The Supreme Court Leaves Domestic Investors Unprotected from Secutiries Fraud

United States investors who  buy or sell securities outside the US, cannot sue in the US or use US law, to recover against foreign fraudsters! Nor can foreign investors trading abroad who are victims of fraud perpetrated in the US by US corporate fraudsters! This dilemma is the new result of the United States Supreme Court's opinion in Morrison v. National Australia Bank. As a result, US investors will now be sent overseas, to forums which are not as investor friendly, to seek recovery.

 

 

Over the past 40 years, Courts have followed the "conduct" and "effects" test to exercise jurisdiction over securities fraud if a major portion of the fraud occurred in the US or if foreign conduct produced immediate and substantial effects in the United States. Justice Scalia, writing for the court, held that their was no affirmative indication that the Exchange Act was intended to apply extraterritorially. Its focus in not on where the deception originated, but on purchases or sales of securities in the US.

Justice Breyer concurred in part only so far as the complaint failed to allege that the purchases were "in connection with" either the purchase or sale of a security listed on a national securities exchange" or "any security not so registered" that was purchased or sold in the US. While there is nothing in the Securities Exchange Act that limits the second category to purchases or sales within the US, Breyer would apply the presumption against extraterritoriality.

Justices Stevens, joined by Ginsburg, also concurred, but only in the judgment, saying that they would adhere to the conduct -and-effects test approach followed over the last 40 years, and rejected the presumption against territoriallity. Rather, the real question should be "how much, and what kinds of, domestic contacts are sufficient to trigger application of Section 10b-5." Taking great issue with the majority, Steven wrote:

Repudiating the Second Circuit’s approach in its entirety, the Court establishes a novel rule that will foreclose private parties from bringing §10(b) actions  whenever the relevant securities were purchased or sold abroad and are not listed on a domestic exchange. The real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are "the focus of the Exchange Act" and "the objects of [its] solicitude." ... In reality, however, it is the "public interest" and"the interests of investors" that are the objects of thestatute’s solicitude.

***

Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated the stock price—and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief under §10(b).

The oddity of that result should give pause. For in walling off such individuals from §10(b), the Court narrows the provision’s reach to a degree that would surprise and alarm generations of American investors—and, I amconvinced, the Congress that passed the Exchange Act.Indeed, the Court’s rule turns §10(b) jurisprudence (and the presumption against extraterritoriality) on its head,by withdrawing the statute’s application from cases inwhich there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens.

Nevertheless, Justice Stevens follows the Court of Appeals decision in concluding that this case, in particular, does not have extensive links to or ramnifications in the US, but rather "has Australia written all over it."

Most important, however, is Justice Stevens concluding paragraph which transcends this case and expresses his heartfelt opinion against the Court's campaign against our securities laws:

The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the result the Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under §10(b)toothless.” Stoneridge, 552 U. S., at 175 (STEVENS, J., dissenting).

We could not agree more.

So now what? As a firm we must now look abroad to protect our clients. While we have done so in the past, it will now become a primary function. Unfortunately, those laws are not as developed as well as those in the US, and access to the Courts is much more difficult.

Senators Lose Will to Allow Pursuit of Aiders and Abettors

As reported by Reuters here the House approved amendments to the Financial Reform Bill  H.R. 4173. The amendment would reinstate the grounds for private civil actions for aiding and abetting in securities fraud -- i.e., overturning the U.S. Supreme Court decision in Stoneridge Investment Partners v. Scientific Atlanta in which the Roberts Court let third parties who assist the frauds go free. The logic went something like this:

1. Defendants actually and knowingly  assisted in sham transactions that misrepresented the financial results of a public company.
2. Defendants had no duty to the investors of another company, nor did they make any public statements about the transactions.
3. Hence, investors did not rely on their conduct when making their investment decisions!!!!

And therefore, unless Congress says otherwise, the Defendants can now move on and help the next fraudster with impunity.

