Posts categorized as "Current Events"

Case of the Month: NML Capital v. Republic of Argentina

If you follow the news you may have seen news reports regarding a case in a New York federal court, NML Capital v. Republic of Argentina.   It's a useful case to study for US legal terms, the federal court system, and where politics and the law intersect.  Below is a simplified summary.

The background to the case is that Argentina issued bonds.  You're probably familiar with bonds:  bonds help companies and countries to raise money.  Basically, investors give money now in return for a promise to get paid back with interest later.  

Argentina has a history of defaulting - - failing to pay back investors.  To help encourage people to buy Argentina's bonds Argentina agreed that if there was a legal battle in connection with the bonds that Argentina would litigate in New York federal court.  The reason to litigate in New York is that New York would be perceived as a neutral place to settle any dispute.  Investors might be nervous about litigating against Argentina in Argentina's courts and would be less willing to buy Argentina's bonds.

 So investors bought the bonds but Argentina defaulted.  Argentina told bondholders that they could get back around 30 cents for every dollar.  Many bondholders agreed to this offer.  In the news you will see the bondholders who agreed to this deal called Exchange Bondholders.  Exchange Bondholders means the investors who agreed to accept Argentina's offer.

But not all the investors agreed to accept Argentina's offer.  Other bondholders wanted Argentina to pay what it owed on the bonds.  These bondholders sued in New York federal court (the case is captioned NML Capital Ltd. v. The Republic of Argentina).  Let's call the bondholders who did not accept the deal "plaintiffs".

The federal court ordered Argentina to not pay the Exchange Bondholders unless Argentina also agreed to make payments to the plaintiffs in the court case.  Argentina, among other things, argued that the US federal court could not tell Argentina what to do because Argentina is a sovereign country.

The judge found Argentina to be in contempt because Argentina failed to follow his orders.   The plaintiffs want the judge to impose a penalty of $50,000/day against Argentina.  This creates political friction between the United States and Argentina because it is unusual for a court in one country to impose a penalty against another country. Argentina has asked for support from the United States government (the executive branch) against what it believes to be improper actions by the court (the judicial branch).

Below is a video I uploaded:



Extraterritorial Application of US Law: Liu Meng-Lin v. Siemens AG

As a general rule, US law does not apply outside the territorial jurisdiction of the United States.  A recent decision by the Second Circuit Court of Appeals (Liu Meng-Lin v. Siemens AG) provides a helpful illustration.   As a reminder, the Second Circuit Court of Appeals is a federal appellate court that decides appeals from  Connecticut, New York, and Vermont district courts.   The Second Circuit is particularly influential with respect to securities laws because it hears cases on appeal from New York, including the federal court in Manhattan.

After the 2008 financial crisis Congress passed a law called the Dodd-Frank Act.  Among many other things, the Dodd-Frank Act provides protection for whistleblowers - - persons who report securities law violations by their companies.    The Dodd-Frank Act prohibits companies from retaliating against employees who report certain types of violations of US law.  

The plaintiff in this case sued his former employer, arguing that the company illegally fired him after he internally reported corrupt practices by the company.  He complained that by firing him, the company violated the Dodd-Frank Act's protection for whistleblowers.

But the district court dismissed his case and the Second Circuit affirmed the district court's decision.  Why? The plaintiff was a foreigner (non-US citizen) working for a foreign company and all of the conduct at issue in the case occurred overseas.  Specifically:

  1. The foreign company's allegedly corrupt activity occurred outside the United States (in North Korea and China).
  2. The plaintiff reported the activity overseas.
  3. The allegedly illegal retaliation occurred overseas.

According to the Second Circuit, the only connection to the United States was that the foreign company was listed on the New York Stock Exchange.  The Second Circuit, citing recent Supreme Court decisions, explained that because Congress did not clearly intend whistleblower protection laws to apply extraterritorially, the plaintiff's case must be dismissed.

Here is a video discussing the case:




Riley v. California: Why the police need a warrant to search the cellular phone of a person under arrest

Last month, in Riley v. California, the Supreme Court decided that the police, absent exceptional circumstances, cannot constitutionally search an arrested person's cellular phone.  If you are studying US law this is a very useful decision to see how courts split on tricky issues.   The case is also helpful to understanding how courts apply precedent and create new precedent.  

The background to the case is that the police are generally allowed to conduct a warrantless search of a person who is arrested.  This is often called a "search incident to an arrest."  That is, the police can search the arrested person's pockets, things the arrested person is carrying, and immediate surroundings.  Courts agree that the police need to conduct these types of  searches to ensure their safety (an arrested person might have a concealed weapon) and to keep arrested persons from destroying evidence.  For example, in one important case, a police search of an arrested person's cigarette pack was held constitutional.

The Supreme Court explained that a warrantless search of a cellular phone is different.  First, cellular phones usually are not dangerous (unless perhaps the arrested person used the phone to contact accomplices who might want to attack the police). Second, although data on a cellular phone can be remotely destroyed, the Supreme Court believed that measures could be taken to secure the data without searching the phone.  Finally, the Supreme Court explained that cellular phones often contain large amounts of personal data, some of it dating years back.  Searching a cellular phones pictures, emails, etc. is too far reaching.  

