Category Archives: securities

Pinter v. Dahl

486 U. S. 622

June 15, 1988

Pinter sold unregistered securities to Dahl. Dahl successfully urged friends and family to also buy securities from Pinter. But the venture failed, and Dahl and his friends sued Pinter for selling them fraudulent securities. Pinter countered that Dahl had fraudulently induced the selling, and that the doctrine of in pari delicto (i.e. ‘you’re just as much at fault!’) barred a successful claim. Additionally, Pinter said that Dahl was also a seller with respect to the securities sold to the friends and family.

The Supreme Court gave a collective shrug, and remanded the case 7-1 after clearing up some of the worst legal muddles (Kennedy did not participate). Blackmun started out by asserting that in pari delicto defenses could, according to Court precedent, be asserted in securities lawsuits. But the defense would only hold if the plaintiff was at least equally at fault, and if the defense would not frustrate the broader purposes of securities law. Blackmun said the record was too sparse to determine whether Dahl was really equally at fault because of his assurances to Pinter that the sale would be a good one.

On the issue of whether Dahl was a seller, Blackmun said that securities law did allow a mere solicitor, rather than a titleholder, to be regarded as a seller. Nonetheless, he took issue with the contention of lower courts that any inducement to third parties, no matter how disinterested or gratuitous, could count as solicitation. Such tests ran afoul with the actual statutory text of securities law. Once again though, the facts behind Dahl’s inducements to his friends and family were too murky, so a remand was given.

Stevens, in dissent, had the decency to offer some answers instead of more questions. Examining all the lower court proceedings, he found no reason to believe that Dahl could possibly be equally at fault, so the in pari delicto claim was no good. On the question of Dahl’s status as a seller, Stevens though the Court was being advisory. Stevens addressed the issue anyway, and wrote that Dahl should not be held liable as a seller because he received no money as a result of any purchases he induced.

For finality and clarity, if nothing else, I would have joined the Stevens dissent. The last thing an overly complex case like this needs is a remand to determine a bunch of probably unanswerable factual questions.

Schneidewind v. ANR Pipeline Co.

485 U. S. 293

March 22, 1988

A natural gas company wanted to sell securities, but the State of Michigan said that its regulatory commission would have to approve this first. The natural gas company protested that federal regulation of the industry was so comprehensive that any regulation by a state was preempted. Michigan responded that federal regulation did not cover the issue of securities, and that companies could certainly comply with both sets of regulations.

The Supreme Court unanimously found preemption (Kennedy did not participate). Blackmun left open the question of whether states could regulate natural gas securities in the absence of federal legislation, but then showed how elaborate and comprehensive the federal regime of regulation was. Although the federal scheme did not specifically mention securities, both state and federal regulation was indeed aimed at controlling the rates and facilities of natural gas companies. Because the end goal was the same, the Michigan law would need to be preempted. Furthermore, while it wouldn’t always happen, on occasion a company would find complying with both sets of regulation an impossibility. Blackmun also was unimpressed that Congress had voted against direct regulation of natural gas securities, since Congressional inaction had historically not mattered in preemption cases. Ultimately a very simple case; moving along.

Basic Inc. v. Levinson

485 U. S. 224

March 7, 1988

A company known as Basic Inc. made three public denials that it had any plans to merge. But these denials were lies, and it soon merged anyway. Investors who had sold their Basic stock during that time frame sued the company for securities fraud. Under the Securities Exchange act, private investors could recover if they were induced to sell stock due to material misstatements by a company. The Court had to decide whether Basic’s denials were material misstatements.

The Court ruled 4-2 that they were (Rehnquist, Scalia, and Kennedy did not participate). First though, the Court unanimously issued a few parameters for future cases. Blackmun said that something is material if it affects the behavior of a reasonable investor. He rejected the argument that merger talks were not material until finalized, because potential mergers certainly did affect stock prices. But Blackmun also rejected the argument that any lie was material, since some lies truly are harmless in the investing world. He ultimately concluded that courts should look, on a case by case basis, at the probability of the merger, and the importance of the merger.

Then, Blackmun said that the case could go forward with a presumption that the stockholders had been defrauded by the misstatements about the merger. Because stock price is dependent on common knowledge of facts, widely spread lies will result in a stock price which is inaccurate – a sort of fraud on the market. But this presumption was rebuttable – Basic could prove that the misstatements did not actually affect stock price, or that everyone really knew the denials were false.

White, joined by O’Connor, took issue with giving the investors a presumption that they had been defrauded. He objected that the fraud-on-the-market theory was judicial activism, and contrary to the intent of Congress so far as legislative material disclosed. He also did not think that inaccurately priced stock even was a fraud on the market, since stock trading is all about finding over- or under-priced stocks. Finally, White noted that Basic stock actually increased during the time period when the denials were issued, and found it baffling that the investors could even claim to have been ‘defrauded’. He predicted that unscrupulous investors would eventually be able to game the system.

I was immediately sympathetic to Blackmun’s opinion – companies ought to be held accountable for lying to stockholders. Telling the same lie three times felt like something straight out of the Bible! But then I read White’s opinion, and was won over. He was right that the cure prescribed by the majority ended up being worse than the disease. And if it weren’t for all the asinine recusals, his dissent probably would have been the majority opinion too.