1993 WL 13076394
For opinion see 114 S.Ct. 385
Supreme Court of the United States.
John S. ROBY, et al., Petitioners, v. THE CORPORATION OF LLOYDs, et al., Respondents.
October Term, 1993.
October 14, 1993.
On Petition for a Writ of Certiorari to the United States Court of Appeals for the Second Circuit
Reply Memorandum in Support of the Petition for a Writ of Certiorari
Dale A. Schreiber, Counsel of Record for Petitioners, Proskauer Rose Goetz & Mendelsohn, 1585 Broadway, New York, New York 10036, (212) 969-3475.
[*i] TABLE OF CONTENTS
Point I: This Court Should Review the Court of Appeals Novel Test Under Which Any Foreign Issuer Can Avoid Securities Regulation for Determining Whether There Has Been a Violation of the Anti-Waiver Provisions 2
Point II: The SEC Has Not Expressed a View about Petitioners Claims. It Should Be Invited to Submit its Views Now 5
[*ii] TABLE OF AUTHORITIES
Dooner v. NMI, Ltd., 725 F. Supp. 153 (S.D.N.Y. 1989) 6 Hector v. Wiens, 533 F.2d 429 (9th Cir. 1976) 6 International Bhd. of Teamsters v. Daniel, 439 U.S. 551 (1979) 6 M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) 3 Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) passim SEC v. W.J. Howey Co., 328 U.S. 293 (1946) 6 SEC v. Ralston Purina Co., 346 U.S. 119 (1953) 3 Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) 3 United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) 6
Securities Act of 1933, Section 12(1) 15 U.S.C.§77l(1) passim [*iii] Securities Act of 1933, Section 12(2) 15 U.S.C.§77l(2) passim Securities and Exchange Commission Rule 10b-5 17 C.F.R. §240.10b-5 passim
[*1] Without ever addressing the central issue presented in the petition whether choice-of-law and forum selection clauses contained in a foreign issuers standard documentation can be enforced in the face of the anti-waiver provisions of the 1933 and 1934 Acts, when enforcement deprives American investors of basic rights and remedies under the Acts respondents present a flurry of inaccurate and disingenuous arguments in urging the Court to deny the petition. In brief, respondents argue that (1) Lloyds is unique and the Court of Appeals decision is so intensively fact based that other issuers will be unable to rely on the decision to justify use of similar clauses to avoid the requirements of the 1933 and 1934 Acts (Opposition at 15); (2) the Court of Appeals standard for enforcing the anti-waiver provisions is not novel, as petitioners contend, but instead solidly based on precedent from this Court (Opposition at 14- [*2] 15); (3) petitioners argument about the anti-waiver provisions, and in particular about the phrases waive compliance and essential feature, was not presented to the courts below, and petitioners have supposedly conceded that the prospect of a future dismissal of their claims under §12(2), Rule 10b-5 and RICO undermines petitioners basis for certiorari (Opposition at 5-6, 18-19, 20); (4) investments in Lloyds syndicates are not full-fledged securities under the 1933 and 1934 Acts (Opposition at 3); and (5) the SEC has already expressed the views that petitioners did not purchase securities that require registration and that Lloyds choice-of-law and forum selection clauses are enforceable (Opposition at 20 n.19, 23). Each of these arguments is wrong. Petitioners address the first three contentions in Point I, and the remaining two contentions in Point II.
Point I: This Court Should Review the Court of Appeals Novel Test Under Which Any Foreign Issuer Can Avoid Securities Regulation for Determining Whether There Has Been a Violation of the Anti-Waiver Provisions.
In Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989), Justice Kennedy set forth this Courts standard for finding violation of the anti-waiver provisions. Reflecting a view that appeared to have the Courts unanimous support, he wrote that impairment of an essential feature of the 1933 or 1934 Acts, such as a shift in the burden of proving lack of scienter, would be barred by the anti-waiver provisions. 490 U.S. at 481.
The test applied by the Court of Appeals here eviscerates that standard. Under the Court of Appeals test, impairment of the remedial provisions of the Acts, and an increased burden in the proof required to sustain a claim, do not violate the anti-waiver provisions. Prohibited waiver will only be found where there is substantial impairment of the Acts transactional mandates, caused, for example, by insufficient incentive under foreign law to deter exploitation of American investors. Contrary to Justice Kennedys clear statement in Rodriguez, the Court of Appeals test severs transactional compliance from remedial compliance.
[*3] It is the Court of Appeals test that is unique in this context, and not any special feature of Lloyds. It is that tests virtual elimination of the anti-waiver provisions that makes the Court of Appeals decision broadly applicable to all foreign issuers. Nothing in the facts or in the Court of Appeals analysis limits its holding to Lloyds.
Respondents ignore Rodriguez and the novelty of the Court of Appeals test. Instead of focussing on Justice Kennedys statements about impairment of essential, remedial rights, they cite The Bremen and Scherk as the pattern for the Court of Appeals test. (The Bremen has nothing to do with statutory anti-waiver provisions or laws creating federal rights, and neither case offers any precedent for the Court of Appeals test).
Respondents claim, erroneously, that petitioners did not raise the essential features argument below. In fact, petitioners relied on Rodriguez below (see petitioners Brief on Appeal, pp 32-36) and raised the anti-waiver clauses at every stage of this proceeding. At oral argument before the Court of Appeals, considerable attention was paid to the details of the test employed by this Court for finding violation of the anti-waiver provisions, and the essential features test was explored then.
