The U.S. Supreme Court heard oral argument in the Emulex case this week. The question presented focused on the mental state for securities claims alleging a misstatement in connection with a tender offer under Section 14(e) of the Securities Exchange Act. While most circuits have found that the required mental state is scienter (i.e., fraudulent intent), the Ninth Circuit decision below concluded that a finding of negligence is sufficient.
Much of the commentary, activity, and briefing in the case, however, was directed at a different issue. For many years, lower courts have found that there is an implied private right of action under Section 14(e). But is that correct under more recent Supreme Court precedents that have limited the creation of implied private rights of action?
As highlighted at the oral argument, however, it is not clear that the Court will be willing to take on an issue that was barely raised below and not directly presented to the Court. Five justices expressed skepticism (at least in their questioning) that the issue was properly before the Court, with Justice Sotomayor asking the petitioners whether considering it would be the equivalent of “rewarding you for not raising it adequately below, rewarding you for mentioning it in two sentences in your cert petition and not asking us to take it as a separate question presented?” Justice Alito, in his only question of the day, asked the government (appearing as amicus): “Could you explain why you think it’s appropriate for us to reach the question whether there’s a private right of action? If you were the Respondent here, would you think that that claim was properly before us? Is that the precedent you want us to set?” If the issue were to be decided, however, Chief Justice Roberts and Justice Gorsuch appeared to be the biggest proponents of the position that there is no implied private right of action for Section 14(e) claims.
On the other hand, the questioning suggested that there may be considerable support for a finding that scienter is the required mental state. Justice Sotomayor noted, in a point picked up by other justices, “that since 14(e) borrows the language of 10-5, and we have all along interpreted 10b-5 to require scienter, why shouldn’t we require the same standard here?” There also was discussion of the practicalities of the Court’s potential rulings. For example, Justice Kavanaugh asked the government whether “that’s caused real-world problems, recognizing the private right of action?” and later asked respondents “how would you assess SEC enforcement alone of a negligence standard versus SEC plus private enforcement of a higher mens rea standard?”
A decision should be issued by June 2019. A transcript of the oral argument can be found here.
Disclosure: The author of The 10b-5 Daily assisted the Washington Legal Foundation in the submission of an amicus brief arguing that there should be a uniform scienter standard for violations of Section 14(e) (misstatements in connection with a tender offer) and Section 14(a) (misstatements in connection with a proxy solicitation).