 Below is a short video discussing the case:


What is the Hobby Lobby case?

When US news sources refer to the "Hobby Lobby case" they are referring to a recent Supreme Court decision, Burwell, Secretary of Health and Human Services, v.  Hobby Lobby, Inc.

The case is generating a lot of controversy and it was a close 5-4  decision.  If you are studying US law it is a useful case to examine how courts interpret statutes and apply precedent.  Below I will discuss one aspect of the case - - whether companies are "people."

To understand the case, there are two important laws to keep in mind.   First, in 1993 the United States passed a law called The Religious Freedom Restoration Act (let's call it the RFRA).  The RFRA is intended to protect people from statutes that would require them to violate their religious beliefs.  The second law is the US version of national health care which, among other things, has regulations that require companies to provide employees with access to contraceptive devices.

One of the biggest controversies in the Hobby Lobby case was whether the RFRA applies only to human beings (often called "natural persons") or whether the law also applies to corporations (often called "legal persons"). In this case, Christian owners of several companies believed that certain types of contraception were equivalent to abortion and were prohibited by their faith.  They argued that the RFRA prohibited the government from compelling their companies to help women gain access to these devices.

 A majority of the Supreme Court held that the RFRA protected the companies and that the government could not require the companies to provide access to the contraceptive devices.  The dissent strongly disagreed and argued, among other things, that for-profit companies do not have religious beliefs that are protected by the RFRA.

How did the Supreme Court justices analyze whether the RFRA was meant to apply to natural persons only or legal persons, too?  The majority relied on, among other things, the dictionary definition of person, which includes companies.  Both the majority and the dissent also examined the history of the law, what they believed was Congress's intention when it passed the law, and relevant past decisions by the Supreme Court.

The controversy is obviously very important but the case offers some interesting insights into how judges interpret the law.  Feel free to comment or email me to discuss further.   

What does it mean when the SEC brings a Section 17(a) enforcement action?

By way of background, the Securities and Exchange Commission has the power to bring civil lawsuits against defendants who allegedly violate US securities laws.  
Section 17(a) is part of the Securities Act of 1933.  You can find it codified at 15 USC Section 77q.  The SEC has brought a number of high-profile Section 17 cases in the past few years.  For example, the SEC sued Citigroup, Inc. pursuant to Section 17(a) following the 2008 financial crisis.
The relevant part of the statute states that it is illegal, in connection with any offer or sale of a security:
"(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
 Here are two key points about Section 17(a):
1. Only the SEC  - - (usually) not private investors - -  can bring a Section 17 action.  Courts (but there is some contrary case law) hold that private investors do not have a "private right of action" - - meaning they are not allowed to sue - - based on violations of Section17.
2. The SEC only has to prove negligence in a Section 17 case.   Keep in mind that Section 10(b) and Rule 10b-5 of the US securities laws require proof that the defendant knowingly or recklessly made a false statement in connection with the offer, sale or purchase of a security.  The SEC does not have to prove that a speaker knew or was reckless in not knowing that a statement was false in a case brought under Section 17(a)(2).  The SEC need only prove that the defendant was negligent in making money from a false statement in connection with the offer or sale of securities.  

Wolf v. Walker: Due Process, Equal Protection, and Federalism

A month or so ago someone asked me about gay marriage and the US Constitution.  Following up on this issue, I suggest reading a recent case, Wolf v. Walker  in which a Wisconsin federal court held that a ban on same-sex marriage was unconstitutional.  Below is a video I have on YouTube discussing some issues in the case.

If you are studying US law you will find the case interesting for a number of reasons.  First, the court decided to apply the intermediate scrutiny test to the Wisconsin law and state constitutional amendment which forbade marriage between anyone other than a man and a woman.  The Court scrutinized the ban under both the Due Process and the Equal Protection Clauses.  

The bulk of the court's analysis was as to whether banning same-sex marriage was so necessary to achieving an important government purpose that a person's fundamental right to marriage should be denied.  The Court held that defendants failed to meet their burden.

For non-US students I think you may find interesting the Court's rejection of Wisconsin's arguments based on federalism and democracy. Among other things, defendants argued that if the people of Wisconsin supported a ban on gay marriage then a court should not interfere.  The Court explained that principles of democracy or federalism do not trump the United States Constitution.  Just as the people of a state may not constitutionally ban interracial marriage, banning same-sex marriage violates the US Constitution.  

This was a district court decision and any appeal will go to the Seventh Circuit Court of Appeals.



City of Providence v. BATS: Section 6 Liability for Stock Exchanges

Another interesting aspect about the City of Providence v. BATS lawsuit is that the complaint alleges that stock exchanges are liable to the putative class of plaintiffs under Section 6 of the Securities Exchange Act of 1934. Section 6 requires stock exchanges to have rules against fraudulent and manipulative practices and to be able to enforce those rules.  According to the complaint, the stock exchanges not only failed to enforce their rules against fraud but the exchanges, together with brokerage firms and high frequency traders, defrauded slower traders.

