Supreme Court Watch: Credit Suisse v. Simmonds
Can a dishonest investment firm legally avoid prosecution by not revealing its illegal activities until after the statute of limitations has expired? In layman’s language, that’s the essence of the case to be argued before the Supreme Court today.
Wall Street greed is on trial in America’s streets. The Occupy movement reminds us of the inequality and inequity in modern America. Manipulation of mortgage-backed securities led only a few years ago to the worst financial crisis the world has seen in eighty years, yet the banks and investment firms continue to make record profits and to hand out record bonuses. There seems to be a different standard — a different world — that serves the investment élite. The case of Credit Suisse Securities (USA) LLC v. Simmonds would seem to address whether the idea of the rule of law applies to them at all.
The case arises from fifty-four IPOs issued in 1999 and 2000. An IPO is an Initial Public Offering, in which a company sells its first public stock to raise money for a business startup or expansion. Typically, the cash supplied to the company comes from one or more investment firms, in exchange for shares of ownership in the company. The investment firms then sell those shares on the public stock market. That sale of shares is an IPO. The investment firms are called “underwriters.”
In this case, Credit Suisse Securities and a number of other investment firms underwrote 54 IPOs of interest. The shares were initially sold in 1999 and 2000. Credit Suisse then arranged for a series of repurchasers to repeatedly buy the shares, always at a higher price, thus artificially inflating the value of the stock. This manner of manipulation is known as “laddering”. This unethical behavior was discovered by a shareholder named Vanessa Simmonds, who brought Credit Suisse and the other investment firms to court, in an effort to make them disgorge the profits they had unethically obtained.
The suit was brought under Section 16(b) of the Securities Exchange Act, which relates to insider trading by directors, officers, and principal stockholders. The District Court dismissed 34 of the 54 cases as insufficiently proven. The Court also dismissed the final 20 cases, as having been brought beyond the two-year statute of limitations as mandated by Section 16(b).
Ms. Simmonds appealed the case to the Ninth Circuit Court. The three-judge Circuit panel upheld the dismissal of the 34 cases, but overturned the 20 dismissed due to being brought beyond the statute of limitations.
There are conditions under which a statute of limitations may be extended or ignored altogether, an action known as tolling. For example, if the victim of a crime is a minor, or if the victim is in bankruptcy or in prison, and so is for a time unable to bring suit, or if the parties to the suit had been engaged in good-faith negotiations — in all these cases, the statute-of-limitations-clock does not begin to run when the alleged crime occurs, but at some later date related to the specific circumstances.
Section 16(b) requires certain reporting regarding securities trading done by directors, officers, and principal stockholders, for the purpose of keeping these transactions transparent, and proving they are above board. The Ninth Circuit ruled that the statute of limitations clock should not begin until the required documents are filed. In the case of the 20 IPOs in Ms. Simmond’s suit, the underwriters never filed the required reports. The Ninth Circuit ruled, therefore, it was quite reasonable to expect it to take more than two years from the IPO issuance date for any possible wrongdoing to be discovered.
Credit Suisse and the other investment firms have appealed the Ninth Circuit’s decision to the Supreme Court, which has agreed to hear the case. At issue here is not whether the IPO underwriters laddered the stock, to thus artificially inflate its price and make unearned (and possibly illegal) profits through manipulation of the stock market. At issue is whether the statute of limitations can be defeated by merely declining to file documents required by law.
As I noted in a previous article, it is common (though by no means universal) that the Supreme Court agrees to hear a case because it intends to overturn the lower court’s ruling. If the Court is nearly certain to agree with the lower court, the Justices usually simply decline to hear the case, and thus the lower court ruling stands. This raises the likelihood that the conservative Justices on the Court are going to tell us that investment firms can legally hide unethical or illegal acts, merely by waiting until after the statute of limitations expires before they file the required documentation which could be used to prove or to expose their crimes.
In one further twist, the Court revealed that Chief Justice Roberts did not take part in the discussion of whether to hear this case. Such an announcement usually (though not always) means that the Justice who didn’t participate intends to recuse him– or herself from consideration of the actual case. This could narrow the usual 5–4 decision to a 4–4 tie, and make for interesting questions during the oral arguments.
- Supreme Court Watch: FOIA Edition
- Supreme Court Watch: University of Texas Southwestern Medical Center v. Nassar
- Cruzin’ for a Bruzin’
- Supreme Court Watch: Association for Molecular Pathology v. Myriad Genetics, Inc.
- Supreme Court Watch: McQuiggin v. Perkins
- Supreme Court Watch: Butt v. Utah
- Supreme Court Watch: Bowman v. Monsanto Co.
- Reparative Repair
- Supreme Court Watch: Genesis Healthcare Corp. v. Symczyk
- Supreme Court Watch: Kirtsaeng v. John Wiley and Sons, Inc.
About dcpetterson (186 posts)
D. C. Petterson is a novelist and a software consultant in Minnesota who has been writing science fiction since the age of six. He is the author of A Melancholy Humour, Rune Song and Still Life. He lives with his wife, two dogs, two cats, and a lizard, and insists that grandchildren are the reward for having survived teenagers. When not writing stories or software, he plays guitar and piano, engages in political debate, and reads a lot of history and physics texts—for fun. Follow on Twitter @dcpetterson