Respondents also contend, erroneously, that petitioners have conceded that the only claims this petition seeks to preserve are those brought under §12(1) and that petitioners have abandoned their effort to litigate in American courts, under American law, claims under §12(2), Rule 10b-5 and RICO. [FN1] The questions presented for review [*4] by this Court concern the Court of Appeals ruling about the antiwaiver provisions, not the underlying claims. But beginning with the statement of the questions presented (Petition at i) and continuing throughout, petitioners have made clear that none of the claims have been abandoned.
FN1. In extraordinary disregard for the carefully constructed system of regulation under the federal securities laws, respondents characterize the §12(1) claims as a tempest in a teapot. (Opposition at 6). To the contrary, the disclosures mandated under §12(1) are at the heart of the securities laws. See SEC v. Ralston Purina Co., 346 U.S. 119 (1953).
Respondents also note, as if it were a concession, that petitioners do not seek review of the district courts dismissal of their claims against the syndicates on the ground that the syndicates lack of juridical status under English law precluded their being sued under the securities laws. That question is not presented for review here because the Court of Appeals did not reach it, but instead resolved it, for arguments sake, in petitioners favor.
Respondents contend (Opposition at 18) that petitioners have abandoned their §12(2) claims because (1) respondents supposedly showed conclusively (despite an unchallenged affidavit to the contrary submitted by petitioners to the district court) that English and American laws are the same regarding responsibility for misleading omissions. [FN2], and (2) differences between American and English law regarding proof of scienter and causation should be disregarded as not fundamentally unfair.
FN2. Moreover, petitioners showed that under long-standing lower court precedent the syndicate lists disseminated to Lloyds investors are sufficient to trigger the obligation to disclose omitted facts under §12(2) and Rule 10b-5.
By that very argument, respondents demonstrate that they have failed to satisfy the test set forth by this Court in Rodriguez. Significantly different standards in England for the kinds of omissions that would render a prospectus misleading, and imposition by English law of burdens to prove scienter and causation, would deprive aggrieved American investors of remedies granted to them by §12(2). The Court of Appeals (although in error, petitioners contend, in many of its conclusions about English law) found that those differences exist. (Petition at 24c-26c). It is those differences that present precisely the kind of impairment of essential features prohibited under this Courts Rodriguez standard.
[*5] Point II: The SEC Has Not Expressed a View about Petitioners Claims. It Should Be Invited to Submit its Views Now.
Contrary to respondents contention (Opposition at 23), the SEC has never determined that petitioners held no security that required registration. Nor has the SEC ever indicated that the question of the enforceability of the choice-of-law and forum selection clauses in the context of this case is moot. (Opposition at 19, 20n. 19, 23.) The only pronouncement by the SEC cited by respondents, an August 5, 1991 letter from the SECs Mary Beach to Representative Pease (Opposition at RA-2-5), suggests that no such determination has been made. Ms. Beach wrote: if the Members Agents solicited participations in accordance with the procedures proposed by Lloyds counsel (an offering structure intended to comply with the Commissions Regulation D), registration under the Securities Act would not be required. However, in light of the issues raised by [petitioner] Mr. Roby and others, the staff may consider whether the actions of Members Agents were consistent with the earlier representations of counsel and whether further action is appropriate. (emphasis added.) [FN3]
FN3. Respondents have reviewed the 1987-88 correspondence between counsel for Lloyds and the SEC that was obtained in response to a Freedom of Information Act request. From that correspondence, initiated by Lloyds at the time it was preparing to expand its recruitment of American investors, it appears that the proposed method of offering was not, in fact, the method used in selling Lloyds securities to American investors. For example, Lloyds submitted to the SEC a hypothetical sample private offering memorandum, and undertook that there would be no general solicitations of American investors. Even the limited disclosures in that sample memorandum were not made to American investors before they made their investment decisions, and there were intensive group solicitations.
Despite respondents suggestions to the contrary (e.g., Opposition at 3), it is indisputable that investments in Lloyds [*6] syndicates are securities under the federal securities laws. [FN4] The Court of Appeals declined to rule on whether the investments constitute securities (Petition at 10c), noting that the SEC has provided little guidance on the issue. In Ms. Beachs letter to Representative Pease (quoted above), the SEC stated unequivocally that investments in Lloyds syndicates are securities. (Opposition at RA-5).
FN4. Lloyds securities are investment contracts, since each involves an investment of money in a common enterprise with profits to come solely from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946).
Investors commitment of assets to the syndicates is certainly a monetary investment under Howey. See, e.g., International Bhd. of Teamsters v. Daniel, 439 U.S. 551, 559 (1979); Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976). Because all investors who participate in a syndicate pool their funds to finance the syndicates underwriting activities, investors participations involve horizontal commonality; and because the fortunes of investors and [syndicates] are linked so that they rise and fall together, investors participations also involve vertical commonality. Dooner v. NMI, Ltd., 725 F. Supp. 153, 159 (S.D.N.Y. 1989) Investors expect to derive profits solely from the efforts of others (the Active Underwriters), through a participation in earnings resulting from the use of investors funds . United Housing Found., Inc. v. Forman, 421 U.S. 837, 852 (1975).
In light of respondents inaccurate portrayal of the SECs views (formulated in a letter by a staff attorney in response to hypothetical facts and divorced from those alleged here), and in light of the irreconcilable inconsistency between the SECs current efforts to regulate foreign issuers (Petition Appendix I-K) and the Court of Appeals decision here, petitioners respectfully urge this Court to ask the SEC for its views in a brief amicus curiae.
The petition for a writ of certiorari should be granted.