Lawsuits against stock exchanges for violations of Section 6 are rare.  In one case from 1976, Carr v. New York Stock Exchange, a California federal court held  "that a failure in the exercise of reasonable diligence may be found only if the Exchange knew or had reasonable cause to know of a violation or suspected violation of a securities law, regulation or rule, or Exchange rule, and failed to proceed with requisite due care in view of the seriousness of the violation, pertinent SEC policies, the rules and practices of the Exchange, and the interests of the member firms, their security holders and the public customers of the Exchange." (italics added)  The Court held that whether the stock exchange was liable in that case was a question for a jury.

The Carr decision is not binding on the City of Providence court and we're a long way from any decision but it's something to consider.  



Interesting Case: HFT Securities Fraud Lawsuit

I started a new playlist on YouTube with interesting recent cases. I will try to update the playlist at least once a month.  

This month's case is a a securities fraud putative class action lawsuit alleging that high frequency traders (HFT), together with brokers and stock exchanges defrauded slower investors and traders in the stock market.  For now, I only have a video discussing in a very simple form the underlying premise of the some of the factual allegations.

The lawsuit is primarily based on a recent book by Michael Lewis called Flash Boys in which the author describes practices by  HFT to make money risk-free on stock exchanges at the expense of others. 

The case has just started and provides a great window to learn about civil procedure and securities fraud class action lawsuits in the United States.  Among other things, a court will have to determine whether the plaintiffs and the defendants may be certified for class action status.  Many people are  familiar with plaintiff class action lawsuits in which a plaintiff represent a class of unnamed plaintiffs.  In the United States, defendant class actions are also possible, in which one or more defendants represent a class of other defendants.  The court must approve a class action before the case can proceed.

What does it mean when Congress 'imposes stricter pleading requirements'?

Generally speaking, it is easy to commence a litigation in the United States because pleading requirements are not strict.  That is, a plaintiff can usually file a lawsuit without including too much detail and without including evidence.  The additional details and evidence can come later.  These same lax rules also apply to counterclaims and defenses. 

Rule 8 of the Federal Rules of Civil Procedure imposes three requirements on a complaint: a short and plain statement of subject matter jurisdiction, a short and plain statement showing that the plaintiff is entitled to relief, and a demand.  Rule 9 requires some additional detail if a complaint or counterclaim alleges fraud (or a defense relates to a mistake).  

Some people criticize lax pleading requirements on grounds that it harms defendants who must pay money to defend or to settle meritless claims. Congress enacted the Private Securities Litigation Reform Act (the PSLRA) in 1995 to curb purportedly meritless securities fraud litigation. The PSLRA makes it more difficult for plaintiffs to commence the lawsuit by requiring additional details in the complaint Recently, interest groups in the United States and members of Congress have worked to enact stricter pleading requirements and other reforms related to patent troll litigation.  

You might want to look at some videos I uploaded regarding pleading requirements in the federal courts.

Schuette v. BAMN: One Case, Eight Judges, Five Opinions

A recent decision by the United States Supreme Court, Schuette v. BAMN is interesting for all sorts of reasons.  One point of interest if you are studying US law is to note the concurring opinions.  A concurring opinion is where a judge agrees with a result but may have different or additional reasons for reaching that result.

In the United States  appellate level federal courts  hears cases as a panel.  In the Circuit Courts of Appeal, the intermediate level federal courts, a panel of three judges usually decides the case.  Sometimes more judges hear the case if it is very important.   The Supreme Court, which is the highest federal court, has nine justices.  In the Schuette case, only eight justices heard the case because one judge was recused.

The issue in the case was whether an amendment to the Constitution of the State of Michigan, as voted on by the people of Michigan, violated the Constitution of the United States.   The Circuit Court held that the amendment was unconstitutional because it violated the Equal Protection Clause.  

Of the eight justices that ruled in the Schuette case, six justices disagreed with the Circuit Court of Appeal and voted to reverse.  But if you look at the case you can see that the case resulted in five different opinions.

First, three justices wrote the opinion of the plurality, determining that the Circuit Court misunderstood case law and incorrectly invalidated the amendment to the state constitution.  

Second, the Chief Justice wrote a short concurring opinion, in which he mainly responded to criticisms by justices who disagreed with the plurality's decision.

Third, two justices joined in a concurring opinion in which they agreed with the result reached by the plurality, but vigorously disagreed with the line of cases on which the plurality relied.

Fourth, one judge wrote a concurring opinion in which he agreed that the amendment was constitutional, but emphasized the democratic voting process by which the amendment was added to the state constitution.

Finally, two justices joined in a dissenting opinion, which was longer in length than the plurality and concurring opinions combined, vigorously disputing the plurality and concurring opinions.