Others Weigh In on Sotomayor

Other blogs have weighed in on Supreme Court Nominee Sonia Sotomayor, and her impact thus far on securities law.  Some of them are very interesting.  The National Law Journal has some interesting comments on Sonia Sotomayor and litigation on Rule 10b-5.  Rule 10b-5 is the corner stone of almost all securities litigation.  The rule is a prohibition of fraud and deceit by both act or omission, in connection with any purchase or sale of securities, and has been used in many cases involving insider trading.  For any attorney engaged in securities litigation as a part of their practice, a Supreme Court Justice’s opinion on the rule is important in deciding how to proceed with their case.  From National Law Journal:

Under the business umbrella, for example, “there’s not a corporation out there, as well as the plaintiffs’ bar, that doesn’t know how important and critical is the issue of the private right of action under 10b-5 of the securities law,” said corporate law scholar J. Robert Brown of the University of Denver Sturm College of Law. “But I doubt it will come up.”

Rule 10b-5 is the leading statutory basis for private securities fraud claims, he said. The Supreme Court’s most recent decision in this area — Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. — was a 5-3 victory for third-party business defendants by the Court’s conservative wing. The decision evinced hostility toward 10b-5 actions and a desire to contain them, said Brown. Just last week the Court agreed to decide another key 10b-5 challenge involving when the statute of limitations begins to run. Merck & Co. Inc. v. Reynolds , No. 08-905.

Retiring Justice David Souter dissented in Stoneridge . Although Sotomayor authored a relatively pro-investor ruling in Merrill Lynch v. Dabit (vacated and remanded by the Supreme Court in 2006), her opinions reflect no discernible philosophy in this area, said Brown and others.

Courthouse News Service has also weighed in on Merrill Lynch v. Dabit, a case covered in a previous post on Lots Stocks and Gavel.

In an interview after the conference, Resident Fellow Theodore Frank of the conservative think tank American Enterprise Institute said the descriptions of Sotomayor as a firm believer in judicial modesty “contradict behavior exhibited by a number of Sotomayor’s actual opinions.”
Frank gave an example, “She went out of her way to give a crabbed anti-business reading of the Securities Litigation Uniform Standards Act that was reversed 8-0 by the Supreme Court.”
Frank here is referring to the 2005 Dabit v. Merrill Lynch case, where investors holding securities argued that misleading statements prompted them to retain securities they otherwise would have sold.
Here, the question rode on whether lawyers bringing the securities class action were able to bring the case in state court as a way of avoiding federal legislation designed to stop the perceived abuse of federal class action securities fraud litigation.
As a member of the Second Circuit Court of Appeals, Sotomayor allowed the suits, but when the case made its way to the Supreme Court, the justices voted 8-0 to reverse the decision, deciding that the act applies in state court cases, as well.

See Also: Sonia Sotomayor and Securities Litigation

Cuban Turns Tables on SEC

Both the Dallas Morning News and Bloomberg are reporting that Dallas Mavericks owner, and one time Chicago Cubs ownership contender, Mark Cuban, is suing the Securities and Exchange Commission claiming that the government agency is illegaly witholding information he requested through the Freedom of Information Act. From the Dallas Morning News:

The billionaire owner of the Dallas Mavericks is seeking a court order to make the nation’s securities cop turn over documents related to its insider-trading investigation of him.

Cuban filed a request for the records in December under the Freedom of Information Act.

“The SEC improperly refused to produce any records,” according to Cuban’s lawsuit.

An SEC spokesman was not immediately available for comment.

The Freedom of Information Act (FOIA)  is a law enacted by Congress in 1966 which allows the Federal Government to release information controlled by the government.  The government retains control over the type of information which can be released, and may deny requests based on the sensativity of the information.  The type of information Cuban seeks is very low on the government sensetivity level.  It is doubtful that the investigation of Mark Cuban’s alleged insider trading is a matter of National Security.  Further such documents relating to the investigation should be released through normal disclosure.  Though FOIA applies to the Federal Government, states have their own versions.  Here is an excellent website with more information on FOIA and how to request information.

The Pequot has sunk!

Looks like Captain Ahab Samberg did not get his whale.  Amidst a probe by the Securities and Exchange Commission, one of the more powerful hedgefunds, Pequot Capital Management, has decided to close shop.  The SEC has been keeping an eye on the legendary investor, Arthur Samberg for possible insider trading involving Microsoft.  Sanberg has decided to liquidate some of his largest hedge funds. From Bloomberg:

The U.S. Securities and Exchange Commission in January reopened a probe into whether Samberg’s funds illegally profited by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. Investigators learned of documents that show former Microsoft employee David Zilkha may have obtained confidential information in 2001 about the software maker, said one of the people. Zilkha left the Redmond, Washington-based company that year to join Pequot, where he worked for less than a year.

“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” Samberg, 68, wrote in the letter, a copy of which was obtained by Bloomberg News.

This is the third complaint by the SEC against Pequot.  Here is a copy of the latest complaint.

