Three years ago, the United States Supreme Court confirmed in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018) that claims brought under the Securities Act of 1933 (the “Securities Act”) are subject to “concurrent jurisdiction,” meaning they can be asserted either in federal or state court and that a state court action cannot be removed to federal court. On the last day of this past term, the Supreme Court announced that it has now accepted certiorari in Pivotal Software, Inc. v. Tran in which it will address the follow-up question of whether the automatic stay of discovery in Securities Act cases applies when those cases are filed in state court.

The Private Securities Law Reform Act (the “PSLRA”), which amended the Securities Act (as well as the Securities Exchange Act of 1934), contains some provisions that apply just when Securities Act claims are filed in federal court and some that also apply when the claims are filed in state court. An important provision of the PSLRA is Section 77z-1(b)(1), which provides in pertinent part that “[i]n any private action arising under this subchapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.” Various state courts, especially in New York and California (where Securities Act claims are often filed), have divided over the question of whether PSLRA Section 77z-1(b)(1) applies to state court-filed claims. This issue has become more pronounced since the Supreme Court’s decision in Cyan, which resulted in more Securities Act filings in state courts.

In Pivotal, investor plaintiffs brought securities actions in both California state and federal courts relating to representations made in connection with an initial public offering. At first, the state court plaintiffs voluntarily stayed their action while a motion to dismiss was pending in federal court, where that action was stayed pursuant to the PSLRA stay. After the federal court case was dismissed, the state court allowed discovery to proceed even though the defendants also moved to dismiss the state court action. Defendants also sought a stay of discovery, arguing that the plain meaning of the statute dictates that the stay applies “in any private action” wherever filed. The California state court, however, denied defendants’ motion, concluding that the PSLRA’s automatic stay was a “procedural” provision that did not explicitly direct stays in state court. The California appellate courts denied requests to review this decision.

Defendants petitioned the United States Supreme Court to take the case on grounds that state trial courts are sharply divided on the question of whether the PSLRA’s automatic stay applies to Securities Act claims filed in state court. The petition also underscored that the issue “consistently evades appellate review” because state appellate courts refuse to review the trial court determinations and the issue does not arise in federal actions. Although the state court plaintiffs decided, after the certiorari petition was filed, voluntarily to stay discovery pending the state court motion to dismiss, the United State Supreme Court nonetheless decided to grant the petition and will issue a decision later in the 2021/2022 term.

The Supreme Court’s decision will likely have a significant impact on Securities Act claims in state court. Stay tuned for further developments.

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As the “new normal” of pandemic virtual legal proceedings appears to be waning, a question arises as to which, if any, practices initially born out of necessity, but no longer so, should continue to be utilized. One such device previously employed sparingly, but which became de rigueur during COVID, is the virtual deposition. In some but not all circumstances, virtual depositions can remain an effective tool for litigators.

The critical considerations in determining whether to continue using this mechanism will hinge on the purpose of the deposition and the stature of the particular witness. For example, if a deposition is being conducted for basic discovery purposes, i.e., understanding the broad strokes of a dispute, or determining generally what the opposing side knows or has, it might make sense to conduct it virtually. What may be obtained from such witnesses over video-link likely would not be enhanced by conducting the depositions in person. Moreover, the technical hiccups sometimes incidental to a video deposition, such as audio deficiencies and temporarily frozen screens, likely would not diminish the value of such “low-stakes” testimony.

But, if the purpose is to obtain testimony that will be presented to a trier of fact, there is no substitute for a live deposition. Like cross-examining an opponent’s witness during a trial, being in the same room to control that witness without the delay of a video feed or the interference of opposing counsel who may be present with the witness while you are not, makes a world of difference. Due to the unavailability of witnesses, cases may be won and lost during depositions. Consequently, it is important to treat these depositions as if you are eliciting trial testimony. Doing so live will give you the best chance at a successful examination.

