Now a report released on May 13, 2011 by the Project on Government Oversight questions the SEC's ability to remain independent in light of the a "revolving door" through which SEC staffers leave the agency for jobs at law and accounting firms that advise the public companies they once regulated, according to a Washington Post review of the report .

"The financial meltdown of 2008 brought renewed focus to the integrity and aggressiveness of federal government oversight of the financial system," the report's executive summary states. "One of the most important agencies overseeing financial markets and investor protection is the [SEC]."

The report is based on the groups analyses of hundreds of SEC documents obtained under the Freedom of Information Act—mainly statements that former employees file post-government employment statements if they plan to represent a client before the Commission within two years of leaving the SEC.. According to the report:

• Between 2006 and 2010, 219 former SEC employees filed 789 post-employment statements indicating their intent to represent an outside client before the Commission, with half (403) coming from the Division of Enforcement.
• Some former SEC employees filed statements within days of leaving the Commission, with one employee filing within 2 days of leaving
• There are 131 entities providing legal, accounting, consulting, and other services that were identified as new employers in the statements. Some entities recruited numerous SEC employees during the five-year period.
• POGO identified instances in which former SEC employees may have been required to file statements during the five-year period but did not
• The SEC Office of Inspector General has identified cases in which the revolving door appeared to be a factor in staving off SEC enforcement actions and other types of SEC oversight, including cases involving Bear Stearns and the Stanford Ponzi scheme
• One recent empirical study uncovered several significant and systematic biases in the SEC's enforcement patterns and found indirect evidence to support the contention that "post-agency employment at higher salaries may operate as a quid pro quo in return for favorable regulatory treatment"
• Some statements indicate that the former employee did participate in or have responsibility for a related matter while they worked at the SEC, but that they discussed the matter with an ethics officer who advised them they could contact Commission staff on that issue on behalf of their new client

The Project on says that its findings lend credence to the concerns of SEC critics wary of the commission's ability to remain independent and notes that the troubling traffic moves two ways. "The revolving door also operates in the opposite direction, where individuals come from entities regulated by the SEC to work for the Commission," states the POGO report. "The general concern is that a conflict of interest could bias SEC oversight and undermine public confidence in the SEC's work, as acknowledged by the current SEC Chairman."

But as lawyers who must sympathize with those underpaid SEC staffers, we do feel it is our civic duty to list your "new employers" found in the report. According to the following table, taken from the report, these firms are standing by to offer you a job:

TeleNav provides cell phone carriers with navigation applications for their cell phones. Sprint Nextel Corp. provided TeleNav with more than 55 percent of its revenues. TeleNav's major competitors include Google, Garman and other companies providing their own navigation services. 

Just three months after the IPO, TeleNav revealed it was renegotiating a key contract with Sprint that would likely lead to substantially lower revenues. TeleNav's stock immediately plummeted nearly 40 percent.

 The usual barebones lawsuits were filed by several other law firms alleging TeleNav knew its shares would nosedive before going public in May. However, these lawsuits are the subject of criticism. For example, one blogger argued here that TeleNav disclosed it was renegotiating its contract with Sprint as early as October 2009 in a registration statement with the U.S. Securities and Exchange Commission: 

"Our current agreement with Sprint expires on December 31, 2011; however, our right to be Sprint’s exclusive provider of Sprint Navigation expires on December 31, 2010. Commencing on December 31, 2010, Sprint may terminate its agreement with us at any time by giving us 30 business days prior written notice. Our failure to renew or renegotiate this agreement on favorable terms or at all, a termination of our agreement by Sprint or our failure to otherwise maintain our relationship with Sprint would substantially reduce our revenue and significantly harm our business, operating results and financial condition."  

Other risk disclosures in the registration statement warn that the Sprint contract could be impacted by competitors offering equivalent or free competitive service: 

“Competitors could begin offering (location-based services) that have at least equivalent functionality to ours for free. For example, Google offers free voice guided, turn by turn navigation as part of its Google Maps product for mobile devices based on the Android 1.6 and higher operating system platform, and Nokia announced its latest version of Ovi Maps on its smartphones, which also provides turn by turn navigation functions. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these (location-based services) to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services, or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful. 

