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U.S. urges review of investment cases

With the support of the Justice Department, two new cases on investment law are more likely to be reviewed by the Supreme Court:  one on the right of investors to sue for false stock registration statements, and one on the duty of employee benefit plan managers to get rid of questionable items in plan portfolios.  Asked by the Court for the government’s views, the Solicitor General urged the Court to rule on both.

The Court’s docket indicates that the Justices will consider whether to grant the petitions in Moores v. Hildes, the registration statement case, and Tibble v. Edison International, the benefit plan case, at their September 29 Conference.  The government’s brief in Moores is here, while its brief in Tibble is here.

Both cases involve issues of timing:  can an investor sue over a false stock registration statement filed with the Securities and Exchange Commission, if he bought that stock even before the statement was on file and therefore could not have relied upon it, and does an employee benefit plan manager have a legal duty to get out of doubtful investments no matter how long they have been in the portfolio, even if there is a cut-off on being sued after six years have passed?  The Solicitor General has urged the Court to grant review and answer “yes” to both.

The Moores case grows out of a merger plan through a stock swap between two software companies, Peregrine Systems, Inc., based in San Diego, and Harbinger Corp., an Atlanta firm, with Harbinger to become a subsidiary.  In April 2000, the respondent in the case, Harbinger director David Hildes, gave Peregrine a proxy to vote his 1.4 million shares in favor of the merger, if it took place.  The merger depended upon Securities and Exchange Commission approval of a registration statement on the deal.  The merger would be off if not completed by October 31, 2000.

The statement was filed with the SEC in May of that year, and Hildes would later claim that it overstated the company’s revenues by $120 million and understated its losses by more than $190 million.  That, he later argued, would be the cause for a sharp drop in Peregrine stock, causing him major losses.  The merger later was completed, but the SEC filed a complaint against the company for filing false financial reports for a series of years.

A group of Peregrine stockholders filed a class-action fraud lawsuit, which was settled.  Hildes, however, chose to sue on his own, against Peregrine executives and that company’s accounting firm, Arthur Andersen, under Section 11 of the Securities Act of 1933.  A federal judge dismissed the case, finding that Hildes had made a binding commitment to swap his shares before the registration statement, so any loss he suffered could not be attributed to that statement.  The U.S. Court of Appeals for the Ninth Circuit, however, ruled that Hildes’s lawsuit should be allowed to go forward, without any requirement that he have relied on the registration statement.  Peregrine directors are now challenging that ruling in their petition to the Supreme Court.

Responding to the Justices’ request for the federal government’s views, Solicitor General Donald B. Verrilli argued that Section 11 does not require an investor to have relied upon a flawed registration statement, if such a statement was claimed to be the cause of that investor’s losses.  Thus, although the government agreed with the Ninth Circuit’s decision, it nonetheless urged the Court to grant review because the U.S. Court of Appeals for the Eleventh Circuit had reached the opposite conclusion.  Resolution of that split among the circuits, the government contended, is important to the enforcement of Section 11 by investor lawsuits.

The Tibble case involves a dispute over the choice of investments available to some 20,000 participants in a California defined-contribution plan created by Edison International, an electricity-generating company based in California.  Employees make contributions into the plan, which are invested in a portfolio by the plan manager.  The employees are entitled to the value of their own investment accounts.

The menu of options open to the employees is chosen by the plan’s investment committee, supervised by the plan manager.  The employee contributions are invested mainly in mutual funds.  The portfolio managers opted to put plan assets into funds that charged higher fees, because the fees were split with the plan, reducing its administrative costs.

Workers covered by the plan sued, contending that lower-fee fund investments were available, and the managers should have chosen those for the portfolio and gotten rid of the higher-fee investments from the pool open to the workers’ choices.

Under federal law, there is a time limit of six years for a beneficiary lawsuit claiming imprudent investment decisions, with the six years starting to run on the date of the last act that violates the duty to run the plan in the beneficiaries’ interest, or on the date on which a failure to perform a duty could have been cured.

A federal judge dismissed the class-action lawsuit, finding that it had been filed more than six years after the managers had placed assets in the higher-fee mutual funds.  The judge also ruled that the courts had to defer to the plan managers’ choices on investments, and declared that the plan’s terms did not rule on the kind of higher-fee fund investments.  After a trial, however, the judge found that the managers did violate their duties under the plan for investments made in the higher-fee funds during the six-year period at issue.   Those results were upheld in full by the Ninth Circuit.

The beneficiaries took the case on to the Supreme Court, raising both the issue about the managers’ duty to keep the portfolios up to date with investments that benefitted the workers’ interests, no matter when particular challenges to investments were made, and the separate question of courts’ duty to defer to the managers’ investment decisions.

Asked by the Supreme Court to react, Solicitor General Verrilli urged the Court to take on only the first issue, on the continuing duty to run the portfolio in the workers’ interest.  The Ninth Circuit, he argued, was wrong on that point, and its decision conflicts with those of other federal appeals courts.

He urged the Court to pass up the judicial deference question, saying there was no real split on that, and, in any event, that would not resolve this case.

It will take the votes of at least four Justices to grant review of either of these cases.



Recommended Citation: Lyle Denniston, U.S. urges review of investment cases, SCOTUSblog (Sep. 16, 2014, 11:36 PM),