But, as Reuters also reported, Senator Chris Dodd, who helped lead the charge in 2004 and 2005 to make it more difficult to sue his campaign donators from the accounting and banking industry, has once again stood in the path of accountability. Dodd was instrumental in the passage of the Private Securities Litigation Reform Act that made it impossible to sue anyone who commits securities fraud unless you can get the facts usually soley in the possession of the fraudsters themselves. Now again, the Senate negotiators for the Financial Reform Bill rejected the amendments to reinstate liability in favor of a "STUDY." Reuters quotes Dodd as saying "The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point." So let's have a study.

This is probably the last chance to get such liability reinstated and Dodd well knows that a STUDY is the kiss of death. He is not really standing up for the little guy in protecting his friends. The lawyers, accountants, bankers, who act as gatekeepers cannot be allowed to assist fraud and line their pockets. The main culprit often has too few resources to pay the damages, is bankrupt, or otherwise judgment proof. Even the SEC cannot recover damages from those who aid and abet. In large part that is why we have the financial/banking mess we have now.

Unless Congress Acts -- The Courts Will Belong to Wall Street, Not Main Street

I have staked out my position on the Supreme Court's continued chipping away at the ability of the investor to get redress for wrongs committed by corporate American. Let's just realize that our Supreme Court has been co-opted to protect corporations over individuals. Shutting the door on the ability to pursue aiders and abettors, now loosely defined to be over-inclusive by the Supreme Court, is just one of the area's Senator Spector seeks to remedy. See my post below. But Senator Spector has also introduced a bill to remedy an newer evil----forcing the wronged to plead more than ever before required, just to get access to the court system.

Senate Bill 1504, would reverse the Supreme Courts decision this year which gives a federal judge the ability to throw out a lawsuit, before discovery, if he does not think it is "plausible". That's a lot of discretion without any guidance, and keeping the case away from a jury based upon personal biases.  

Senate Bill 1504 is designed to return the standard to what it was prior to 2007, when the Court handed down its ruling in Bell Atlantic Corp. v. Twombly. That case and another — Ashcroft v. Iqbal from the most recent term — have raised the standard that pleaders must meet to avoid having their cases quickly tossed. Specter, in remarks prepared for the Senate floor, accused the Court’s majorities of making an end run around precedent with the two recent cases. 

“The effect of the Court’s actions will no doubt be to deny many plaintiffs with meritorious claims access to the federal courts and, with it, any legal redress for their injuries,” Specter said. “I think that is an especially unwelcome development at a time when, with the litigating resources of our executive-branch and administrative agencies stretched thin, the enforcement of federal antitrust, consumer protection, civil rights and other laws that benefit the public will fall increasingly to private litigants.”

At issue is how specific a pleading must be under the Federal Rules of Civil Procedure. Rule 8 requires that a complaint include “a short and plain statement of the claim showing that the pleader is entitled to relief,” while Rule 12 allows for the dismissal of complaints that are vague or that fail to state a claim. Under Iqbal, a 5-4 decision written by Justice Anthony Kennedy, many courts are now requiring more-specific facts that aren’t often available until discovery.

The Iqbal -Twombly debate arrived on Capitol Hill when  the House Committee on the Judiciary Subcommittee on the Constitution, Civil Rights and Civil Liberties held hearings on October 27, 2009. The hearing was entitled "Access to Justice Denied – Ashcroft v. Iqbal." The Committee’s page about the hearing, including links to the witnesses’ testimony can be found here. From Arthur Miller's written comments: 

Not only has plausibility pleading undone the simplicity and legal basis of the Rule 8 pleading regime and the limited function of the motion to dismiss, but it also grants virtually unbridled discretion to district judges. Under the new standard, the Court has vested trial judges with the authority to evaluate the strength of the factual “showing” of each claim for relief and thus determine whether or not it should proceed.