The blogger goes on to write: 

“It is a common practice for specialized US law firms to seek class action status on such topics (GPS manufacturer SiRF faced the same type of complaint few years ago), but here their case seems particularly weak. It is however a pain in the neck for TeleNav.” 

Mighty strong risk disclosures, right? Wrong! This is where MF Global and our investigation come in to play. 

Suppose the facts show that prior to the IPO, TeleNav was so concerned about the upcoming contract negotiations with Sprint and the competition, that it wanted to go public before Sprint pulled the plug on their relationship.  If TeleNav knew nothing more than the risk disclosures above, it is doubtful that they could be held liable for not disclosing their fears and belief so long as they said nothing about their fears and belief. 

Suppose, however, that TeleNav knew before the IPO that Sprint was complaining about the resources it devotes to TeleNav's product – called "Sprint Navigation" – and told TeleNav management that it was in favor of Google's free navigation services instead of TeleNav's on Sprint's Android devices. Further, suppose Sprint told TeleNav it would not pre-load TeleNav’s product on Sprint's Android devices, but that TeleNav could sell their own services through Sprint Zone, forcing TeleNav to start its own branding efforts. 

Now we have a case! Just this week a federal appellate court clarified when risk disclosures are material misrepresentations or omissions. In Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., the Second Circuit Court of Appeals stated: 

Investors are interested in issuer statements only insofar as those statements bear on the future. While it is true that predictions about the future can represent interpretations of present facts (and vice versa), there is a discernible difference between a forecast and a fact, and courts are competent to distinguish between the two.  

A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction. 

The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking and thus insulated by the bespeaks-caution doctrine -even while statements or omissions as to the operations in place (and present intentions as to future operations) are not. 

Thus, the Court found that characterizations of MF Global's risk-management system-that the system was “robust,” for example - invited the inference that the system would reduce the firm's risk. It went on to find that bespeaks caution did not apply insofar as those characterizations communicate present or historical fact as to the measures taken. Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired. 

So too with TeleNav, the key question will be whether the "bespeaks caution" doctrine applies to TeleNav's description of its contract with Sprint, the expiration of that contract and the threat of the competitors. Our investigation causes us to believe that the risk of renegotiation of the Sprint contract was not just a possibility, but a current reality in which TeleNav's management knew they were in trouble. It was not a future risk, but one that had already transpired by the time of the IPO. 

I have lectured to corporate executives over the last 20 some years about this classic type of IPO fraud. It's often the one chance in a lifetime to cash in on millions by selling stock to the public. The temptation to hide or ignore bad news is great and accompanied by the mantra, “just get it done.” Risk disclosures are often written with this in mind, and the lawyers who draft them do a great disservice to their clients and the investors when the risks have already begun to manifest. 

Hagens Berman continues to investigate this matter, and to represent investors who purchased TeleNav stock before July 30, 2010. You may read more on the Hagens Berman website here, or read the press release here. To be eligible to be a lead plaintiff you must move by November 2, 2010. Contact Reed Kathrein at 510-725-3030 for a consultation or email Hagens Berman at tnav@hbsslaw.com.

Over the past 40 years, Courts have followed the "conduct" and "effects" test to exercise jurisdiction over securities fraud if a major portion of the fraud occurred in the US or if foreign conduct produced immediate and substantial effects in the United States. Justice Scalia, writing for the court, held that their was no affirmative indication that the Exchange Act was intended to apply extraterritorially. Its focus in not on where the deception originated, but on purchases or sales of securities in the US.

Justice Breyer concurred in part only so far as the complaint failed to allege that the purchases were "in connection with" either the purchase or sale of a security listed on a national securities exchange" or "any security not so registered" that was purchased or sold in the US. While there is nothing in the Securities Exchange Act that limits the second category to purchases or sales within the US, Breyer would apply the presumption against extraterritoriality.

Justices Stevens, joined by Ginsburg, also concurred, but only in the judgment, saying that they would adhere to the conduct -and-effects test approach followed over the last 40 years, and rejected the presumption against territoriallity. Rather, the real question should be "how much, and what kinds of, domestic contacts are sufficient to trigger application of Section 10b-5." Taking great issue with the majority, Steven wrote:

Repudiating the Second Circuit’s approach in its entirety, the Court establishes a novel rule that will foreclose private parties from bringing §10(b) actions  whenever the relevant securities were purchased or sold abroad and are not listed on a domestic exchange. The real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are "the focus of the Exchange Act" and "the objects of [its] solicitude." ... In reality, however, it is the "public interest" and"the interests of investors" that are the objects of thestatute’s solicitude.

