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From Securities Regulation Daily, March 23, 2015

Supreme Court Docket: Court declines to address application of Morrison in criminal context, duty to update

By Rodney F. Tonkovic, J.D.

The Supreme Court today denied certiorari in two cases involving securities-related issues. First, Bryan Coffman asked the court whether the 6th Circuit's application of the "conduct" test specifically overruled in Morrison violated the holding and precedent set out in that case, and whether criminal liability under Exchange Act Section 10(b) extends to conduct in connection with an extraterritorial purchase or sale of securities. Coffman argued that Morrison precluded criminal prosecution because the alleged scheme occurred in Canada and involved a company’s Canadian offices and Canadian investors (Coffman v. U.S).

The district court (E.D. Ky.) declined to dismiss the counts against Coffman because the U.S. mail and wires were indisputably used to execute the alleged scheme to defraud. The Sixth Circuit denied Coffman's appeal, stating that because portions of the transactions at issue occurred in the U.S., it was fair to characterize them as domestic. Coffman asserted that the Sixth Circuit "ignored" Morrison in applying the conduct test. The application of Morrison in the criminal prosecution of securities fraud is "murky," Coffman said, urging the adoption of the framework provided by the Second Circuit in U.S. v. Vilar. In Vilar, the court emphasized the presumption against extraterritoriality and held that the only question was "whether the relevant conduct occurred in the territory of a foreign sovereign."

Next, in Stiefel Laboratories, Inc. v. Finnerty, the petitioners asked whether Exchange Section 10(b) and Rule 10b-5 impose a duty on a corporation to "update" prior truthful statements. Stiefel had been private since its founding in 1847 and had been vocal about its intention to stay under family control. In 2008, however, the company began looking for a buyer and was sold in 2009. The suit was filed by Finnerty, an employee who had exercised his rights under the company's employee stock bonus plan without knowledge of the merger talks. A jury returned a verdict for Finnerty, and Steifel appealed, arguing that the merger negotiations were immaterial and that it had no duty to disclose.

The Eleventh Circuit held that Stiefel had a duty to disclose facts necessary to make its statements about remaining privately held not misleading. The court did not decide whether Stiefel had an immediate duty to update the public when the merger negotiations became serious, but held that it had a duty to update Finnerty before it repurchased shares of its own stock from him. In its petition for certiorari, Stiefel argued that the Eleventh Circuit's decision created an inter-circuit conflict on the existence and breadth of a duty to update.

New petition on qualified immunity. Additionally, a recently-filed petition asks that the Court consider whether a government officer performing discretionary functions is entitled to a defense of qualified immunity when facing monetary penalties under a federal statute. The Eleventh Circuit held that a former City of Miami budget director could not use the qualified immunity doctrine to avoid SEC enforcers. The appellate court pointed to the SEC's role as a government enforcer with the ability to punish wrongdoers and noted that civil penalties differ from a claim for compensation arising from a pecuniary loss. Boudreaux's petition urges a resolution to the conflict between the Eleventh Circuit's opinion and Supreme Court precedent on the importance of qualified immunity to protect government officers from monetary liability for their discretionary functions. (SEC v. Boudreaux, March 17, 2015).

Read the docket. These and other cases impacted by the Supreme Court’s order today can be referenced in the latest version of the Supreme Court Docket. Cases are listed separately, along with a brief summary of the questions raised and the status of the appeal.

The cases are No. 14-687 (Steifel Laboratories), No. 14-967 (Coffman), and No. 14-1142 (Boudreaux).

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