April 23, 2014

Supreme Court To Decide If It Will Decide Whether Securities Exchange Act Section 16 Plaintiff Has Constitutional Standing

No Harm, No Foul

The late Lakers broadcaster Chick Hearn was known for coining or popularizing numerous basketball expressions, including “air ball” and  ”no harm, no foul”.   Now, the U.S. Supreme Court may soon decide whether the principle of “no harm, no foul” applies to Section 16, the other insider trading statute.

Do Section 16 Plaintiffs Suffer Injury In Fact?

In 2009/2010, a private investment fund, Bulldog Investors General Partnership, engaged in various open-market trades in the shares of common stock of another fund.  Bulldog admits that it violated Section 16(b) of the Securities Exchange Act of 1934 but sought dismissal of the ensuing suit by a private plaintiff, Deborah Donoghue.   Bulldog argued that because Donoghue had suffered no injury in fact, she had no standing to claim a foul.  The U.S. District Court agreed with Donoghue and the Second Circuit Court of Appeals agreed with the lower court.  Bulldog sought one last bite by filing a petition for writ of certiorari to the U.S. Supreme Court.  Bulldog Investors General Partnership v. DonoghueCase No. 12-818.

Can Violation Of A Statute Alone Constitute Injury In Fact?

According to the Supreme Court’s docket, the briefs have been distributed for tomorrow’s conference.  As the Supreme Court Rules make clear, obtaining certiorari is by no means assured:

Review on a writ of certiorari is not a matter of right, but of judicial discretion.  A petition for a writ of certiorari will be granted only for compelling reasons.

Nonetheless, Bulldog’s petition resurrects an important question that the Supreme Court ducked last year when it dismissed its writ of certiorari in Edwards v. First Am. Fin. Corp.,610 F.3d 514 (9th Cir. 2010), cert. granted, 131 S. Ct. 3022 (2011), dismissed as improvidently granted, 132 S. Ct. 2536 (2012): just how far can Congress go in creating injury in fact by simply enacting a statute?  Or, as Chief Justice John Roberts commented during oral arguments in Edwards:

 You said violation of a statute is injury in fact.  I would have thought that would be called injury in law.

In some ways, Bulldog’s petition presents a purer legal question for the court.  In Edwards,the plaintiff had purchased insurance from the defendant and the alleged statuory violation was in connection with that purchase.  When a plaintiff brings a Section 16 claim, there is no privity and the statutory violation is not incident to any transaction between the plaintiff.  Remarkably, a Section 16 plaintiff is not required to be a security holder of the issuer at the time of the alleged violation.   Gollust v. Mendell, 501 U.S. 115, 123 (1991).

Why is injury in fact so important?  Without injury in fact, a plaintiff does not possess the standing required by the U.S. Constitution for a case to be heard in federal court.

© 2010-2014 Allen Matkins Leck Gamble Mallory & Natsis LLP

About the Author

Keith Paul Bishop, Business Attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients on compliance,...


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