Securities Exchange Act of 1934

Issues

This case asks the Supreme Court to define the private right of action under Section 14(e) of the Securities Exchange Act of 1934. Gary Varjabedian and other Emulex Corporation shareholders contend that they have a right to file a private action against Emulex under Section 14(e). Emulex Corporation and Avago Technologies Wireless Manufacturing, Inc. counter that Section 14(e) does not allow a private cause of action based on negligence, and that a higher scienter standard should apply instead. The Supreme Court’s ruling will have significant implications for shareholders’ interests in the event of a merger.

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Issues

In 2002, the Erica P. John Fund, which supports the Archdiocese of Milwaukee, sued Halliburton, an oil-services company, for securities fraud.  The lawsuit accused Halliburton of lying about its asbestos liabilities, overstating its revenues, and building up hype about the company’s merger with Dresser Industries. The lawsuit was brought on behalf of a class consisting of all shareholders of Halliburton. Contesting this class action, Halliburton argues that the lawsuit could not be brought by all shareholders unless individual shareholders actually relied on Halliburton’s alleged fraudulent acts to make their investment decisions. However, the Fund contends that reliance by the individual shareholders is presumed due to the fraud-on-the market theory established by Basic v. Levinson. The theory assumes that all public information provided by a company is incorporated into its stock price. Thus, Halliburton’s fraudulent information harmed all of its shareholders even if not every one of them personally read and relied on the information. The Supreme Court’s decision in this case will determine whether the fraud-on-the-market theory remains valid. If the Court rejects the theory, then plaintiffs would have a harder time initiating lawsuits for securities fraud, and companies that allegedly commit the fraud would likely pay less in damages.

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In this case, the Supreme Court will decide whether Section 27 of the Securities Exchange Act of 1934 (“Exchange Act”) provides federal courts with exclusive jurisdiction over state law claims based on violations of the Exchange Act or whether state courts are permitted to hear such state law claims. See Brief for Petitioner, Merrill Lynch, et al. at i. Merrill Lynch argues that Manning relies on Regulation SHO, a federal regulation, and therefore federal courts have exclusive jurisdiction under the Exchange Act. See id. at 19. On the other hand, Manning argues that, because his claims are based on state law, state courts have jurisdiction over this case, even if some elements of his claim rely on federal law. See Brief for Respondent, Greg Manning, et al. at 25. Ultimately, the Court’s decision has the potential to affect whether uniformity in decision-making is necessary to enforce Regulation SHO and whether state courts can govern duties arising under federal regulations. See Brief of Amicus Curiae The Chamber of Commerce of the United States of America, in Support of Petitioner at 8–9.

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