So here’s a bizarre little PSLRA procedural case out of the Ninth Circuit.  Mark Habelt, a shareholder of iRhythm, filed a securities action on behalf of himself and a class of other investors, alleging the company committed fraud.  As is not uncommon in these cases, other class members moved to be appointed lead.  Habelt himself did not so move, and eventually, the Public Employees’ Retirement System of Mississippi was appointed lead, and its counsel – a different firm than Habelt’s – was appointed lead counsel.

Again, as is common, PERSM filed an amended complaint that continued to name Habelt in the caption, but did not include him as a named plaintiff in the substantive allegations.  Eventually, the case was dismissed on the pleadings, and PERSM did not appeal.

Habelt, however, did.  And the Ninth Circuit, 2-1, held that he did not have standing to do so.  The court reasoned:

“[a] person or entity can be named in the caption of a complaint without necessarily becoming a party to the action.”… Beyond an individual’s mere inclusion in the caption, the more important indication of whether she is a party to the case are the “allegations in the body of the complaint.” It is upon this ground that Habelt’s argument falters. While it is true that Habelt filed the initial complaint in this matter, that complaint has now been extinguished. …Nor does Habelt’s status as a putative class member give him standing to appeal. Although “an unnamed member of a certified class may be considered a party for the [particular] purpos[e] of appealing an adverse judgment,” the “definition of the term ‘party’” does not cover an unnamed class member “before the class is certified.”

The implication was that the only way Habelt could have become a party and advanced his appeal was if he had first moved to intervene at the district court level.

So, my thoughts.

First, at least in the securities space, this is an unusual situation because I, at least, was always under the impression that most dismissals on the pleadings are appealed – from the attorneys’ perspective, the incremental costs are negligible.  So I wonder why the lead plaintiff chose not to do so here. I have not studied the underlying case at all so I have no idea if this is correct, but an obvious reason not to do so would be fear of generating unfavorable precedent – lead counsel (and some lead plaintiffs) are repeat players in this space and might reasonably care about that.

Second, but Habelt did want to appeal!  Obviously, whatever PERSM’s counsel’s calculus, Habelt and/or his attorneys had a different calculus.  But he wanted to appeal on behalf of the class, and procedurally, that’s just … weird.  What would happen if he won?  Does the case get remanded for PERSM – which abandoned it – to continue litigating?  Is Habelt lead now?  Is the LP contest reopened?

All of this just highlights a real problem: lead plaintiff and lead counsel represent the class, but they do so even before a true Rule 23 process.  And they can really bind the class nonetheless, because even if Habelt had intervened, there’s a real possibility he could not have appealed on the class’s behalf without reopening lead plaintiff selection, see In re Merck Sec. Litig., 432 F.3d 261 (3d Cir. 2005).  And in many cases, a district court judgment may be issued before a potential intervenor even knows it’s necessary to intervene to preserve an appeal right.

Plus – as the Habelt dissent noted – the chances that Habelt could just file a new action – after all, he wasn’t formally a party to the original one, according to the Ninth Circuit – are slim to none.  Statutes of repose are not tolled during the pendency of a class action, see California Public Employees’ Retirement System v. ANZ Securities, 582 U.S. 497 (2017), and the limitations period is not tolled for successive class cases, see China Agritech v. Resh, 138 S. Ct. 1800 (2018), and since securities class actions take forever to resolve (months can pass before a lead plaintiff is appointed, years before the motion to dismiss briefing is complete and an opinion issued), that functionally gives a terrific amount of power to whoever is appointed lead to in fact bind the class, unless class members want to be preemptive enough to intervene on spec.