***

Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated the stock price—and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief under §10(b).

The oddity of that result should give pause. For in walling off such individuals from §10(b), the Court narrows the provision’s reach to a degree that would surprise and alarm generations of American investors—and, I amconvinced, the Congress that passed the Exchange Act.Indeed, the Court’s rule turns §10(b) jurisprudence (and the presumption against extraterritoriality) on its head,by withdrawing the statute’s application from cases inwhich there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens.

Nevertheless, Justice Stevens follows the Court of Appeals decision in concluding that this case, in particular, does not have extensive links to or ramnifications in the US, but rather "has Australia written all over it."

Most important, however, is Justice Stevens concluding paragraph which transcends this case and expresses his heartfelt opinion against the Court's campaign against our securities laws:

The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the result the Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under §10(b)toothless.” Stoneridge, 552 U. S., at 175 (STEVENS, J., dissenting).

We could not agree more.

So now what? As a firm we must now look abroad to protect our clients. While we have done so in the past, it will now become a primary function. Unfortunately, those laws are not as developed as well as those in the US, and access to the Courts is much more difficult.

1. Defendants actually and knowingly  assisted in sham transactions that misrepresented the financial results of a public company.
2. Defendants had no duty to the investors of another company, nor did they make any public statements about the transactions.
3. Hence, investors did not rely on their conduct when making their investment decisions!!!!

And therefore, unless Congress says otherwise, the Defendants can now move on and help the next fraudster with impunity.

But, as Reuters also reported, Senator Chris Dodd, who helped lead the charge in 2004 and 2005 to make it more difficult to sue his campaign donators from the accounting and banking industry, has once again stood in the path of accountability. Dodd was instrumental in the passage of the Private Securities Litigation Reform Act that made it impossible to sue anyone who commits securities fraud unless you can get the facts usually soley in the possession of the fraudsters themselves. Now again, the Senate negotiators for the Financial Reform Bill rejected the amendments to reinstate liability in favor of a "STUDY." Reuters quotes Dodd as saying "The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point." So let's have a study.

This is probably the last chance to get such liability reinstated and Dodd well knows that a STUDY is the kiss of death. He is not really standing up for the little guy in protecting his friends. The lawyers, accountants, bankers, who act as gatekeepers cannot be allowed to assist fraud and line their pockets. The main culprit often has too few resources to pay the damages, is bankrupt, or otherwise judgment proof. Even the SEC cannot recover damages from those who aid and abet. In large part that is why we have the financial/banking mess we have now.

Senate Bill 1504, would reverse the Supreme Courts decision this year which gives a federal judge the ability to throw out a lawsuit, before discovery, if he does not think it is "plausible". That's a lot of discretion without any guidance, and keeping the case away from a jury based upon personal biases.  

Senate Bill 1504 is designed to return the standard to what it was prior to 2007, when the Court handed down its ruling in Bell Atlantic Corp. v. Twombly. That case and another — Ashcroft v. Iqbal from the most recent term — have raised the standard that pleaders must meet to avoid having their cases quickly tossed. Specter, in remarks prepared for the Senate floor, accused the Court’s majorities of making an end run around precedent with the two recent cases. 

“The effect of the Court’s actions will no doubt be to deny many plaintiffs with meritorious claims access to the federal courts and, with it, any legal redress for their injuries,” Specter said. “I think that is an especially unwelcome development at a time when, with the litigating resources of our executive-branch and administrative agencies stretched thin, the enforcement of federal antitrust, consumer protection, civil rights and other laws that benefit the public will fall increasingly to private litigants.”

At issue is how specific a pleading must be under the Federal Rules of Civil Procedure. Rule 8 requires that a complaint include “a short and plain statement of the claim showing that the pleader is entitled to relief,” while Rule 12 allows for the dismissal of complaints that are vague or that fail to state a claim. Under Iqbal, a 5-4 decision written by Justice Anthony Kennedy, many courts are now requiring more-specific facts that aren’t often available until discovery.