In conducting this analysis, judges are first to distinguish factual allegations from legal conclusions, since only the former need be accepted as true. Some post-Iqbal decisions suggest that the conclusion category is being applied quite expansively, embracing allegations that one might well consider to be factual and therefore historically jury triable.

By transforming factual allegations into legal conclusions and drawing inferences from them, judges are performing functions previously left to juries at trial, and doing so based only on the complaint.

Once trial judges have identified the factual allegations, they then must decide whether a plausible claim for relief has been shown by relying on their “judicial experience and common sense,” highly subjective concepts largely devoid of accepted—let alone universal—meaning.

Further, the plausibility of factual allegations appears to depend on the judge’s opinion of the relative likelihood of wrongdoing as measured against a hypothesized innocent explanation. As is true of the division between fact and legal conclusion, the Court has provided little direction on how to measure the palpably nebulous factors of “judicial experience,” “common sense,” and “more likely” alternative explanation it has inserted into the threshold Rule 12(b)(6) dynamic.

Once again, a citizen’s due process right to a day in court before a jury of his or her peers is threatened.

The subjectivity at the heart of Twombly-Iqbal raises the concern that rulings on motions to dismiss may turn on individual ideology regarding the underlying substantive law, attitudes toward private enforcement of federal statutes, and resort to extra-pleading matters hitherto far beyond the scope of a Rule 12(b)(6) motion to dismiss. As a result, inconsistent rulings on virtually identical complaints may well be based on judges’ disparate subjective views of what allegations are plausible.

Courts already have differed on issues that were once settled. For instance, the Third Circuit has ruled that the 2002 Supreme Court decision in Swierkiewicz v. Sorema, N.A.,which upheld notice pleading in employment discrimination actions, no longer was valid law after Twombly-Iqbal.27 Courts in other circuits disagree.

Twombly and Iqbal have swung the pendulum away from the prior emphasis on access for potentially meritorious claims; it probably will affect litigants bringing complex claims the hardest. Those cases -- many involving Constitutional and statutory rights that seek the enforcement of important national policies and often affecting large numbers of people -- include claims in which factual sufficiency is most difficult to achieve at the pleading stage and tend to be resource consumptive.

Already, recent decisions suggest that complex cases, such as those involving claims of discrimination, conspiracy, and antitrust violations, have been treated as if they were disfavored actions. Perhaps the propensity to dismiss these claims should come as no surprise: Twombly and Iqbal arose in two such contexts, and lower courts may find it easier to apply the Supreme Court’s reasoning to complaints with seemingly similar facts. Yet ambiguity abounds. Where is the plausibility line and what must be pled to survive a motion to dismiss? How will each judge’s personal experience and common sense affect his or her determination of plausibility? As a result of these and other uncertainties, the value of prior case law and predictability are obscured, and plaintiffs will be left guessing as to what each individual judge will consider sufficient. Throughout, the defendant basically gets a pass.

Moreover, how can plaintiffs with potentially meritorious claims plead with factual sufficiency without discovery, especially when they are limited in terms of time, lack resources for pre-institution investigations, and critical information is held by the defendants? 

Moreover, how can plaintiffs with potentially meritorious claims plead with factual sufficiency without discovery, especially when they are limited in terms of time, lack resources for pre-institution investigations, and critical information is held by the defendants?

 

It's Time To Reinstate Aiding and Abetting Liability Against Those Who Help Securities Fraud

Now is the time, if ever, for Congress to pass legislation that would reinstate aiding and abetting liability for accountants, lawyers, and others who help corporate executives commit securities fraud that harm investors. The public is outraged from watching all those who assisted in the market meltdown walk away with their huge bonuses.

