In Williams-Yulee v. The Florida Bar (.pdf), the Supreme Court rejected a First Amendment challenge to the Florida Canon of Ethics that bans judicial candidates from personally soliciting campaign contributions.  And I realize this is an odd case to discuss on this blog – nothing about it explicitly engages business law issues – but bear with me as I get to the (perhaps, ahem, somewhat attenuated) business-related point.

The gripping story of how an accountant took on Halliburton and won.

It’s the story of Tony Menendez, a Halliburton accountant who believed that the company was incorrectly recognizing revenue.  When the company wouldn’t correct its practices, he went to the SEC.  Halliburton learned of the complaint,  Menendez was ostracized, and the SEC investigation was dropped.  This kicked off a years-long battle in which Menendez sought protection under SOX as a whistleblower, ultimately culminating in a decision from the Fifth Circuit. 

What the article does not discuss, though, is the legal issue that dominated the case – namely, what legally qualifies as an adverse action for SOX purposes.  Halliburton executives disclosed Menendez’s identity to the rest of the accounting department, and his coworkers shunned him; thus, the critical question was, did disclosure of his identity, coupled with ostracism, constitute a materially adverse action?  See Halliburton, Inc. v. Administrative Review Bd., 771 F.3d 254 (5th Cir. 2014).  Notably, just last month, the Fifth Circuit – in a very closely divided decision – decided not to rehear the case en banc, over the lengthy dissent of Judge Jolly.  See Halliburton Co. v. Admin. Review Bd., United States DOL, 596 Fed. Appx. …

An ongoing issue in many securities cases concerns the precise state of mind necessary to satisfy the element of scienter in a Section 10(b) violation.  The basic dispute is about whether the defendant must have intended to harm investors, or whether it is sufficient if the defendant simply intended to mislead them.

One would have thought this issue was settled by the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  There, the defendants lied to investors by falsely claiming that they were not engaged in merger negotiations.  The lie was not intended to harm anyone; if anything, the defendants intended to benefit investors by concealing the talks so as not to prejudice a beneficial deal.  The Supreme Court did not weigh in on the definition of scienter per se, but it did emphasize that the defendants’ benign motives would not immunize them from liability.  As the Court put it, “[W]e think that creating an exception to a regulatory scheme founded on a prodisclosure legislative philosophy, because complying with the regulation might be ‘bad for business,’ is a role for Congress, not this Court.”

Similarly, in Nakkhumpun v. Taylor, 2015 U.S. App. LEXIS 5547 (10th Cir. Apr. 7, 2015), the Tenth Circuit rejected a defendant’s argument that his false statements – in that case, false characterizations as to why a corporate asset sale had fallen through – were intended to benefit investors by attracting new deal partners.  The Tenth Circuit held that whatever the defendant’s ultimate motive, Section 10(b) liability would be imposed if he intentionally or recklessly misled investors.

Nonetheless, courts continue to sporadically define Section 10(b) scienter in a more limited manner.

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It was recently announced that the SEC has reached a settlement in its lawsuit against Freddie Mac executives Richard Syron, Patricia Cook, and Donald Bisenius.  The basic allegation in the case was that these executives violated Section 17 of the Securities Act and Section 10(b) of the Exchange Act by dramatically understating Freddie Mac’s exposure to subprime mortgages.  The executives falsely claimed that Freddie Mac’s portfolio included $2 to $6 billion of subprime loans, when the true figure was closer to $141 billion to $244 billion.  Freddie Mac’s exposure to subprime loans ultimately caused it to experience dramatic losses, thus harming investors.

The SEC ran into difficulty because there is no accepted definition of “subprime.”  The SEC alleged that investors understood the term to refer to certain loans issued with a high likelihood of default, such as loans with high loan to value and debt to income ratios.  The executives, however, claimed that “subprime” was understood by investors only to refer to loans that were designated as subprime by their originators.