A second important consideration is the stature of the witness. A virtual deposition would certainly be appropriate for a low ranking company employee with no ability to bind an organization, or a document custodian whose elicited testimony would likely be mechanical in nature. However, the deposition of a critical fact witness, high-ranking company official, or corporate designee most definitely should be conducted live, if possible. There simply is no substitute for looking a witness in the eyes during questioning to gauge their credibility, or obtaining a face-to-face assessment of their composure and demeanor. That type of evaluation is simply not possible over a video-link, particularly given the possibility of technical mishaps.

These considerations should not be viewed in a vacuum, of course. For more and more clients, a primary concern is legal cost containment. For those attorneys with national practices, being able to conduct the video deposition of a witness who resides on the other side of the country surely will provide significant cost savings for such a client. Similarly, a busy litigator’s life will be made easier by having the option of deposing a witness virtually, rather than committing to otherwise avoidable travel time.

Like most legal conundrums, the answer to this question is not clear-cut. But, having options like those outlined above to address the different types of witnesses and circumstances will increase the likelihood of eliciting valuable testimony.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers:  “Two Election-Related Decisions, Decided on Strict Ideological Grounds, Close Out the Term.”

The following is an excerpt:

No harmony today. The Court has rendered two 6-3 decisions mirroring strong ideological divisions. In one, Brnovich v. Democratic National Committee, the Court was unmoved by allegations that two provisions of Arizona election law offended Section 2 of the Voting Rights Act (“VRA”) and had resulted in disproportionate burdens on minority voters. In the other, Americans for Prosperity Foundation v. Bonta, the Court upheld the claim of several conservative charities that the California policy that required organizations like theirs to provide the State with a list identifying their largest donors offended their First Amendment rights. [Full disclosure: I am a member of the Board of Directors of the Campaign Legal Center, a public interest group that has taken public positions in both of these election campaign-related cases that accord with both dissents. To the extent that any opinion is expressed herein, it is my own.]

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Today, but a Few More Unusual Alliances.”

The following is an excerpt:

Three decisions were released today, each showing a greater division of opinion than we’ve seen over the last several weeks. While one of the three, an immigration case, was decided across strict conservative/liberal reputational lines, the other two, yet again, were the result of unusual alliances of Justices expressing independent views of the law and jurisprudential process.

In Johnson v. Guzman Chavez, there at least was no conflict between the conservative majority (Alito, J., joined by Roberts, C.J., and Kavanaugh, J., with Thomas and Gorsuch, J.J., concurring) and the liberal dissenters (Breyer, Sotomayor, and Kagan, J.J.) concerning the facts and the issue to be decided. The case concerns several non-citizens who had been ordered removed from the United States, who then returned illegally. The government then reinstated their removal orders and detained them. They argued that they could not be removed because they reasonably feared torture in the countries to which the government wanted to send them, and that they were entitled to bond during the expected lengthy time of proceedings to resolve the matter. The Court had to determine which of two provisions of immigration law governed the question of detention: 8 U. S. C. §1226 or 8 U. S. C. §1231. If it was §1226, which applies “pending a decision on whether the alien is to be removed from the United States,” then the aliens may receive a bond hearing before an immigration judge. If the answer is §1231, which applies after an alien is “ordered removed,” then the alien is not entitled to a bond hearing. The Court’s majority concluded that it is §1231, not §1226, that governs the detention of aliens subject to reinstated orders of removal. They, therefore, are denied a bond hearing. One would think, as the majority has, that the literal language of Section 1331 indeed should control, given the fact that the aliens in question clearly had been “ordered removed.” However, it takes 23 pages for Justice Alito to justify that simple application. The reason for that lies in the addressing the attempt of the dissenters to focus on the law’s 90-day removal period and its potential application to “withholding-only” proceedings—a limitation that it generally is impracticable to meet—and also what, to the dissenters, is the overriding significance of protecting aliens who have a legitimate fear of persecution. At the outset of the Biden administration, the country is experiencing a wave of illegal immigration. The Johnson case is likely going to have effect concerning the processing of many new detainees.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Two ‘GVRs’ Show Continued Restraint by the Justices.”