Senator Arlin Specter, introduced Senate Bill 1551 on July 30, 2009, seeking to do just that. The Bill called th "Liability for Aiding and Abetting Securities Violations Act of 2009," is currently co-sponsored by Edward Kaufman [D-DE], John Reed [D-RI] and Sheldon Whitehouse [D-RI]. The Bill seeks to amend the SEC Act of 1934 subject to liability in a private civil action any person that knowingly or recklessly provides substantial assistance to another person (aids and abets) in violation of that act. The Senator's goal is to restore the ability to sue third parties in securities fraud lawsuits as freely as you could before the U.S. Supreme Court's ruling in Stoneridge v. Scientific Atlanta (Supreme Court docket).

The main provision of the Bill states:

For purposes of any private civil action implied under this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of this title to the same extent as the person to whom such assistance is provided.’.

Senator Spector"s floor speech follows: 

 Mr. President. I have sought recognition to urge support for the legislation I just introduced, the Liability for Aiding and Abetting Securities Violations Act of 2009. My legislation would overturn two errant decisions of the Supreme Court--Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 1994, and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 U.S. 148, 2008, by amending the Securities Exchange Act of 1934 to authorize a private right of action for aiding-and-abetting liability.

 Act's main anti-fraud provision, §10(b), makes it "unlawful for any person, directly or indirectly," to commit acts of fraud "in connection with the purchase or sale of any security." Nearly fifty years ago the Court implied a private right of action under §10(b). The result was that investors could recover financial losses caused by violations of 10(b) and the companion regulation issued by the SEC commonly known as "Rule 10b-5."

Until Central Bank, every circuit of the Federal Court of Appeals had concluded that §10(b)'s private right of action allowed recovery not only against the person who directly undertook a fraudulent act--the so-called primary violator--but also anyone who aided and abetted him. A five-Justice majority in Central Bank, intent on narrowing §10(b)'s scope, held that its private right of action extended only to primary violators.

When Congress debated the legislation that became the Private Securities Litigation Reform Act of 1995, PSLRA, then-SEC chairman Arthur Levitt and others urged Congress to overturn Central Bank. Congress declined to do so. The PSLRA authorized only the Securities and Exchange Commission, SEC, to bring aiding-and- abetting enforcement litigation.

It is time for us to revisit that judgment. The massive frauds involving Enron, Refco, Tyco, Worldcom, and countless other lesser-known companies during the last decade have taught us that a stock issuer's auditors, bankers, business affiliates, and lawyers--sometimes called "secondary actors"--all too often actively participate in and enable the issuer's fraud. Federal Judge Gerald Lynch recently observed in a decision calling on Congress to reexamine Central Bank that secondary actors are sometimes "deeply and indispensably implicated in wrongful conduct." In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d. 304, 318 n.15, S.D.N.Y. 2009. Professor John Coffee of Columbia Law School, a renowned expert on the regulation of the securities markets, has even laid much of the blame for the major corporate frauds of this [sic].

The immunity from suit that Central Bank confers on secondary actors has removed much-needed incentives for them to avoid complicity in and even help prevent securities fraud, and all too often left the victims of fraud uncompensated for their losses. Enforcement actions by the SEC have proved to be no substitute for suits by private plaintiffs. The SEC's litigating resources are too limited for the SEC to bring suit except in a small number of cases, and even when the SEC does bring suit, it cannot recover damages for the victims of fraud.

Last year's decision in Stoneridge made matters still worse for defrauded investors. Central Bank had at least held open the possibility that secondary actors who themselves undertake fraudulent activities prescribed by §10(b) could be "held liable as ..... primary violator[s]." Stoneridge has largely foreclosed that possibility. A divided Court held that §10(b)'s private right of action did not "reach" two vendors of a cable company that entered into sham transactions with the company knowing that it would publicly report the transactions in order to inflate its stock price. The Court conceded that the suppliers engaged in fraudulent conduct prescribed by §10(b), but held that they were not liable in a private action because only the issuer, not they, communicated the transaction to the public. That remarkable conclusion put the Court at odds with even the Republican Chairman of the SEC.

My legislative response would take the limited, but important, step amending of the Exchange Act to authorize a private right of action under §10(b) (and other, less commonly invoked, provisions of the Act) against a secondary actor who provides "substantial assistance" to a person who violates §10(b). Any suit brought under my proposed amendment would, of course, be subject to the heightened pleading standards, discovery-stay procedures, and other defendant-protective features of the PSLRA.