In any event, I’m not sure what the solution is (other than unwinding ANZ and China Agritech), and though the situation is rare, the Ninth Circuit’s grounds for dismissal strike me as elevating form over substance – a trap for the unwary, if you will.  Habelt filed a complaint, it was never dismissed, his name was on the case – of course he reasonably assumed he was still a party.  To hold otherwise only invites future jockeying.  Will all class members who filed complaints insist on having their names be included in subsequent pleadings?  File preemptory motions to intervene?  I can’t see what benefit there would be to encouraging such a system.  But again, if the LP process would circumvent Habelt’s right to represent the class on appeal anyway, a la Merck, then, I suppose, no harm no foul.

Last week, I posted about a discussion group I am organizing on teaching numeracy for the Southeastern Association of Law Schools (SEALS) 2024 annual meeting.  (Thanks to those who responded!)  I also am working with folks who are organizing another session.  More on that in another post!  And some of you or others you know also may be proposing panels or discussion groups.  But the Business Law Workshop at the conference can always use another program, imv.

With that thought in mind, I am reaching out to suggest that you organize a business program for the SEALS 2024 annual meeting.  The SEALS submission webpage includes instructions and information about the submission process and a hypertext link to the the submission site.  The submission site is open for 2024 program proposals now and is easy to navigate.  I am happy to help by answering any questions you may have (or by getting answers for you).

The only tricky parts are determining the type of session you want to organize and complying with the requirements for that type of session.  The two most common types of programs are panels and discussion groups, as follows:

PANELS

Panels are the traditional presentations at most conferences. The time allotted is about an hour-and-a-half, and between 4 and 6 panelists do presentations around a central theme or subject. You should leave time for questions or discussion with the audience at the end of the presentations.

Here are the rules that govern Panels:

• • Panels must include at least four speakers.
  • Panels must include both a title for the program, as well as a description of the program.
  • If your proposal would fit into a workshop in a particular area (e.g., constitutional law, criminal procedure, business law, teaching), please indicate that fact in your proposal.
  • Before you list someone as a speaker, please confirm that person is willing and able to participate.
  • The one-panel-per-person rule applies. No attendee may serve on more than one panel. This rule governs all kinds of panels and includes moderators and panelists. There are a
    couple of situations in which this rule will not apply: the Call for Papers presentations, Discussion Groups, mentors for new scholars, and programming in the other special workshops with attendance limited to special registrants (e.g., the workshops for new law teachers and prospective law teachers).
  • Only one person per school can be on a panel unless the two people are co-authors. They are treated as one person for purposes of time.
  • At least half the panelists (including the moderator) must be from institutional and affiliate member schools,

DISCUSSION GROUPS

Discussion Groups require ten discussants, with the designation of one of them as the moderator of the discussion. Groups may include a few additional discussants. Discussion Groups are scheduled in either two-hour or three-hour blocks. The discussants often have concise written papers on a central theme, abstracts, or have prepared some thoughts around several questions connected to that theme. The discussants circulate their papers or thoughts in writing before the conference, spend 3-5 minutes summarizing their points, and then discuss the theme in more depth along with all attendees in the room. Wide audience participation and discussion are the focus of this kind of programming.

To propose a Discussion Group, you will need at least ten discussants.

• • Discussion Group proposals must include a title, as well as a description of the Discussion Group.
  • Before you list someone as a speaker, please confirm that person is willing and able to participate.
  • If your proposal would fit into a workshop in a particular area (e.g., constitutional law, criminal procedure, business law, teaching), please indicate that fact in your proposal.
  • The one-panel-per-person rule does not apply.
  • The one-person-per-school rule does not apply.
  • Discussion Group organizers must issue a call for participants.
  • At least one-fourth of the discussants must be from institutional and affiliate member schools.

So, think about who you might want to join up with to vet current research or talk about teaching methods, techniques, or tools!  Then, propose a program.  The date of the conference (July 21-27, 2024) is optimally situated to position business law faculty for the new school year.  As a result, it is a great conference for rededicating oneself to one’s law scholarship and teaching.

Natalya Shnitser posted a really fascinating paper that taught me about collective investment trusts (CITs), which, I have to admit, wasn’t something I knew anything about.