Senator Arlin Specter, introduced Senate Bill 1551 on July 30, 2009, seeking to do just that. The Bill called th "Liability for Aiding and Abetting Securities Violations Act of 2009," is currently co-sponsored by Edward Kaufman [D-DE], John Reed [D-RI] and Sheldon Whitehouse [D-RI]. The Bill seeks to amend the SEC Act of 1934 subject to liability in a private civil action any person that knowingly or recklessly provides substantial assistance to another person (aids and abets) in violation of that act. The Senator's goal is to restore the ability to sue third parties in securities fraud lawsuits as freely as you could before the U.S. Supreme Court's ruling in Stoneridge v. Scientific Atlanta (Supreme Court docket).

The main provision of the Bill states:

For purposes of any private civil action implied under this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of this title to the same extent as the person to whom such assistance is provided.’.

Senator Spector"s floor speech follows: 

 Mr. President. I have sought recognition to urge support for the legislation I just introduced, the Liability for Aiding and Abetting Securities Violations Act of 2009. My legislation would overturn two errant decisions of the Supreme Court--Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 1994, and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 U.S. 148, 2008, by amending the Securities Exchange Act of 1934 to authorize a private right of action for aiding-and-abetting liability.

 Act's main anti-fraud provision, §10(b), makes it "unlawful for any person, directly or indirectly," to commit acts of fraud "in connection with the purchase or sale of any security." Nearly fifty years ago the Court implied a private right of action under §10(b). The result was that investors could recover financial losses caused by violations of 10(b) and the companion regulation issued by the SEC commonly known as "Rule 10b-5."

Until Central Bank, every circuit of the Federal Court of Appeals had concluded that §10(b)'s private right of action allowed recovery not only against the person who directly undertook a fraudulent act--the so-called primary violator--but also anyone who aided and abetted him. A five-Justice majority in Central Bank, intent on narrowing §10(b)'s scope, held that its private right of action extended only to primary violators.

When Congress debated the legislation that became the Private Securities Litigation Reform Act of 1995, PSLRA, then-SEC chairman Arthur Levitt and others urged Congress to overturn Central Bank. Congress declined to do so. The PSLRA authorized only the Securities and Exchange Commission, SEC, to bring aiding-and- abetting enforcement litigation.

It is time for us to revisit that judgment. The massive frauds involving Enron, Refco, Tyco, Worldcom, and countless other lesser-known companies during the last decade have taught us that a stock issuer's auditors, bankers, business affiliates, and lawyers--sometimes called "secondary actors"--all too often actively participate in and enable the issuer's fraud. Federal Judge Gerald Lynch recently observed in a decision calling on Congress to reexamine Central Bank that secondary actors are sometimes "deeply and indispensably implicated in wrongful conduct." In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d. 304, 318 n.15, S.D.N.Y. 2009. Professor John Coffee of Columbia Law School, a renowned expert on the regulation of the securities markets, has even laid much of the blame for the major corporate frauds of this [sic].

The immunity from suit that Central Bank confers on secondary actors has removed much-needed incentives for them to avoid complicity in and even help prevent securities fraud, and all too often left the victims of fraud uncompensated for their losses. Enforcement actions by the SEC have proved to be no substitute for suits by private plaintiffs. The SEC's litigating resources are too limited for the SEC to bring suit except in a small number of cases, and even when the SEC does bring suit, it cannot recover damages for the victims of fraud.

Last year's decision in Stoneridge made matters still worse for defrauded investors. Central Bank had at least held open the possibility that secondary actors who themselves undertake fraudulent activities prescribed by §10(b) could be "held liable as ..... primary violator[s]." Stoneridge has largely foreclosed that possibility. A divided Court held that §10(b)'s private right of action did not "reach" two vendors of a cable company that entered into sham transactions with the company knowing that it would publicly report the transactions in order to inflate its stock price. The Court conceded that the suppliers engaged in fraudulent conduct prescribed by §10(b), but held that they were not liable in a private action because only the issuer, not they, communicated the transaction to the public. That remarkable conclusion put the Court at odds with even the Republican Chairman of the SEC.

