What's behind the US high court's reenergized focus on securities cases?

It has been nearly 80 years since Congress federalized securities regulation, and almost 70 years since the federal courts first recognized a private right of action for securities fraud. You would think that, over that vast stretch of time, the federal courts had settled virtually all of the important issues relating to the meaning and reach of the laws affecting securities litigation.

You would be wrong.

Since 2010 alone, the U.S. Supreme Court has decided five major cases interpreting key provisions of the federal securities laws, and two more cases are on the docket for the current term. This surpasses the total of five securities cases decided by the high court during the previous 15 years.

How to explain this flurry of recent activity? Is the court trying to send a message?

To begin with, a little history. In the Securities Act of 1933, Congress established a private right for investors, imposing strict liability on issuers who sold securities through a materially misleading prospectus. The following year, Congress enacted a prohibition on fraud in connection with any purchase or sale of a security. Section 10(b) of the Securities Exchange Act of 1934, however, did not include a private right of action; rather, Congress created the Securities and Exchange Commission and charged it with promulgating enforcement rules.

It was not until 1946 that a federal district court first held that an aggrieved investor could invoke Section 10(b) in a federal action to recover damages for securities fraud. In the ensuing four decades, the Supreme Court periodically weighed in on the various attributes of the "implied" private right of action, but it was not until 1988 that the court explicitly confirmed the existence of such a right, based on a combination of "judicial interpretation and application, legislative acquiescence, and the passage of time." Basic v. Levinson, 485 U.S. 224, 231.) And it was not until 1991 that the court decided on a uniform federal statute of limitations for the claim. Lampf et al. v. Gilbertson, 501 U.S. 350.

The fact that a private right of recovery was not written into the act, but had to be "implied" by the courts, helps to explain why so many of the basic attributes of securities fraud claims have been developed through judicial decisions. As a result, Section 10(b) of the 1934 act has received a healthy amount of attention from the Supreme Court.

Over the years, this attention has come in fits and spurts. In one notable burst of activity between 1975 and 1977, the court issued a string of decisions that defined many of the terms that are foundational in Section 10(b) jurisprudence: the requirement that a violation be "in connection with" a purchase or sale of securities (Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 421 U. S. 730 (1975)); the mental state known as "scienter" that is a required element of the claim (Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)); the definition of "materiality" (TSC Industries v. Northway, 426 U. S. 438 (1976)); and the meaning of a "manipulative or deceptive" device (Santa Fe Industries v. Green, 430 U. S. 462, 477-78 (1977)).

Why were all of these seminal decisions issued within such a short span of time? It may be no accident that these cases came before the Supreme Court when they did. In 1966, major revisions to Rule 23 of the Federal Rules of Civil Procedure made it possible for investors to use class action litigation to enforce their rights under the 1934 act. Once securities class actions began to have increasing economic consequences for issuers and investors, it was only a matter of time before key issues involving the interpretation of Section 10(b) would find their way to the Supreme Court.

After the late 1970s, the frequency of securities litigation opinions from the Supreme Court subsided. The next major changes in the field were statutory: in 1995 and 1998, Congress enacted sweeping procedural changes affecting securities class actions, involving pleading standards, the selection of class counsel, the timing of discovery and the availability of relief in state courts. These statutes, however, did not have an immediate impact on the frequency with which securities fraud cases reached the Supreme Court.

How, then, to explain the most recent cluster of cases? At first glance, they appear to deal with a diverse array of subjects: who may be liable as a "maker" of a false statement (Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011)); whether a plaintiff is required to prove "loss causation" in order to obtain class certification (Erica P. John Fund v. Halliburton, 131 S. Ct. 2179 (2011)); whether there is a bright-line test for materiality or scienter (Matrixx Initiatives v. Siracusano, 131 S. Ct. 1309 (2011)); the territorial limits of subject matter jurisdiction (Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010)); when the statute of limitations begins to run (Merck v. Reynolds, 130 S. Ct. 1784 (2010)); and whether materiality must be established at the class certification stage (Amgen v. Connecticut Retirement Plans, No. 11-1085, argued Nov. 5, 2012).

A closer examination, however, suggests a possible link to the 1975-77 cases. Just as the expansion of the class action remedy preceded those earlier cases, the last several years have been highlighted by increasingly large cases alleging widespread misconduct throughout entire industries and industry segments. Although the absolute number of new case filings has fluctuated, the aggregate financial exposures involved in recent cases have continued to increase dramatically.

Against this backdrop, it is notable that several of the recent cases have concerned the reach of Section 10(b) and the breadth of the remedy it affords. Morrison limited the availability of relief in cases involving foreign purchasers and foreign exchanges. Erica P. John Fund and Amgen deal with the requirements that a plaintiff must meet before class certification. These two cases are related to the court's recent decision in Wal-Mart Stores v. Dukes, 131 S. Ct. 2541 (2011), which involved the commonality requirement for sex discrimination class actions under Title VII of the Civil Rights Act of 1964. (It is also notable that Amgen was argued on the same day as Comcast v. Behrend, No. 11-864, which raised questions of class treatment in the antitrust context.) In the context of the increasingly large damages being sought in cases related to the most recent financial crisis, how these cases are decided will have enormous financial consequences.

Once again, it may be no accident that so many securities cases are coming to the court at one time. In all of these cases, the Supreme Court appears to be focused on the proper scope of relief in class actions. At oral argument, justices have openly acknowledged that the lines they draw will have significant impact on the settlement value of the cases.

It may be that once the court has established guidelines for class treatment under Section 10(b), the frequency of its securities law decisions will once again abate. But if the last few decades teach us anything, it is that the federal securities laws will continue to be an important subject of the Supreme Court's jurisprudence.

The views set forth herein are the personal views of the authors and do not necessarily reflect those of the firm.