On Thursday, September 17, the Senate Judiciary Committee, Subcommittee on Crime and Drugs held a hearing entitled to consider the Bill, entitled  "Evaluating S. 1551: The Liability for Aiding and Abetting Securities Violations Act of 2009." S. 1551.  Sen. Arlen Specter's chaired the hearing. The witnesses were John C. Coffee, Columbia University School of Law; Patrick J Szymanski, General Counsel, Change to Win (a group of labor unions); Tanya Solov, Director, Illinois Securities Department, of behalf of the North American Securities Administrators Association; Robert J. Giuffra, Jr., a partner in Sullivan & Cromwell LLP, NYC; and Adam C. Pritchard, University of Michigan Law School. Coffee, Szymanski and Solov testified in favor of the Bill. Their can be found here:

The issue: Whether stock purchasers are entitled to utilize a lesser variant of the "fraud on the market" doctrine, calledthe "integrity of the market" doctine, to create a rebuttable presumption of reliance, when a stock is maniplutated in a non-verbal way.

In Desai v. Deutsche Bank Securities (9th Cir. - July 29, 2009), a Ninth Circuit panel held that the lower court was correct in refusing to certify a class action based on market manipulation of the stock of GenesisIntermedia, Inc. by various bad actors, including various entities of Deutsche Bank, and one of its Canadian employees. The market manipulation scheme was complex, the Court accepted that "the scheme had driven GENI's Stock price from $12 per share to over $52 per share." It now trades for pennies. Plaintiffs sued and sought to certify a class of those who purchased the stock during the market manipulation.

Judge Wilson, in the Central District of California, refused to certify the class because each individual member of the class would have to prove its own personal reliance, presumably, the lack of market manipulation, and therefore individual questions of fact predominated. The appellate panel, consisting of Judge John T. Noonan, who wrote the per curiam opinion, and Justices Diermuid F. OScannlain, and Susan P. Graber, agreed.

Justices Noonan and Graber believed that they could reverse the lower court only for a clear abuse of discretion. Plaintiffs had conceded that they needed to prove reliance. ( I'm not sure I would have conceded reliance in a market manipulation case, though I would have conceded lack of knowledge is required). Justice Noonan then drew the battle lines:

Reliance can be presumed in two situations. In omission cases, courts can presume reliance when the information withheld is material pursuant to Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). Reliance can also be presumed in certain circumstances under the so-called “fraud on the market theory.” Basic INc. V Levinson, 485 U.S. 224, 241-49 (1988),Precisely to which cases this presumption applies—that is, to misrepresentation, to omission, to manipulation cases, or to some combination of the three—is an issue the parties contest on appeal. The two presumptions are conceptually distinct.

As explained by the Court, the fraud on the market theory is “based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business.” Basic v. Levinson, 485 U.S. at 241 (internal quotation marks omitted).

So far so good!

But then , Justice Noonan loses his way by picking and choosing verbage from cases that statethat the fraud on the market presumtionis available "only" when a plaintiff alleges a material misrepresentation or omission realting to a stock sold in an efficient market. On examination, however, it appear these cases are notmarket manipulation cases, probably because, up until now, they have been so rare or well hidden.

Butplaintiffs hadconceded that they could not prove an efficient market. (An efficient market quickly digests new information...from almost any source...causing the stock price to quickly adjusts to incorporate that new information. A thinly traded stock might not absorb the information quickly and therefore any news may not create a price reaction for weeks. In such a case, the disparity between individual investors knowledge becomes an issue. ) Having so conceded, they could not utilize the traditional definition of the fraud on the market presumption.

As for the Affiliated Ute presumption,the lower court rejected the theory that a manipulation was, in essence or fact, an omission. ( A holding with which I strongly disagree).

Applying a "clear abuse of discretion" standard, Judge Noonan agreed.The Affiliated Ute presumption has only been applied to cases of omission when there exists a duty to speak. The Court refused to extend the presumption to manipulative conductwhich "has always been distinct " from omissions., for example, in Rule 10b-5. The Court then claims to"follow" the 10th Circuit in Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000)which is not a market manipulation case. In fact the word "manipulation"only appears once in the lengthy opinion. For those who remember the 1989 Miniscribe class action, Wiles is a related individual case based upon a fraud whereby Miniscribe cooked its books by shipping bricks instead of product to warehouses, thereby overstating revenues and earnings....one of the good ol' frauds).

