Most of the nation’s attention on Wednesday will be fixed on the U.S. Supreme Court, where the justices will hear arguments in King v. Burwell, a case that could bring down President Obama’s healthcare law. Securities lawyers, though, should keep an eye on Delaware Chancery Court as well. Vice Chancellor Travis Laster is scheduled to hear arguments about whether to approve a proposed $275 million settlement of derivative claims against Activision board members who allegedly breached their duties when they agreed to a $6 billion buyback of shares held by Vivendi in 2013.
There’s been a lot of discussion lately of the Securities and Exchange Commission’s authority to define insider trading, thanks to the 2nd U.S. Circuit Court of Appeal’s landmark December 2014 decision in U.S. v. Newman and a statement last November by U.S. Supreme Court Justices Antonin Scalia and Clarence Thomas that questioned whether the SEC has the power to determine what constitutes criminal conduct. The commission’s redefinition of the scope of liability for civil securities fraud – in a split opinion last December in an enforcement action against two former employees of the investment manager State Street – has received much less attention. But as an appeal of the SEC opinion by the former State Street executives, John Flannery and James Hopkins, moves forward at the 1st Circuit, it could test the SEC’s authority to interpret securities law through a specific enforcement action.
The most interesting amicus brief in the government’s landmark appeal of a December 2014 ruling by the 2nd U.S. Circuit Court of Appeals that overturned the convictions of accused insider traders Todd Newman and Anthony Chiasson was not from the Securities and Exchange Commission. It wasn’t much of a surprise that the SEC agreed with U.S. Attorney Preet Bharara that a three-judge 2nd Circuit panel made a grievous mistake when it held that the government can’t bring an insider trading case if a tipster’s only gain is helping a casual friend. Nor was it a shock that the National Association of Criminal Defense Lawyers backed Newman and Chiasson, who oppose the government’s request for reconsideration of the panel’s hearing.
In July 2013, a federal appeals court overseeing thousands of individual smokers’ suits against Philip Morris USA, R.J. Reynolds and Lorillard threw up its hands in defeat.
For more than nine years, U.S. District Judge Lynn Hughes of Houston presided over a False Claims Act case in which two auditors from the U.S. Minerals Management Service accused Shell Exploration of improperly deducting transportation and storage costs from the royalties it owes the U.S. government on offshore oil and gas leases. Hughes didn’t think much of the plaintiffs’ claims. He granted summary judgment to Shell in 2012, and then, after the 5th U.S. Circuit Court of Appeals revived and remanded the suit in 2012, granted Shell’s renewed summary judgment motion in 2014.
I don’t envy Judge Thomas Wheeler of the U.S. Court of Claims. Last week, the Justice Department and former AIG chief Maurice Greenberg filed hundreds of pages of post-trial briefs in Greenberg’s multibillion-dollar Fifth Amendment case, which alleges that the government engaged in an unconstitutional taking when it received about 80 percent of AIG’s equity in exchange for bailing the company out of a near-death liquidity crisis in 2008. Wheeler, who oversaw a six-week bench trial last fall, featuring testimony from officials who led the government’s response to the financial crisis, now has to wade through the two sides’ competing versions of both the facts and the law.
Timothy McGee, a onetime Ameriprise financial advisor, contends that he never would have been found guilty of insider trading if the Securities and Exchange Commission hadn’t revised its interpretation of securities fraud law in 2000. On Friday, the U.S. Supreme Court is scheduled to consider McGee’s argument when the justices conference on his petition for review of his 2013 conviction. And there’s a good chance that McGee’s appeal will catch the attention of Justices Antonin Scalia and Clarence Thomas, who invited insider trading defendants to challenge the SEC’s authority in a statement last November in an appeal by a different convicted inside trader, Douglas Whitman.
Remember the unusual structure of FreeportMcMoran’s $137.5 million settlement with investors last month? The settlement resolved shareholder derivative claims, brought by investors in the name of the corporation. Typically, the cash recovered in shareholder derivative litigation goes to the company’s treasury, which means investors benefit only indirectly. But Freeport agreed to distribute all of the settlement money (less attorneys’ fees) to shareholders in a special dividend. I hypothesized that the Freeport deal might be a new model for derivative suits, an answer to critics who call derivative litigation a mere shift of funds from one corporate pocket to another.
Last October, when a federal jury in Cleveland concluded that Whirlpool was not liable to a class of Ohio washing machine purchasers who claimed the products had a tendency to develop a moldy smell, I said the outcome was a vindication of class actions. Whirlpool had argued in the years leading up to the trial in federal court in Cleveland that it couldn’t get a fair shake if consumers’ claims were tried en masse. I argued that the jury’s defense verdict showed that defendants – and not just plaintiffs – can reap the benefits of a trial of classwide claims.
(Update: After this post was published, I learned from a reliable source that Chief Justice Strine was being facetious in his assessment of Beck! The Chief Justice was actually dissing Kanye; I misread his deadpan comment about Beck.)