THE SUPREME COURT’S “DIG” OF EMULEX, INC.

GIVES NEW LIFE

TO SECURITIES CASES IN THE NINTH CIRCUIT

In a rare procedural move, on Wednesday the U.S. Supreme Court

effectively reversed its own decision to review an opinion from the Ninth Circuit
that refused to apply the same defendant-friendly standard as the other five circuit
courts of appeal that have addressed similar securities cases brought by private
plaintiffs asserting claims under the 1933 Act. In so doing, the Supreme Court let
stand a very important private “right of action” which allows investors the right to
bring cases in federal court against public corporations, challenging their
disclosures in public filings relating to mergers and tender offers.

The Supreme Court granted the petition for writ of certiorari by Emulex, Inc.
in January, prompting widespread speculation that the Court would take the
opportunity to resolve the circuit split in applying the higher “scienter” standard
that applies to similar securities cases where private plaintiffs bring claims under
the 1934 Act. Unlike the 1933 Act, the 1934 Act necessarily requires fraud as an
element of such claims. The 1933 Act claims, however, are strict liability and non-
fraud based. Thus, the Ninth Circuit correctly applied the lower negligence
standard in Emulex, which was the primary issue that was litigated in the courts
below.

However, in its petition for review by the Supreme Court, Emulex took the
bold move of attempting to expand the scope of the Supreme Court’s review in the
hopes of obtaining a ruling on a much broader issue that had not been previously
raised or disputed by Emulex in the lower courts: whether a private right of action
even exists for claims under the 1933 Act, or whether only the federal government
(through the U.S. Securities and Exchange Commission) can assert such claims.
Corporate defense attorneys and other interested groups that filed amicus briefs
had lobbied for the Supreme Court to use the Emulex case as an opportunity to
revoke the private right of action under the 1933 Act, in attempt to shut down
private plaintiffs from asserting claims under the 1933 Act against companies that
make misleading statements in their public filings relating to mergers and tender
offers, the latter of which was the subject of Emulex. This type of litigation has
been used by plaintiffs increasingly in recent years to challenge mergers in federal
court, with corporations likewise seeking to shut down such litigation with
increasing fervor – and success. However, after hearing oral argument just a week
earlier on April 15, the Supreme Court on Wednesday dismissed the appeal as
“improvidently granted” (known as a DIG), and declined that invitation.

The Supreme Court’s decision is a welcome respite from recent legislation

and judicial trends limiting private plaintiffs’ ability to assert claims against
corporations and executives that take advantage of the U.S. capital markets and
trade on national securities exchanges, but seek to avoid any accountability to
private investors.

While corporate shills and defense attorneys maintain the party line that
securities laws are enforced by federal regulators, the SEC’s own have recently
come forward with troubling revelations and admissions about the nature of the
relationships between the agency and the large corporations it supposedly
“regulates.” Recent remarks by SEC Commissioner Hester M. Peirce at the
agency’s annual “SEC Speaks” conference in Washington, DC on April 8 and 9
seriously called into question whether any enforcement is actually occurring when
it comes to the largest and most powerful corporations, and if so, whether it is the
law as written or some other “secret law” that is being enforced. And, even if the
federal securities laws are being enforced consistently and as written, the
counterpoint that private litigation is a necessary supplement given the limited
resources and ability of the federal government to address violations continues to
have validity.

Some have criticized the Supreme Court’s one-sentence dismissal of the

Emulex petition as a “punt,” but it could just as easily have been a message.
That’s the point of the DIG – nobody knows why the appeal was dismissed. But
one thing is clear: the hotly-disputed ruling is now settled precedent in the Ninth
Circuit. And investors are better off for it.