Don’t get too excited about the news Monday that the U.S. Supreme Court has agreed to hear the appeal of bond investors whose antitrust claims against the global banks involved in the Libor-setting process were tossed last year.
Sometimes, the best way to understand the broad implications of a court’s decision isn’t to read the ruling itself but rather the dissent. That was certainly true a year ago, when Justice Antonin Scalia attacked the U.S. Supreme Court’s decision in Windsor v. U.S., which struck down federal prohibitions on same-sex marriage as an unconstitutional intrusion on the equal rights of gays and lesbians. The majority’s ruling was carefully constrained, but a furious Scalia predicted that the stirring language of Justice Anthony Kennedy’s opinion would reverberate more loudly in the lower courts than the actual holding. As we now know from decisions all over the country striking down restrictions on same-sex marriage, Scalia was right.
Let’s state the obvious: Big Business did not get what it wanted Monday from the U.S. Supreme Court, which refused in Halliburton v. Erica P. John Fund to overturn Basic v. Levinson, the 25-year-old precedent that permits shareholders to bring classwide claims of securities fraud.
Companies should not mislead consumers about their products. Some do anyway. Those companies should be held accountable for their deception, not only because they lied but also to deter other companies from lying.
The hedge fund NML Capital is going to have to execute some fancy footwork to maintain its argument that Argentina is plotting to evade a ruling by the 2nd U.S. Circuit Court of Appeals that prohibits the foreign sovereign from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds.
As of April, the Federal Housing Finance Agency has recovered about $15 billion from 15 big banks that supposedly misrepresented the quality of the mortgage-backed securities they peddled to Fannie Mae and Freddie Mac. FHFA is expecting more to come: The conservator still has cases under way against Goldman Sachs, HSBC, Nomura and Royal Bank of Scotland. The National Credit Union Administration, meanwhile, has netted more than $330 million in settlements with banks that duped since-failed credit unions into buying deficient MBS. NCUA is also still litigating against several other defendants, some of which it sued only last September. When you add in MBS suits by the Federal Deposit Insurance Corporation on behalf of failed banks, there are about four dozen ongoing cases, involving some $200 billion in rotten mortgage-backed securities, brought by congressionally created stewards.
France, Brazil and Mexico told the U.S. Supreme Court this week that the 2nd Circuit Court of Appeals has endangered sovereign debt markets with its ruling last year against the Republic of Argentina. In amicus briefs supporting Argentina’s petition for Supreme Court review, the foreign sovereigns argue that the 2nd Circuit gravely misinterpreted the so-called “pari passu” (or equal footing) clause of Argentina’s sovereign debt contracts. By ruling that Argentina may not pay bondholders who exchanged defaulted bonds for restructured debt before it pays hedge fund creditors that refused to exchange their defaulted bonds, the amicus briefs argue, the 2nd Circuit has undermined international debt restructurings, permitting vulture investors to hold entire foreign economies hostage.
After oral arguments Wednesday morning at the U.S. Supreme Court in Halliburton v. Erica P. John Fund, I ran into a few securities class action plaintiffs lawyers in the court’s lobby, at the statue of Chief Justice John Marshall. They were looking jaunty indeed. The consensus in their little group was that the justices showed little inclination to toss out the 1988 precedent that has been the foundation of the megabillion-dollar securities class action industry. They regarded Wednesday’s argument as a hopeful portent that classwide securities fraud litigation is likely to survive the Supreme Court’s re-examination of Basic v. Levinson.
On Wednesday, the U.S. Supreme Court will hear oral arguments in Halliburton v. Erica P. John Fund, the most momentous securities case of the last quarter century. When this term ends in June, we’ll know whether the fraud-on-the-market theory that the Supreme Court codified in the 1988 case Basic v. Levinson will remain intact as the foundation of the securities class action industry or whether shareholders will lose the leverage of classwide damages claims for supposed fraud under the Exchange Act of 1934. I’ve been saying it for months: Untold billions of dollars hang on the justices’ determination in the Halliburton case.
Conventional wisdom has it that the future of most securities fraud class actions will come down to U.S. Supreme Court Chief Justice John Roberts (and possibly Justice Samuel Alito, who, as a judge on the 3rd Circuit Court of Appeals, wrote quite interesting decisions about fraud-on-the-market reliance). Last term, in dissents in Amgen v. Connecticut Retirement Plans, Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy made clear their skepticism about the court’s 1988 precedent in Basic v. Levinson, the case that made securities fraud class actions possible via its holding that shareholders may be presumed to have relied on corporate misstatements about a stock that trades in an efficient market. Based on the Amgen majority opinion, Justices Ruth Bader Ginsburg, Stephen Breyer, Elena Kagan and Sonia Sotomayor seem disinclined to overturn Basic when the court once again takes up the issue of classwide shareholder reliance on March 5 in Halliburton v. Erica P. John Fund.