My legislative response would take the limited, but important, step amending of the Exchange Act to authorize a private right of action under §10(b) (and other, less commonly invoked, provisions of the Act) against a secondary actor who provides "substantial assistance" to a person who violates §10(b). Any suit brought under my proposed amendment would, of course, be subject to the heightened pleading standards, discovery-stay procedures, and other defendant-protective features of the PSLRA.

On Thursday, September 17, the Senate Judiciary Committee, Subcommittee on Crime and Drugs held a hearing entitled to consider the Bill, entitled  "Evaluating S. 1551: The Liability for Aiding and Abetting Securities Violations Act of 2009." S. 1551.  Sen. Arlen Specter's chaired the hearing. The witnesses were John C. Coffee, Columbia University School of Law; Patrick J Szymanski, General Counsel, Change to Win (a group of labor unions); Tanya Solov, Director, Illinois Securities Department, of behalf of the North American Securities Administrators Association; Robert J. Giuffra, Jr., a partner in Sullivan & Cromwell LLP, NYC; and Adam C. Pritchard, University of Michigan Law School. Coffee, Szymanski and Solov testified in favor of the Bill. Their can be found here:

John Coffee

Patrick Szymanski

Tanya Solov

 

Messrs. Giuffa and Pritchard both testified against the Bill, asking for lesser enforcement of the securities laws, and arguing that private law suits cost millions to those who are sued (forgetting about the billions lost in the recent market crash), and pointing to the evil plaintiffs lawyers who actually make money enforcing these laws ( and conveniently ignoring the millions made by the attorenys now shielded from liability when they help their clients commit fraud. Rather, they prefer that the inept SEC retain sole jurisdiction to go after aiders and abettors. Professor Pritchard wants to do away with actual damages and substitute only the amounts gained by the wrongdoers...effectively making damages so small that no attorney could afford to bring a case. Thier testimony can be found here:

Robert Giuffra

Adam Pritchard

 

Senator Patrick Leahy's statement in favor of the Bill can be found here:

 

The Honorable Patrick Leahy

 

 

 

Market Manipulation Cases Can Never Be Certified, So Says Ninth Circuit?

In what will hopefully be a short-lived opinion, a panel of the Ninth Circuit issued a per curiam opinion which appears to state that plaintiffs can never certify a class action for market manipulation....only for outrightmisrepresentations or ommissions---a curious if not frightening holding at a time when Wall Street has proven itself to be ....hmmm...shall we say less than ethical.

The issue: Whether stock purchasers are entitled to utilize a lesser variant of the "fraud on the market" doctrine, calledthe "integrity of the market" doctine, to create a rebuttable presumption of reliance, when a stock is maniplutated in a non-verbal way.

In Desai v. Deutsche Bank Securities (9th Cir. - July 29, 2009), a Ninth Circuit panel held that the lower court was correct in refusing to certify a class action based on market manipulation of the stock of GenesisIntermedia, Inc. by various bad actors, including various entities of Deutsche Bank, and one of its Canadian employees. The market manipulation scheme was complex, the Court accepted that "the scheme had driven GENI's Stock price from $12 per share to over $52 per share." It now trades for pennies. Plaintiffs sued and sought to certify a class of those who purchased the stock during the market manipulation.

Judge Wilson, in the Central District of California, refused to certify the class because each individual member of the class would have to prove its own personal reliance, presumably, the lack of market manipulation, and therefore individual questions of fact predominated. The appellate panel, consisting of Judge John T. Noonan, who wrote the per curiam opinion, and Justices Diermuid F. OScannlain, and Susan P. Graber, agreed.

Justices Noonan and Graber believed that they could reverse the lower court only for a clear abuse of discretion. Plaintiffs had conceded that they needed to prove reliance. ( I'm not sure I would have conceded reliance in a market manipulation case, though I would have conceded lack of knowledge is required). Justice Noonan then drew the battle lines:

Reliance can be presumed in two situations. In omission cases, courts can presume reliance when the information withheld is material pursuant to Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). Reliance can also be presumed in certain circumstances under the so-called “fraud on the market theory.” Basic INc. V Levinson, 485 U.S. 224, 241-49 (1988),Precisely to which cases this presumption applies—that is, to misrepresentation, to omission, to manipulation cases, or to some combination of the three—is an issue the parties contest on appeal. The two presumptions are conceptually distinct.