The case has now settled, and, under the terms of the settlement, the executives will make payments to a Fair Funds account for the benefit of investors, in…

In Dura Pharmaceuticals, Inc. v. Broudo, 544 US 336 (2005), the Supreme Court held that to bring a fraud-on-the-market action under Section 10(b), shareholders would have to plead and prove the element of “loss causation,” namely, that disclosure of the fraud caused the company’s stock price to drop, resulting in plaintiffs’ losses.

Since Dura was decided, there has been concern that companies might try to avoid liability by strategically disclosing information in a manner that would make it more difficult for plaintiffs to establish stock price effects.

In their new paper, Disclosure Strategies and Shareholder Litigation Risk, Michael Furchtgott and Frank Partnoy take significant steps toward establishing that these fears are well-grounded.

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When forum selection bylaws first became a thing, the response from the plaintiffs’ bar was a bit muted.  This is because at least some plaintiffs’ firms viewed forum selection bylaws as beneficial, in that they had the potential to cut down on competition among plaintiffs’ firms for control over a given case.  No longer would a firm filing a case in Delaware have to fear that a competing firm, filing a case in another jurisdiction, would settle on sweetheart terms – or worse, end up getting dismissed, with collateral estoppel effects – before the Delaware firm had a chance litigate. 

 Which brings us to the Walmart litigation and a dispute between two plaintiffs’ firms.

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On Tuesday, the Supreme Court finally issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (.pdf), concerning the definition of “opinion falsity” in the context of a lawsuit under Section 11 of the Securities Act.

Joan described the case in more detail here, but the basic issue was, what does it mean for a statement of opinion to be false?  Or, to ground it more in the facts of Omnicare, if the company files a registration statement – as Omnicare did – that claims that the company “believes” its contracts are in compliance with the law, is that statement false when the DoJ sues for Medicaid fraud?

The defendants argued that opinion statements – such as a “belief” in legal compliance – can only be false if they falsely represent the speaker’s belief, i.e., if the speaker did not really believe that Omnicare was in compliance.  If the speaker did believe in such compliance, then even if that belief was unfounded or turned out to be false, the statement itself would be literally true.  

The plaintiffs agreed that statements of opinion may be false if the speaker misrepresents his or her own opinion, but also argued that opinions may be false for other reasons.  For example, according to the plaintiffs, an opinion statement is false if the statement has no reasonable basis, regardless of the subjective beliefs of the speaker.  So in Omnicare’s case, its statement about legal compliance would be false if it did not bother to investigate whether its contracts were in compliance with the law, or if it ignored information that suggested the contracts were not in compliance.

In general, the case was pitched as a dispute about the continuing viability of Section 11 as a strict liability statute.  Section 11, 15 U.S.C. §77k, provides that issuers are strictly liable for false statements in registration statements, and signatories of the registration statement are liable unless they demonstrate that they conducted a reasonable investigation of those statements.  So, if Omnicare prevailed in its argument that belief statements are only false if the speaker misstates his own belief, it would, as a practical matter, require the plaintiffs to demonstrate that the speaker intentionally misled investors, thus importing a scienter requirement into Section 11.  The effect would be particularly pronounced because there is a great deal of slipperiness regarding what counts as an opinion statement in the first place.

Ultimately, the Supreme Court adopted a standard that fit within the framework advocated by the plaintiffs, although the Court used a narrower formulation.  The Court agreed with the defendants that statements of opinion can only be false if disbelieved by the speaker – if the speaker misstates his or her own belief – but then went on to hold that such statements may be misleading if they omit material information.  Such as, if they omit the fact that the speaker had no basis for the belief he or she purported to hold and failed to conduct any investigation into the matter.  It depends on context and delicate inferences yadda yadda yadda, but a registration statement is a formal document and investors are likely to assume that statements of belief contained therein are the product of a reasonable investigation, etc.

But none of this is what the case was really about.

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