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The Supreme Court's new term includes cases challenging investors' burden of proof in securities litigation and whether 401(k) plan fiduciaries can be sued for investment choices made years earlier.
Almost of as much interest to large institutional investors and their lawyers is the court's decision — just days before scheduled arguments — to not hear a securities class-action case testing the time limits for plaintiffs to join such lawsuits.
Questions about fiduciary duty will be answered after the court hears arguments next year in Tibble et al. vs. Edison International et al., but also could come up in another case that the court has been petitioned to accept, Tussey et al vs. ABB Inc. et al.
The securities case, Omnicare Inc. vs. Laborers District Council Construction Industry Pension Fund et al., will be heard first, with arguments scheduled for Nov. 3.
After reaching settlements resolving allegations of kickbacks, the pharmaceutical services firm was sued by the pension fund, which claimed Omnicare misled investors in its registration statement for an initial public offering. Since then, lower courts have disagreed on whether such statements are challengeable facts or simply subjective opinions, and how much more investors seeking damages would have to prove.
Omnicare's court filing “has proposed a rule that would effectively immunize (securities) issuers from liability,” said Blair Nicholas, San Diego-based managing partner at securities litigation firm Bernstein Litowitz Berger & Grossmann L.L.P. Mr. Nicholas is one of the lawyers who filed an amicus brief on behalf of 40 U.S. and foreign public pension funds representing $2 trillion in combined assets. “The integrity of the offering process and federal securities law would effectively be eviscerated,” he said. “Public pension plans rely on the veracity of the statements, and opinions of material facts make up a significant portion” of such statements.
The presence of several foreign pension fund interests, including Royal Mail Group's £3.3 billion ($5.31 billion) pension fund and APG Asset Management, which oversees the €325 billion ($410.44 billion) assets of the ABP pension fund, Heerlen, Netherlands, on the amicus brief “really shows how important it is to foreign investors who rely on the opinions in the registration statement when investing in the U.S.,” said Mr. Nicholas.
If the Supreme Court discourages investors from taking registration disclosures at face value, that ruling is expected to shift more due diligence to large investors themselves, regardless of whether they have the staff and budget for it. Such a ruling also could dim investors' appetite for new company offerings, which are having a banner year, said Michael Stocker, New York-based partner with Labaton Sucharow L.L.P., which represents investors in these kinds of lawsuits. With no track record to go on during initial offerings, a looser standard for statements made in offerings “could well change institutional investors' risk tolerance for IPOs,” he said.
Lawyers representing institutional investors say it is also worth noting a case the Supreme Court will not hear.
Originally scheduled for the court’s Oct. 6 opening day arguments, a securities litigation case brought by the $25.1 billion Mississippi Public Employees’ Retirement System, Jackson, against a now-defunct mortgage firm challenged the time limits for investors to join or opt out of class-action lawsuits. The petition was supported by other pension funds including the $294.2 billion California Public Employees’ Retirement System, Sacramento; $188.3 billion California State Teachers’ Retirement System, West Sacramento; $45.3 billion Colorado Public Employees’ Retirement Association, Denver; $15.5 billion Montana Board of Investments, Helena; and $130.2 billion Texas Teacher Retirement System, Austin. But with settlements pending in the original case, the Supreme Court took it off the docket.
Leaving the question split in lower courts “means a potential big problem for investors,” said Mr. Stocker. To protect their right to sue or join class-action lawsuits, investors “might have to file placeholders. We counsel institutional investors to be tuned in to this.”
Large investors “have to be far more proactive,” agreed Mr. Nicholas. “Investors can’t sit around and wait for an opt-out deadline.”
In 2015, the Supreme Court is expected to break ground on how to interpret the Employee Retirement Income Security Act’s six-year statute of limitations on fiduciary-breach lawsuits.
The Tibble et al. vs. Edison International et al. case challenging whether such claims are time-barred, “is a first,” said attorney Nancy Ross, a partner in Mayer Brown L.L.P.’s employment and ERISA litigation practice in Chicago. “We have never seen the court address the scope of the statute of limitations on fiduciary-breach claims.” Arguments are expected to be scheduled for February, with a decision in early summer.
Edison International is the parent of Southern California Edison, Rosemead, Calif., sponsor of the $4 billion Edison 401(k) plan. Some plan participants complained fiduciaries breached their duty by continuing to offer higher-cost retail mutual funds when institutional-class funds were available. In a statement, the company said that actions in the best interests of participants “are reflected in numerous rulings in our favor,” including the appeals court denial of the class action, which led to the plaintiffs’ petition to the Supreme Court. That petition was filed in October 2014 by Jerome J. Schlichter, managing partner of law firm Schlichter Bogard & Denton, St. Louis, citing differences among courts as to when the statute of limitations begins and ends. In deciding whether to take the case, the Supreme Court sought the opinion of U.S. Solicitor General Donald Verrilli Jr., who argued that time-barring such claims is wrong because “ERISA imposes a continuing duty of prudence on plan fiduciaries.”
The solicitor general’s position “is recognition of the importance of this issue in protecting retirement assets,” said Mr. Schlichter in an interview. “Is there an ongoing clock that is applicable to the ongoing actions?” Expanding the time frame would increase fiduciaries’ duty to monitor investment choices, for both fees and performance, which is a good practice anyway, said Mr. Schlichter. “There are many plan sponsors and fiduciaries doing the right thing. If they have been doing the right thing, they don’t have to do anything (different).”
Ms. Ross thinks with the increased visibility of ERISA issues in the courts, the Supreme Court justices will tread carefully before changing the six-year timeframe for fiduciaries to be sued for breach of duty. She noted the justices already have admonished lower courts in other rulings about not making it too onerous for sponsors to offer retirement plans. “If there’s a pattern, it’s the Supreme Court recognizing the nation’s dependence on employer-provided retirement security. It’s all about balance,” said Ms. Ross.
A second legal argument raised in Tibble, but set aside by the Supreme Court when it accepted the case, is whether plan fiduciaries should be accorded deference in cases alleging breach of duty.
Hazel Bradford writes for Pensions & Investments, a sister publication of Business Insurance.
A federal appeals court Thursday agreed to review a lower court ruling striking down health care reform law premium subsidies for lower-income individuals purchasing coverage in the federal insurance exchanges.