As explained by the Court, the fraud on the market theory is “based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business.” Basic v. Levinson, 485 U.S. at 241 (internal quotation marks omitted).

So far so good!

But then , Justice Noonan loses his way by picking and choosing verbage from cases that statethat the fraud on the market presumtionis available "only" when a plaintiff alleges a material misrepresentation or omission realting to a stock sold in an efficient market. On examination, however, it appear these cases are notmarket manipulation cases, probably because, up until now, they have been so rare or well hidden.

Butplaintiffs hadconceded that they could not prove an efficient market. (An efficient market quickly digests new information...from almost any source...causing the stock price to quickly adjusts to incorporate that new information. A thinly traded stock might not absorb the information quickly and therefore any news may not create a price reaction for weeks. In such a case, the disparity between individual investors knowledge becomes an issue. ) Having so conceded, they could not utilize the traditional definition of the fraud on the market presumption.

As for the Affiliated Ute presumption,the lower court rejected the theory that a manipulation was, in essence or fact, an omission. ( A holding with which I strongly disagree).

Applying a "clear abuse of discretion" standard, Judge Noonan agreed.The Affiliated Ute presumption has only been applied to cases of omission when there exists a duty to speak. The Court refused to extend the presumption to manipulative conductwhich "has always been distinct " from omissions., for example, in Rule 10b-5. The Court then claims to"follow" the 10th Circuit in Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000)which is not a market manipulation case. In fact the word "manipulation"only appears once in the lengthy opinion. For those who remember the 1989 Miniscribe class action, Wiles is a related individual case based upon a fraud whereby Miniscribe cooked its books by shipping bricks instead of product to warehouses, thereby overstating revenues and earnings....one of the good ol' frauds).

Regardless, to the extent that an omission might have existed, the plaintiffs failed to allege a duty. And the Court refuses to even attempt to discuss any duty of market participants to the market.

Next plaintiffs argued for a modification of the fraud on the market theory to fit such a situation, and claimed a rebuttable presumption based upon investorsreliance upon the "integrity of the market." The lower court rejected this too.

Judge Noonanfirst concedes that investors rely on the integrity of the market, citing Basic:

[T]he theory presumes first that “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price.” Id. at 247. Second, “[b]ecause most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations . . . may be presumed for purposes of a Rule 10b-5 action.” Id.

He notes plaintiffs argument that investors "typically rely on the 'integrity of the market,' that is, that no one has destroyed its efficiency by manipulation [and] when manipulation allegedly destroys the efficiency of the market, and with it the reliability of the market’s price." And he does not disagree. But when asked to find, that as a matter of law, plaintiffs are entitle to such a presumption, Judge Noonan can only summon the argument, "We are chary."

The Court argues, no authority compelled the lower court to adopt this new theory and that the Supreme Court has evidenced a "restrictive view" of private suits, and to not extend 10b-5 beyond its present boundaries, citing Stoneridge, 128 S. Ct. at 773.

The Court unfortunately pulls the Stoneridge quote out of context. In Stoneridge, the issue was framed as creating a private cause of action for aiders and abettors...a cause of action rejected more long ago in Central Bank. Hence the full quote is:

Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the §10(b) private right should not be extended beyond its present boundaries. See Virginia Bankshares, supra, at 1102 (“[T]he breadth of the [private right of action] once recognized should not, as a general matter, grow beyond the scope congressionally intended”); see also Central Bank, supra, at 173 (determining that the scope of conduct prohibited is limited by the text of §10(b)).

