Mary Eaton and Roger Netzer are partners in the Litigation Department of Willkie Farr & Gallagher LLP.
Mary Eaton
Since President Obama’s nomination of Sonia Sotomayor to the United States Supreme Court on May 26th, much has been written about Judge Sotomayor’s remarkable and inspiring life story and its potential impact on her judging. To the extent much attention has been paid to Judge Sotomayor’s track record on securities law matters, it has focused on the opinion she authored in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), a case of first impression in the Second Circuit concerning the reach of the preemption provisions of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The panel for whom Judge Sotomayor wrote held that SLUSA preempted claims alleging the “purchase or sale” of a covered security, but did not preempt mere “holder” claims, thus potentially paving the way for the plaintiffs’ bar to evade the restrictions Congress has repeatedly sought to impose on securities class action cases. In what The Washington Times recently and colorfully labeled a judicial “smackdown,” the Supreme Court unanimously reversed that decision in 2006 by a vote of 8 to 0, with Justice Stevens writing for the Court.
Roger Netzer
Some have pointed to Judge Sotomayor’s decision in Dabit as evidence of judicial activism and proof that she is not suitable for appointment to the nation’s highest court. In fact, Dabit proves neither proposition, because the correct resolution of the issue in Dabit was hardly self-evident. Not only did the other two judges on the Second Circuit panel — both of them Republican appointees — agree with Judge Sotomayor’s analysis, but also three other Circuit Courts of Appeals (the Eighth, Ninth and Eleventh) had reached the same conclusion before Judge Sotomayor. The Seventh Circuit subsequently disagreed, and in Dabit the Supreme Court resolved the split.
Looking beyond Dabit, Judge Sotomayor’s track record both as a United States District Court Judge and as a member of the Court of Appeals for the Second Circuit belies the suggestion that she has an “anti-business” tendency with respect to private securities law issues. As our analysis shows, with few exceptions, Judge Sotomayor has tended to side with corporate defendants on private securities litigation matters during her 17 years on the bench.
Judge Sotomayor sat as a District Court Judge from 1992 to 1998, having been nominated by President George H.W. Bush in 1991. During her tenure on the District Court, we found eight cases where defendants sought dismissal of private securities fraud claims before trial — either on a motion to dismiss or for summary judgment — on the basis that plaintiffs had failed to either plead or prove the essential elements of their claims. Judge Sotomayor ruled in favor of the defendants on the securities law issues in all but one case, dismissing the claims on such grounds as failure to show loss causation, reliance, or scienter, and failure to plead fraud with the requisite particularity. Of those eight decisions, only two were appealed, and both were affirmed.[1]
Judge Sotomayor’s record of weeding out fraud claims under the federal securities laws continued after her elevation to the Second Circuit in 1998, upon the nomination of President Clinton. We found 14 cases where Judge Sotomayor was part of a panel called upon to decide whether the District Court’s pre-trial dismissal of private federal securities law claims was proper. In each case, the panel unanimously affirmed the dismissal on the grounds that plaintiffs had failed to plead or prove such essential elements as materiality or loss causation, failed to meet the heightened pleading standard for fraud, or neglected to assert a timely claim.[2]
Among those cases was Rombach v. Chang, in which the Second Circuit parted company with other Courts of Appeals in holding that the heightened pleading standard of Rule 9(b) applies to claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 “insofar as the claims are premised on allegations of fraud.” 355 F.3d 164, 171 (2004). Also among those cases was the Second Circuit’s important decision in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2005), one of a series of cases alleging securities fraud via research reports that were supposedly intended to artificially inflate the stock prices of companies that were clients of the firm’s investment banking business. While the Lentell decision arguably made it easier for plaintiffs to evade dismissals on statute of limitations grounds, its holding on loss causation — that investors must plead facts showing that the loss was caused by materialization of the concealed risk or face dismissal under Rule 12(b)(6) — favored defendants.
To judge by her track record in cases concerning the federal securities laws, Judge Sotomayor has demonstrated herself to be a thoughtful jurist who has carefully hewn to federal law and congressional policy. While this may be a pivotal time in the development of American securities law, as some have suggested, it is impossible to say from the present perspective whether Judge Sotomayor’s appointment to the Supreme Court is likely to have a dramatic impact on that development, one way or the other.
[1] Kimberlin v. Ciena Corp., No. 96 CIV. 8704, 1998 WL 603234 (S.D.N.Y. Sept. 11, 1998); Adair v. Kaye Kotts Assocs., No. 97 CIV. 3375, 1998 WL 142353 (S.D.N.Y. Mar. 27, 1998); Ainbinder v. Kelleher, No. 92 CIV. 7315, 1997 WL 420279 (S.D.N.Y. July 25, 1997), aff’d, 152 F.3d 917 (2d Cir. 1998); Addeo v. Braver, 956 F. Supp. 443 (S.D.N.Y. 1997); Gershon v. Wal-Mart Stores, Inc., 901 F. Supp. 128 (S.D.N.Y. 1995); Levy v. Weksel, 85 Civ. 0990, 1995 WL 117637 (S.D.N.Y. Mar. 17, 1995); Azurite Corp. v. Amster & Co., 844 F. Supp. 929 (S.D.N.Y. 1994), aff’d, 52 F.3d 15 (2d Cir. 1995); Ainbinder v. Wall St. Clearing Co., No. 92 Civ. 7315, 1993 WL 106408 (S.D.N.Y. Apr. 7, 1993).
[2] Caiafa v. Sea Containers Ltd., No. 08-3006-cv, 2009 WL 1383457 (2d Cir. May 19, 2009); Gordon Partners v. Blumenthal, 293 F. App’x 815 (2d Cir. 2008); Muller-Paisner v. TIAA, TIAA-CREF Enters. Inc., 289 F. App’x 461 (2d Cir. 2008); Masters v. GlaxoSmithKline, 271 F. App’x 46 (2d Cir. 2008); Starr v. Georgeson S’holder, Inc., 412 F.3d 103 (2d Cir. 2005); Kass v. Simon, 137 F. App’x 382 (2d Cir. 2005); Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), cert. denied, 546 U.S. 935 (2005); Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004); DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003); In re N2K Inc. Sec. Litig., 202 F.3d 81 (2d Cir. 2000); Hart v. Internet Wire, Inc., 50 F. App’x 464 (2d. Cir. 2002); Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d Cir. 2000); Salter v. N.Y. Stock Exch. Inc., 201 F.3d 432 (2d Cir. 1999); Mercury Air Grp., Inc. v. Jet USA Airlines, Inc., 189 F.3d 461 (2d Cir. 1999).