Regardless, to the extent that an omission might have existed, the plaintiffs failed to allege a duty. And the Court refuses to even attempt to discuss any duty of market participants to the market.

Next plaintiffs argued for a modification of the fraud on the market theory to fit such a situation, and claimed a rebuttable presumption based upon investorsreliance upon the "integrity of the market." The lower court rejected this too.

Judge Noonanfirst concedes that investors rely on the integrity of the market, citing Basic:

[T]he theory presumes first that “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price.” Id. at 247. Second, “[b]ecause most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations . . . may be presumed for purposes of a Rule 10b-5 action.” Id.

He notes plaintiffs argument that investors "typically rely on the 'integrity of the market,' that is, that no one has destroyed its efficiency by manipulation [and] when manipulation allegedly destroys the efficiency of the market, and with it the reliability of the market’s price." And he does not disagree. But when asked to find, that as a matter of law, plaintiffs are entitle to such a presumption, Judge Noonan can only summon the argument, "We are chary."

The Court argues, no authority compelled the lower court to adopt this new theory and that the Supreme Court has evidenced a "restrictive view" of private suits, and to not extend 10b-5 beyond its present boundaries, citing Stoneridge, 128 S. Ct. at 773.

The Court unfortunately pulls the Stoneridge quote out of context. In Stoneridge, the issue was framed as creating a private cause of action for aiders and abettors...a cause of action rejected more long ago in Central Bank. Hence the full quote is:

Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the §10(b) private right should not be extended beyond its present boundaries. See Virginia Bankshares, supra, at 1102 (“[T]he breadth of the [private right of action] once recognized should not, as a general matter, grow beyond the scope congressionally intended”); see also Central Bank, supra, at 173 (determining that the scope of conduct prohibited is limited by the text of §10(b)).

Plaintiffs were not seeking to extend 10b-5 or create a private cause of action. The law clearly forbids market manipulation and private causes of action have existed under this law for decades.

Justice Noonan, thus, avoids any analytical examination of the requested presumption. Instead he concludes merely "that the district court did not abuse its discretion in refusing to adopt the integrity of the market presumption." In other words...he punts on what the law is or should be.

O'Scannlain, on the other hand, goes after his colleagues for dodging the legal issue, making out a good argument for en banc review:

Unfortunately, however, we are left to conclude abruptly with a declaration of the result, for we cannot agree on the correct approach. I believe that, because the validity of a presumption of reliance in securities class actions is a matter of law and because errors of law are per se abuses of discretion, we must explicitly decide whether Investors are entitled to this novel presumption as a matter of law. I write separately to explain my view.

Even so, O'Scannlain goes on to find the presumption legally unsupportable and logically inadvisable. On the legal side, he can onlysummon citations to non-market manipulation cases that have no application to these facts. On the logic side, he actually makes plaintiffs case. He starts by admitting:

Most investors do, I think it fair to say, assume that the markets are not corrupt. Cf. Basic, 485 U.S. at 246-47 (“It has been noted that ‘it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?’ ” (quoting Schlanger v. Four-Phase Sys. Inc., 555 F. Supp. 535, 538 (S.D.N.Y. 1982))).

But then he concludes, in logic that escapes rigor, that if the presumption were adopted, then no plaintiff would ever have to prove reliance. In so concluding, he simply forgets that plaintffs seek only to apply this presumption to market manipulation cases....which the Court has just found to be distinct from misrepresentation and omission cases, legally.

Similarly he argues that the theory "would permit a presumption of reliance no matter how unlikely it is that the market price in question would actually reflect the alleged manipulation." Again,how is it that the presumption of reliance would not still require the plaintiffs to prove that the price during the entire class period was inflated by the manipulation, and by how much? O'Scannlain does not say.