The following is an excerpt:

The Court issued two per curiam opinions today, both of them granting cert., vacating the judgments below, and remanding the cases to a lower court for further factual inquiry, a procedure known colloquially as a “GVR.” Both of these unsigned opinions represent restraint, deferring to trial courts for factual findings and deferring reaching legal issues until it is unavoidable. In one of the two cases, three conservative Justices, a bit anomalously to normal conservative doctrine, I suggest, criticize the majority for doing that. However, in the end, the Court is acting as what it is supposed to be: one of legal review, not factfinding.

As last week’s decision in Cedar Point Nursery v. Hassid, illustrates, property rights cases are controversial among the Justices (and others), though not necessarily along the lines that many observers might have assumed. Today’s decision in another Fifth Amendment takings case, Pakdel v. City and County of San Francisco, avoids any such controversy. Here, the unanimous Court acknowledges the general rule that, in determining whether a regulatory taking violates the Fifth Amendment, a federal court should not consider the claim before the government has reached a “final” decision. However, the exhaustion of state remedies is not a prerequisite to an action, such as this one, under 42 U. S. C. §1983. Thus, the married couple who are co-owners of a multiunit residence, who had applied for conversion of the building into a condominium, but now sought the vacation of a lifetime lease to a tenant that had been a feature of the conversion approval, argued that their compelled agreement to the lease provision was an unconstitutional regulatory taking. While their appeals of the denial of their position were pending, the Supreme Court held that a §1983 case can be brought without first bringing a state lawsuit. The Ninth Circuit, nevertheless, insisted, pursuant to another Supreme Court ruling, that plaintiffs may challenge only “final” government decisions, which had not taken place here. In reversing the oft-reversed Ninth Circuit, the Supreme Court held that the appeals court’s view of finality was too stringent, that it tended to impose a rigid exhaustion condition that is not required in §1983 takings cases. Instead, the finality requirement is “relatively modest,” with a plaintiff having to show no more than that there is no question about how the city mandates that its governing regulation applies. On remand, the lower court will be able to take that into account, along with the issues just identified by the Court in the Cedar Point case.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “More Unlikely Lineups.”

The following is an excerpt:

Some critics might claim that the Justices are trying to prove something—that the unlikely alliances that they are forming are confined to narrowly drawn opinions issued to counter criticisms coming from the political arena that extra Justices should be appointed to the Court, or term limits should be imposed. It is, I suggest, clear enough that the Chief Justice is doing a masterful job of promoting restraint and unity, and I’ve commented to that effect on several recent occasions. However, that aside, it also is clear that the individual Justices are deciding cases according to their independent, personal, jurisprudential views, and are hardly marching in lockstep along two sides of a conservative-liberal divide. The unpredicted lineups in the three cases decided by the Court today firmly illustrate that point.

TransUnion LLC v. Ramirez is a case decided under the Fair Credit Reporting Act (FCRA), which creates a private cause of action by consumers to recover damages for certain actions. TransUnion is a credit reporting agency that compiles and sells consumer credit reports that included, through an add-on product, information as to consumer names that were matched up against a list of terrorists, drug traffickers, and other criminals maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC). A class of 8,185 individuals with OFAC alerts in their credit files sued TransUnion under the FCRA for failing to use reasonable procedures to ensure the accuracy of their credit files. It was stipulated that only 1,853 class members (including the named plaintiff, Sergio Ramirez) had their misleading credit reports containing OFAC alerts provided to third parties during the period. The reports of the other 6,332 members of the class were not so circulated.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Surprising Consensus Under a Strong Chief Justice.”

The following is an excerpt:

A number of commentators, including myself, have been highlighting the apparent fact that under the strong leadership of the Chief Justice, the Supreme Court is exhibiting what, to many, has been surprising consensus in opinions, even in cases that are publicly controversial.

This has led to cases decided on narrow, fact-specific grounds, applying constitutional avoidance in some cases and multiple partial concurrences or dissents in others, but generally unanimous or near-unanimous outcomes.