As I understand it, they function very much like a mutual fund, but they’re managed by banks instead of investment companies.  As such, they are exempt from much of the securities regulation that protects mutual fund investors – very little transparency or liquidity – but they’re increasingly showing up on 401k menus, to the point where, according to Shnitser, they now represent 30% of defined contribution plan assets.

The rationale for this exemption from securities regulation is that, once upon a time, when defined benefit plans dominated the workplace, it was assumed employers/pension plans would be able to bargain on equal terms, but that’s not true today, when individual workers simply select CITs from among other investment choices.

One area I’m particularly interested in is their role in corporate governance.  Because these are retirement plan assets, CITs are ERISA fiduciaries, and that means, among other things, that they must vote their shares to benefit the plan, just like a pension fund would.  But because they don’t have to publicly report their votes, there’s no real mechanism of enforcement.  That said, the big mutual fund companies – BlackRock, Vanguard, Fidelity, State Street – have apparently gotten into this space, figuring, if banks are going to be able to offer CITs that compete with mutual funds but with fewer regulatory burdens, mainstream asset managers may as well claim a piece of that business, too.  Which would suggest that CIT shares are being voted the same way fund families vote – BlackRock, I assume, doesn’t have a separate voting policy for CITs versus index funds.  But since the big mutual fund companies are now experimenting with versions of pass through voting, will that mean CIT investors are left out in the cold?

Anyway, here’s the abstract:

The retirement security of millions of American workers is increasingly tied to an investment vehicle that most have never even heard of, and whose dramatic rise has received almost no regulatory scrutiny in recent decades. With nearly $7 trillion dollars in assets, “collective investment trusts” (CITs) are rapidly replacing mutual funds on the investment menus of employer-sponsored retirement plans. Individuals who once had staked their retirement nest eggs on the returns from mutual funds have had more and more of their savings transferred into bank sponsored CITs, which now hold nearly 30% of all assets in defined contribution plans, up from just 13% a decade ago. Yet despite such dramatic growth and economic significance, CITs which look and act a lot like mutual funds but are sponsored by banks and subject to oversight by the Comptroller of the Currency—have been largely overlooked, with almost no critical analysis of CITs as investment funds, as institutional investors, and as increasingly important participants in an interconnected financial system.

This Article tells the story of a century-old bank product seizing on regulatory gaps and exploding in popularity among retirement plans seeking cheaper investment options for individual participants. The dramatic growth of CITs raises new and critical questions about the tradeoffs associated with CITs: in particular, the benefits of lower fees versus the individual and systemic risks that may stem from lower transparency, fragmented regulatory oversight, fewer restrictions on permitted investments, and centralized control in the hands of bank trustees. In identifying these tradeoffs, this Article builds the foundation for future scholarship to improve the understanding of the behemoth investment vehicle whose growth and impact have gone largely unexamined over the last four decades.

Another case challenging FINRA’s constitutionality has generated a District Court opinion upholding FINRA’s constitutionality.  Judge Reyes found that, Alpine “does not suggest that courts must enjoin every challenged FINRA enforcement action pending the Alpine merits decision.”

Kim differs from Alpine in some significant ways.  The plaintiff does not face expulsion, just an ordinary fine and disciplinary proceeding.  Kim faces a possible $30,000 fine and a requirement to disgorge $16,000 in profits.  This, unsurprisingly, complicates his attempt to secure an injunction against the enforcement action because it doesn’t seem as though he will face any irreparable harm–just “an enforcement hearing, months away, and most likely, monetary fines.”

The case also differs in that amici got involved at an early stage this time.  The opinion thanks “CBOE Global Markets, Inc.; CME Group Inc.; National Futures Association; and the Securities Exchanges.”  

Most courts will not be familiar with SROs.  Given that, it makes sense for a range of amici to come in on these cases to help give context to courts.

Ultimately, how this issue will turn out for Kim depends on the pending Alpine appeal.