Revealingly, O'Scannlain seems to back track and recognize theproblems with his concurring opinion inhis concluding. This footnote accurately captures the entire issue...and best statement for l an en banc courtto tackle:

I recognize the possibility that certain allegations of manipulative conduct might change the application of the fraud on the market theory. This is because the plaintiff in manipulation cases often alleges that a defendant directly manipulated the price. Certainly, a plaintiff must still show that the market in question could absorb into the price the misinformation communicated by the alleged manipulation. But need a plaintiff show the same type of proof of an efficient market in a manipulation case as is required in a misrepresentation case? Although I note the doctrinal wrinkle, this is a question I would agree we actually do not need to reach, because Investors forsook the fraud on the market theory.

Justice Graber, in her concurring opinion, defends Justice Noonan's contention that the Court need not reach the legal question:

All we have to decide is whether the district court had to recognize that new theory. If so, then the court made a mistake of law (and hence abused its discretion, see Koon v. United States, 518 U.S. 81, 100 (1996) (“A district court by definition abuses its discretion when it makes an error of law.”)).

I agree with O'Scannlain that the Court should have addressed, as a full panel, a broader application of the fraud on the market theory in market manipulation cases. An efficient market should not and, indeed, cannot be a requirement where there are no statements to be absorbed by the market participants in making their decisions. The Court should not have said that a lower Court has no duty to find the right law for the right circumstances, even if it is a new application of a principle. How else does law evolve. It has to start in the lower Courts. Justices Noonan and Graber, shirked their duty.

But in the end, it may not matter that much to the plaintiffs bar. The reason why there is no authority on the subject is, as O'Scannlain states, simply reflects "the relative rarity of" manipulative conduct cases. So the impact will be minimal on securities fraud cases.....except now that the fear of a lawsuit is gone, maybe the fraudsters will start crawling through the cracks.

Shaun Martin's Blog California Appellate Report, has a very good discussion and first analysis of the case at Desai v. Deutsche Bank Securities (9th Cir. - July 29, 2009).

 

Chairman Schapiro discusses the SEC proposal:
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Text of Chairman's statement

Washington, D.C., July 22, 2009 — The Securities and Exchange Commission today voted unanimously to propose measures intended to curtail "pay to play" practices by investment advisers that seek to manage money for state and local governments. The measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.

The proposals relate to money managed by state and local governments under important public programs. Such programs include public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees can invest money for their retirement, and 529 plans that allow families to invest money for college.

To help manage this money, state and local governments often hire outside investment advisers who may directly manage this money and provide advice about which investments they should make. In return for their advice, the investment advisers typically charge fees that come out of the assets of the pension funds for which the advice is provided. If the advisers manage mutual funds or other investments that are options in a plan, the advisers receive fees from the money in those investments.

Investment advisers are often selected by one or more trustees who are appointed by elected officials. While such a selection process is common, fairness can be undermined if advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process.

The selection process also can be undermined if elected officials or their associates ask advisers for political contributions or otherwise make it understood that only advisers who make contributions will be considered for selection. Hence the term "pay to play." Advisers and government officials who engage in pay to play practices may try to hide the true purpose of contributions or payments.

"Pay to play practices can result in public plans and their beneficiaries receiving sub-par advisory services at inflated prices," said SEC Chairman Mary Schapiro. "Our proposal would significantly curtail the corrupting and distortive influence of pay to play practices."

Andrew J. Donohue, Director of the SEC's Division of Investment Management, added, "Pay to play serves the interests of advisers to public pension plans rather than the interests of the millions of pension plan beneficiaries who rely on their advice. The rule we are proposing today would help ensure that advisory contracts are awarded on professional competence, not political influence."

The rule being proposed for public comment by the SEC includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements.

Restricting Political Contributions

Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

The rule would apply to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule would apply to political incumbents as well as candidates for a position that can influence the selection of an adviser.

There is a de minimis provision that permits an executive or employee to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser and certain of its executives and employees from coordinating, or asking another person or political action committee (PAC) to:

1. Make a contribution to an elected official (or candidate for the official's position) who can influence the selection of the adviser.
2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

Banning Third-Party Solicitors

The proposed rule also would prohibit an adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser.

Restricting Indirect Contributions and Solicitations

Finally, the proposed rule would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if that conduct would violate the rule if the adviser did it directly. This provision would prevent advisers from circumventing the rule by directing or funding contributions through third parties.

Public comments on today's proposed rule must be received by the Commission within 60 days after their publication in the Federal Register. 

http://www.sec.gov/news/press/2009/2009-168.htm