional cases that would be of interest to investors when the Justices meet at conferences throughout the term. Berman Tabacco will provide updates on all key investor cases in forthcoming newsletters. Stay tuned.