Cuban says SEC Insider Trading Lawsuit Should be dismissed

Mark Cuban through his attorney is stating that the court should dismiss the Insider Trading claims against him by the Securities and Exchange Commission.   The law is relatively simple.  Those who have access  to confidential corporation information cannot engage in trading based on information that they know, which is not available to the public.  In plain English, if someone owns a large amount of stock in a company, and is informed of the company’s impending doom (or other substantial loss) based on information that is not made to the public at large (ie- confidential information), he/she cannot use that information to trade their stock in order to avoid a financial loss.  They need to wait until the information is made to the public through normal reporting procedures.  According to the article in Bloomberg, Cuban claims that although he did have confidential information, he did not have a fiduciary relationship with the company, and therefor did not incure liability.  From the article in Bloomberg:

In its Nov. 17 lawsuit, the SEC claimed Cuban, 50, promised during a telephone call with Mamma.com’s chief executive officer to keep information confidential about the company’s stock sale. Later that day, Cuban avoided more than $750,000 in losses by ordering the sale of his 6.3 percent stake in the Montreal-based Internet search company, the agency said.

Fitzwater said he would rule on Cuban’s request at a later date….

Kevin P. O’Rourke, an SEC lawyer, denied the agency was trying to enlarge the law.

“This case, we believe, is based on a straight-down-the- line application of insider-trading law,” he told Fitzwater.

Ferrara argued that Cuban’s confidentiality agreement didn’t make him Mamma.com’s “fiduciary,” or someone required to act for the benefit of another.

The alleged vow to keep information secret doesn’t create a duty to refrain from acting on it, he said. An SEC rule at issue in the case pertains only to family or other personal relationships, he said.

Here is a copy of the original complaint against Mark Cuban.

SEC sues Professor and Lawyer for Securities Fraud

I am glad I didn’t have this professor for Business Ethics.  To top it all off, it seems as they used their students as employees to further their scheme. From Star-Telegram:

Using forged bank records, the men made it appear that a company they controlled was earning spectacular returns from such trades, the lawsuit says. As a result, the suit says, since at least July 2006 more than 60 investors bought stock in the company, Global One.

The SEC obtained an emergency court order to freeze the assets of Robert D. Watson, who taught at A&M from January to April, and attorney and CPA Daniel J. Petroski of Houston. A court-appointed receiver will try to recover assets.

I will soon get around to writing my large, long awaited article on Ponzi schemes and how to avoid them.  It may seem like old news, but most Ponzi schemes often start when the market is down, so now is a prime opportunity for shifty individuals to take advantage of ordinary people.

Sonia Sotomayor and Securities Litigation

Today President Obama nominated Sonia Sotomayor for the Supreme Court of the United States vacancy left by Justice David Souter.  It is interesting to note that Judge Sotomayor has had four of her rulings overturned by the very court she is now nominated to sit.   One of these cases dealt with in an interpretation of law dealing with Securities Litigation Uniform Standards Act .

The case, Merrill Lynch, Pierce, Fenner and Smith, Inc., v. Dabit, 547 U.S. 71 (2006) arose out of an investigation of Merrill Lynch by then New York State Attorney General, Eliot Spitzer.  The public investigation alleged that a breach of fiduciary duty ocurred because Merrill Lynch was giving investment advice based on their loyalty to certain large investment banking clients, rather than the best financial interests of individual investors.  Though the public investigation was settled out of court, it spurred a number of private law class action lawsuits against Merrill Lynch.  The suit eventually goes 2nd Circuit, where Sonia Sotomayor is sitting as judge.

So in other words, Merrill Lynch was allegedly in bed with a series of investment bankers, which manipulated the price of stocks.  When the stock prices fell, many investors (Including plaintiff, Dabit) lost the value of their stocks, and the brokers lost their commissions when investors look elsewhere.

Sounds like Merrill Lynch has breached their duty to the people who use them to invest, right?  Can they sue?  Short answer, yes, with a “but”.  The “but” is that in 1998, congress passed the Securities Litigation Uniform Standards Acts.  The effect of the law was to preempt certain class actions alleged under state law from being filed in either state or federal court if the cause of action was “in connection with the purchase or sale” of securities. The main purpose of the law suit was to prevent people from filing frivolous lawsuits against large companies with “deep pockets”, which would have the effect of tying up the judicial system.

When the case came to her, Judge Sotomayor took the opinion that the law did not bar standing for all lawsuits in connection with the sale or purchase of securities, even though the act specifically said it did bar standing.  Citing a 30 year-old case, written long before the Securities Litigation Uniform Standards act,  she opined that the law still allowed for class action law suits to be filled by those who suffered direct loss due to the purchase or sale of securities.  Blue Chip Stamps v Manor Drug Stores, 421 US 723 (1975).

In other words, she took an activist position in favor of an interpretation that would have allowed the suit to go forward, in spite of specific language in the law that would have barred it.

Her ruling was overturned unanimously with the Supreme Courts opinion being authored by one of the most liberal Justices on the Supreme Court, John Paul Stevens.