Three of the four cases decided by the Court today clearly fit that characterization. The fourth, a property rights case, displays a traditional conservative/liberal split of views, but, as the Chief Justice makes clear, a most respectful philosophical, not political, division.

Click here to read the full post and more on SCOTUS Today.

SCOTUS-Today

Our colleague Stuart Gerson of Epstein Becker Green has a new post on SCOTUS Today that will be of interest to our readers: “Three More Cases Demonstrating Jurisprudential Reason, Not Politics.”

The following is an excerpt:

Another busy day for the Court, which is no surprise given the short time remaining in the term and the number of opinions that yet have been published. If there is a distinguishing characteristic, it is the continued fracturing of the stereotype that the Justices act for political, not jurisprudential reason, and hence that there are immovable blocs of liberals and conservatives.

Thus it is worthy of note that one of the three cases decided today finds Chief Justice Roberts, along with Justices Breyer, Kagan, and Kavanaugh, joining a Barrett opinion in full. And Justice Thomas filed a dissenting opinion in which Justices Breyer, Sotomayor, and Kagan joined as to its main substantive parts. A great deal of credit should go to the Chief Justice, who clearly has been able to convince a continuing series of majorities to practice constitutional avoidance and insist upon parties’ satisfaction of Article III standing requirements. Last week’s decision on the Affordable Care Act, California v. Texas, is a monument to that laudable administration.

Click here to read the full post and more on SCOTUS Today.

Trading,Securities,Abstract,Background.

Last week, the Securities and Exchange Commission’s Office of Information and Regulatory Affairs released the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which includes the SEC’s rulemaking agenda.

According to the SEC’s press release, notable proposed and final rulemaking areas include:

  • Disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk
    Market structure modernization within equity markets, treasury markets, and other fixed income markets
  • Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market
  • Investment fund rules, including money market funds, private funds, and ESG funds
  • Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including, among other things, securities-based swaps and related rules, incentive-based compensation arrangements, and conflicts of interest in securitizations
  • Enhancing shareholder democracy
  • Special purpose acquisition companies
  • Mandated electronic filings and transfer agents
  • 10b5-1 affirmative defense provisions

One of the first items to be addressed, by October 2021, is proposed rule amendments to address concerns about Rule 10b5-1’s affirmative defense provision. Rule 10b5-1 provides an affirmative defense to corporate insiders and issuers from insider trading law if they adopt a trading plan in good faith and before they become aware of material nonpublic information. The proposed rulemaking on Rule 10b5-1 follows less than a week after SEC Chairman Gary Gensler gave a speech highlighting his concerns about the use of 10b5-1 trading plans. In that speech he also noted that he had asked staff to make recommendations “how we might freshen up Rule 10b5-1.” It is likely that the ideas he raised in his speech, including a mandatory cooling off period before the first transaction, limitations on when 10b5-1 plans can be cancelled, mandatory disclosure of 10b5-1 plans and limits on the number of plans, become part of the rulemaking discussion. Insiders and issuers should pay close attention to the process because it may lead to changes in 10b5-1 plans beyond what is current practice. For example, a four to six month cooling off period is longer than what many consider best practice.    

What is also noteworthy is what was not included in the SEC’s release – rulemaking concerning digital assets – which drew the ire of two commissioners and is somewhat surprising given the growth of digital assets. On June 14, commissioners Hester M. Peirce and Elad L. Roisman issued a statement noting, among other things, the lack of proposed rules regarding digital assets and allowing companies to compensate gig economy workers with equity and also expressed their concern that the SEC was planning to revisit areas that had been the subject of recent rulemaking, such as proxy updates, resource extraction payments, the definition of accredited investor, and whistleblowers.

Although the SEC’s rulemaking agenda may change, this release provides a guide for the SEC’s regulatory initiatives in the near future. And, it will be interesting to see whether the Commissioners Peirce and Roisman and able to garner support to address digital assets.