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Starting with the Great Depression, legislative reforms were put in place to protect U.S. investors Over the last 17 years, Congress and the U.S Supreme Court have stripped investors of much protections In the current “Occupy” environment, sentiment may be running high for legislative re-reforms. This presentation discusses the Supreme Court cases of Citizens United, Morrison and Stoneridge and possible legislative roll-backs.
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Occupy Wall Street through Legislative
ReformReed R. KathreinPeter E. Borkon
Hagens Berman Sobol Shapiro LLP
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75 Years of Investor Protection Overturned
Starting with the Great Depression, legislative reforms were put in place to protect U.S. investors
Over the last 17 years, Congress and the U.S Supreme Court have stripped investors of much protections
In the current “Occupy” environment, sentiment may be running high for legislative re-reforms
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Recent Examples Corporations are now persons? Citizens United
Foreign Corporations get a free pass to defraud U.S Investors? Australia Bank v. Morrison
Banks, Accountants Lawyers and Others can aid and abet fraud with impunity. Stoneridge, Janus, Central Bank
The application of SLUSA to almost all frauds, preempting state remedies
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Citizens United The First Amendment prohibits limitations on independent
spending for political purposes by corporations and unions.
Justice Kennedy 5-4 opinion
Dispute originated when Citizens United sought to air a film critical of Hillary Clinton called Hillary: The Movie
Impacts: Expansion of corporate funding in political process? Increased influence of lobbying? Corporate personhood?
Democratic Senators proposing constitutional amendment
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Citizens UnitedJustice Stevens dissent:
In the context of election to public office, the distinction between corporate and human speakers is significant. Although they make enormous contributions to our society, corporations are not actually members of it. They cannot vote or run for office. Because they may be managed and controlled by nonresidents, their interests may conflict in fundamental respects with the interests of eligible voters. The financial resources, legal structure, and instrumental orientation of corporations raise legitimate concerns about their role in the electoral process. Our lawmakers have a compelling constitutional basis, if not also a democratic duty, to take measures designed to guard against the potentially deleterious effects of corporate spending in local and national races.
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Citizens UnitedPossible Amendments:
1. Congress shall have power to regulate the raising and spending of money and in kind equivalents with respect to Federal elections, including through setting limits on
‘‘(1) the amount of contributions to candidates for nomination for election to, or for election to, Federal office; and
‘‘(2) the amount of expenditures that may be made by, in support of, or in opposition to such candidates.
2. A State shall have power……
Corporations are not persons…
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Morrison (Australia Bank)Old Law allowed private securities fraud suits against corporations where:
“significant conduct” in furtherance of the fraud occurred in the United States;
foreign conduct that has an adverse effect on U.S. markets, investors, or both.
New Law:
Transaction must occur on U.S. exchange. Bars claims against foreign companies, and U.S. companies, if stock is bought on overseas exchanges;
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Morrison (Australia Bank)
Impact Vivendi, Olympus, ADRS (unsponsored),swaps.
SEC saved? Too thin…possibly no subject matter.
What if exchanges are merged? Where does the transaction take place anyway?
Creates a high barrier to a geographically diverse portfolio.
Sends business overseas.
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Morrison (Australia Bank)SEC has requested comments from the public as
to whether it should recommend to Congress that the ruling should be overruled or limited by Congress;
Legislation needed to reinstate the “conduct and effects” test.
Solicitor General’s proposal with no effects test:“significant conduct” in the United States that was
“material” to the fraud’s success, and the fraud directly caused the plaintiff’s injury.
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StoneridgeOld Law allowed SFS where persons aided and abetted the fraud.
New Law: No private right of action for "scheme liability" or aiding and abetting under the federal securities laws.
Stoneridge protects or customers or suppliers who substantially assist fraud. Rational…no explicit authority…no reliance.
Central Bank protected banks.
Janus Funds protects investment adviser which do not “make” the statement because fund trustees have “ultimate authority over the statement, including its content and whether and how to communicate it.” .
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Stoneridge Allowing recourse from secondary actors that may serve as
“gatekeepers” would deter them from aiding and abetting…and fraud motivate them to be diligent gatekeepers.
Gatekeepers include accountants, lawyers, securities analysts, credit rating agencies, and underwriters…actors assisting publicly held companies with their securities transactions and related disclosures.
In some cases, publicly traded companies cannot complete their securities transactions without the approval of such secondary actors.
These secondary actors can provide a check on securities fraud to the benefit of investors.
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StoneridgeFormer Senator Arlen Specter proposed on July
30, 2009 Senate Bill 1551, “The Liability for Aiding and Abetting Securities Violations Act of 2009.”
Dodd-Frank mandated GAO study released June 2011—merely repeats arguments pro and con. “Debate continues…”
Needed Action: Legislation allowing private litigation against a person that provides "substantial assistance" in a violation of the securities laws.
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SLUSAPreempts class actions that alleged fraud under
state law "in connection with the purchase or sale" of securities. Such lawsuits cannot be filed in state or federal court;
Courts are broadly interpreting SLUSA to cover all frauds even if there is no purchase or sale of a security…e.g. Madoff; Ponzi schemes etc.
Needed action: Legislation to stop overly expansive reading pre-empting breach of fiduciary duty and negligence claims,