Plaintiffs were not seeking to extend 10b-5 or create a private cause of action. The law clearly forbids market manipulation and private causes of action have existed under this law for decades.

Justice Noonan, thus, avoids any analytical examination of the requested presumption. Instead he concludes merely "that the district court did not abuse its discretion in refusing to adopt the integrity of the market presumption." In other words...he punts on what the law is or should be.

O'Scannlain, on the other hand, goes after his colleagues for dodging the legal issue, making out a good argument for en banc review:

Unfortunately, however, we are left to conclude abruptly with a declaration of the result, for we cannot agree on the correct approach. I believe that, because the validity of a presumption of reliance in securities class actions is a matter of law and because errors of law are per se abuses of discretion, we must explicitly decide whether Investors are entitled to this novel presumption as a matter of law. I write separately to explain my view.

Even so, O'Scannlain goes on to find the presumption legally unsupportable and logically inadvisable. On the legal side, he can onlysummon citations to non-market manipulation cases that have no application to these facts. On the logic side, he actually makes plaintiffs case. He starts by admitting:

Most investors do, I think it fair to say, assume that the markets are not corrupt. Cf. Basic, 485 U.S. at 246-47 (“It has been noted that ‘it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?’ ” (quoting Schlanger v. Four-Phase Sys. Inc., 555 F. Supp. 535, 538 (S.D.N.Y. 1982))).

But then he concludes, in logic that escapes rigor, that if the presumption were adopted, then no plaintiff would ever have to prove reliance. In so concluding, he simply forgets that plaintffs seek only to apply this presumption to market manipulation cases....which the Court has just found to be distinct from misrepresentation and omission cases, legally.

Similarly he argues that the theory "would permit a presumption of reliance no matter how unlikely it is that the market price in question would actually reflect the alleged manipulation." Again,how is it that the presumption of reliance would not still require the plaintiffs to prove that the price during the entire class period was inflated by the manipulation, and by how much? O'Scannlain does not say.

Revealingly, O'Scannlain seems to back track and recognize theproblems with his concurring opinion inhis concluding. This footnote accurately captures the entire issue...and best statement for l an en banc courtto tackle:

I recognize the possibility that certain allegations of manipulative conduct might change the application of the fraud on the market theory. This is because the plaintiff in manipulation cases often alleges that a defendant directly manipulated the price. Certainly, a plaintiff must still show that the market in question could absorb into the price the misinformation communicated by the alleged manipulation. But need a plaintiff show the same type of proof of an efficient market in a manipulation case as is required in a misrepresentation case? Although I note the doctrinal wrinkle, this is a question I would agree we actually do not need to reach, because Investors forsook the fraud on the market theory.

Justice Graber, in her concurring opinion, defends Justice Noonan's contention that the Court need not reach the legal question:

All we have to decide is whether the district court had to recognize that new theory. If so, then the court made a mistake of law (and hence abused its discretion, see Koon v. United States, 518 U.S. 81, 100 (1996) (“A district court by definition abuses its discretion when it makes an error of law.”)).

I agree with O'Scannlain that the Court should have addressed, as a full panel, a broader application of the fraud on the market theory in market manipulation cases. An efficient market should not and, indeed, cannot be a requirement where there are no statements to be absorbed by the market participants in making their decisions. The Court should not have said that a lower Court has no duty to find the right law for the right circumstances, even if it is a new application of a principle. How else does law evolve. It has to start in the lower Courts. Justices Noonan and Graber, shirked their duty.

But in the end, it may not matter that much to the plaintiffs bar. The reason why there is no authority on the subject is, as O'Scannlain states, simply reflects "the relative rarity of" manipulative conduct cases. So the impact will be minimal on securities fraud cases.....except now that the fear of a lawsuit is gone, maybe the fraudsters will start crawling through the cracks.

Shaun Martin's Blog California Appellate Report, has a very good discussion and first analysis of the case at Desai v. Deutsche Bank Securities (9th Cir. - July 29, 2009).