Category Archives: Appellate Monitor

Early reports from today’s Supreme Court oral argument in Merrill Lynch v. Dabit (see post below) suggest that the Second Circuit may be reversed. The justices evidently were skeptical that Congress, in passing SLUSA, meant to allow holders to bring a securities class action in state court, while forcing purchasers and sellers to bring the same case in federal court. Dow Jones Newswires (via wsj.com – subscrip. req’d) and the Financial Times (via MSNBC.com) have articles, while the Wall Street Journal’s Law Blog gets a first-hand report from a law professor who attended the hearing.

Quote of note (Financial Times): “Justice Stephen Breyer said he was worried that permitting such suits in state court would allow investors to circumvent the limits imposed by federal securities laws on purchaser and seller suits. Mr. Breyer said nothing would stop them from proceeding in state court, simply by filing their suits as holders rather than sellers. Justice Ruth Bader Ginsburg asked: ‘Why would Congress with respect to this category want there to be a more plaintiff-friendly rule than it put in place for the purchaser-seller?'”

Media interest in Merrill Lynch v. Dabit, the SLUSA case being heard by the U.S. Supreme Court today, has been muted. Nevertheless, there are some good Internet sources on the case. Scotusblog provides an in-depth preview of the oral argument. The Wall Street Journal’s new Law Blog also has a post.

The respondent’s brief in Merrill Lynch v. Dabit, the first of two SLUSA cases that will be heard by the Supreme Court this term (see post below), can be found here. The following entities have filed amicus briefs in support of Dabit’s position: the National Association of Shareholders and Consumer Attorneys and AARP, IJG Investments Limited Partnership and Iriys Guy, Phillip Goldstein and Bulldog Investors, and New York. Oral argument is scheduled for next Wednesday.

When you’re hot, you’re hot. The Securities Litigation Uniform Standards Act of 1998 (SLUSA) will be the subject of a second U.S. Supreme Court argument this year following the granting of certiorari in the Kircher v. Putnam Funds Trust case. The question presented is whether a party may appeal a district court’s decision to remand a case to state court pursuant to SLUSA. There is currently a circuit split between the Second and Ninth Circuits (not appealable) and the Seventh Circuit (appealable) on this issue. Scotusblog reports that the case will be heard in April.

The U.S. Court of Appeals for the First Circuit has issued an interesting opinion in a research analyst case. The decision – Brown v. Credit Suisse First Boston LLC, 2005 WL 3359728 (1st Cir. Dec. 12, 2005) – affirms the dismissal of securities fraud claims based on alleged false “buy” recommendations made by CSFB’s analysts with respect to the stock of Agilent Technologies.

The court held that the plaintiffs needed to plead facts “sufficient to indicate that the speaker did not actually hold the opinion expressed.” In examining the existence of this “subjective falsity,” the analysis of the falsity of the statement and the defendants’ fraudulent intent (i.e., scienter) cannot be separated. Accordingly, the PSLRA’s heightened pleading standard for scienter should be applied and the plaintiffs must “plead provable facts strongly suggesting that the speaker did not believe [a] particular opinion to be true when uttered.”

Turning to the complaint, the court found that “while the plaintiffs’ allegations regarding the obvious conflicts of interest and general state of corruption within CSFB’s analyst ranks may be enough to turn the stomach of an ethically sensitive observer, they are insufficient, on their own, to support a fraud pleading with respect to the subjective falsity of the eight ‘buy’ recommendations issued on Agilent stock.” In particular, the court rejected a series of CSFB e-mails that suggested its analysts engaged in “sharp practice,” but fell short of creating a strong inference that any particular “buy” rating did not reflect the personal belief of the analyst in question.

Holding: Dismissal affirmed.

Quote of note: “The plaintiffs’ allegations, if true, show beyond hope of contradiction that the defendants operated without much concern for ethical standards. But the fact that an organization is ethically challenged does not impugn every action that it takes. In a securities fraud case, the plaintiffs still must carry the burden, imposed by the PSLRA, of pleading facts sufficient to show that the particular statements sued upon were false or misleading when made. This is as it should be: the securities laws – and section 10(b) in particular – were designed to provide a damages remedy for losses incurred as a result of false or misleading statements, not to punish defendants for bad behavior in a vacuum.”

There is no lack of amici curiae who have filed briefs on behalf of Merrill Lynch in Merrill Lynch v. Dabit, the SLUSA case before the Supreme Court. The list includes (with hyperlink to the brief where available) the Department of Justice/SEC, the U.S. Chamber of Commerce, the Investment Company Institute, Lord Abbett & Co./Vance Management, the Washington Legal Foundation, the Securities Industry Association/Bond Market Association, and Pacific Life Insurance.

Oral argument in Merrill Lynch v. Dabit, the SLUSA case before the Supreme Court, has been scheduled for Wednesday, January 18. The petitioner’s brief can be found here.

The official question presented in the Dabit case before the U.S. Supreme Court is:

“Whether, as the Seventh Circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?

The Associated Press reports that the U.S. Supreme Court has declined to grant cert in the Lentell v. Merrill Lynch case. In Lentell, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of two research analyst cases based on the plaintiffs’ failure to adequately plead loss causation. The 10b-5 Daily’s summary of the Second Circuit decision can be found here.

In a typical securities class action, the dismissal of the claims against the individual defendants leads to the dismissal of the claims against the company. In the absence of an underlying Rule 10b-5 violation, there also can be no control person liability. But consider this scenario: the suit is stayed against the controlled entity because it is in bankruptcy. Can the control person claims continue against the individual defendants even if the Rule 10b-5 claims against them have been dismissed? The U.S. Court of Appeals for the First Circuit says yes, but how the district court is supposed to implement the decision is unclear.

In In re Stone & Webster, Inc. Sec. Litig., 414 F.3d 187 (1st Cir. 2005), the court affirmed the dismissal of the Rule 10b-5 claims against the CEO and CFO of Stone & Webster (the only individual defendants in the case) based on the failure to adequately plead scienter (i.e., fraudulent intent). The Section 20(a) claims for control person liability against the CEO and CFO, however, were allowed to continue. The CEO and CFO petitioned for rehearing on this issue, arguing that the dismissal of the underlying Rule 10b-5 claims necessitated the dismissal of the Section 20(a) claims.

In a separate opinion, the court denied the petition. See In re Stone & Webster, Inc. Sec. Litig., 2005 WL 2216319 (Sept. 13, 2005). The claims against the company had not been dismissed. Instead, they had been stayed when the company filed for bankruptcy protection. The court held that the dismissal of the Rule 10b-5 claims against the CEO and CFO “is in no way incompatible with the establishment of their secondary liability under Sec. 20(a) as controlling persons of Stone & Webster, predicated on Stone & Webster having violated Rule 10b-5.”

On remand, however, the district court appears to be presented with a difficult puzzle. Whether a defendant corporation has acted with scienter is normally determined by looking “to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment.” Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004). The CEO and CFO were the only individual defendants in the case. If the case is not going to proceed against them, how can the corporation be found to have acted with scienter? The opinion refers to the possibility that “the acts of other agents might also serve as predicates for the Sec. 20(a) liability,” but this seems like merely a theoretical assertion if all of the individual defendants have been dismissed. Stay tuned.