Wednesday, March 14, 2007

Court’s Friends Spar Over Tellabs

Photo Sharing and Video Hosting at Photobucket Led by Marc Dann, the recently elected Democratic Attorney General of Ohio, the attorneys general for 22 states, plus the attorneys general for Puerto Rico and American Samoa, have filed an amicus brief (here) in the Tellabs case pending before the U.S. Supreme Court. The states’ brief strongly disagrees with the SEC’s recently filed amicus brief (here). The D & O Diary’s prior discussion of the SEC’s Tellabs brief can be found here.

The AGs urge the Supreme Court to reject the pleading standard advocated by the SEC and to affirm the pleading standard adopted by the Seventh Circuit in the Tellabs case. The state’s brief says:

The States are alarmed by this case because Tellabs and the SEC are advocating a pleading standard so high that investors will be prevented from bringing most fraud suits. If that happens, the investor rights so carefully protected by the States for so many decades are in grave danger. And if investors are not protected from fraud, the market could return to the days when fraudulent promoters were the norm and not the exception.

Among the arguments that the attorneys general raise is that, as representatives of public pension funds on whose behalf the AGs initiate securities fraud lawsuits in order to protect the interests of fund participants, the AGs are interested in the availability of effective legal means to pursue securities fraud. In making these arguments, the AGs make an oft-repeated mistake; they argue that “these state funds willingly litigate to protect their members retirements, whereas the private funds do not.” The states further argue that private funds “are discouraged from filing because it takes time and resources away from income-producing activities.”

As Adam Savett at the Securities Litigation Watch blog (here) has demonstrated, it simply is not true that private funds (such as mutual funds, banks and insurance companies) do not act as lead plaintiffs in securities class action lawsuits. (The D & O Diary’s prior post on this topic can be found here.) While it does not diminish the states’ arguments that they have a legitimate interest in the maintenance of vigorous mechanisms to address securities fraud, it is not true that there are no private investor funds willing to act on behalf of injured investors.

Readers will recall that Ohio AG Dann took the lead in Ohio’s recent opt-out settlement in the Time Warner securities litigation (refer here). In his March 9, 2007 press release announcing the Tellabs amicus brief’s filing (here), Dann said that his decision to become involved in the case was “a response to the brief filing in the case by the [SEC] in which the Commission took a position that would make it more difficult for public and private institutional investors and other shareholders to recover losses in securities class action.” Dann states in the press release that the position advocated by Tellabs and the SEC “would severely damage one of the most powerful mechanisms for controlling fraud in the marketplace: legitimate securities lawsuits by large institutional investors such as the States’ pension funds.”

I had supposed that the other attorneys’ general who signed onto the brief would all turn out to be Democrats, like Ohio’s Dann. To my surprise, according to party-affiliation information posted on the National Association of Attorneys General website (here), seven of the 22 state AGs who signed the brief are Republicans. (I am not sure of the political affiliation of the Attorney General of Puerto Rico and the acting Attorney General of the Territory of American Samoa, both of whom were appointed to their positions.)

It was actually pretty interesting going through the list of attorneys general who signed onto the brief. For example, from the great state of California, there's old Governor Moonbeam himself, Edmund G. "Jerry" Brown, Jr. There are also some famous sons amongst some states' native sons who signed onto the brief, like New York's Andrew Cuomo and Delaware's Joseph R. "Beau" Biden III. (Jerry Brown is also of course a famous son himself.) There are also a number of women, including Minnesota's recently elected Democratic AG Lori Swanson; Illinois's second-term Democratic AG Lisa Madigan; Kelly Ayotte, New Hampshire's first woman AG (and a Republican), who has served since 2004; and Nevada's Democratic AG Catherine Cortez Masto (whose official online biography is borderline incomprehensible and does not divulge when she was elected). (If it seems like I have a thing about state AGs, it is because early in my career, I worked for Mary Sue Terry, who later went on to become Virginia's first woman attorney general.)

I do wonder why some AGs signed onto the brief, but not others. For example, why would the Puerto Rico AG and the AG for American Samoa sign on, but not the AG for Guam or AG for the Northern Mariana Islands? Or, why the AGs for New York and Connecticut, but not the Democratic AG for New Jersey, Stuart Rabner?

One final note of blog envy; the AGs’ brief quotes the WSJ.com Law Blog in support of their brief. Another blow for the legitimacy of the blogosphere.

Hat tip to Bruce Carton at the Best in Class Blog (here) for his prior post on the state AGs’ amicus brief.

The D & O Diary's prior post on why the Tellabs case matters can be found here.

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