With thesupport of the Justice Department,two new cases on investment law are more likely to be reviewed by the Supreme Court: one on the right of investors to sue for false stock registration statements, and one on the duty of employee benefit plan managers to get rid of questionableitems in plan portfolios. Asked by the Court for the governments views, the Solicitor General urged the Court to rule on both.
The Courts docketindicates thatthe Justices will consider whether to grant thepetitions inMoores v. Hildes,the registration statement case, and Tibble v. Edison International,the benefit plan case, attheir September 29 Conference. The governments brief in Mooresis here, whileits brief in Tibble is here.
Both cases involve issues of timing: can an investor sue over a false stock registration statement filed with the Securities and Exchange Commission, if hebought that stock even before the statement was on file and thereforecould not have relied upon it, and doesan employee benefit plan manager have a legal duty to get out ofdoubtful investments no matter how long they have been in the portfolio, even ifthere is a cut-off on being sued after six years have passed? The Solicitor General has urged the Court to grant review and answer yes to both.
The Moores case grows out of a merger plan through a stock swap between two software companies, Peregrine Systems, Inc., based in San Diego, and Harbinger Corp., an Atlanta firm, with Harbinger to become a subsidiary. In April 2000, the respondent in the case, Harbinger director David Hildes, gave Peregrine a proxy to vote his 1.4 million shares in favor of the merger, if it took place. The merger depended upon Securities and Exchange Commission approval of a registration statement on the deal. The merger would be offif not completed by October 31, 2000.
The statement was filed with the SEC in May of that year, and Hildes would later claim that it overstated the companys revenues by $120 million and understated its losses by more than $190 million. That, he later argued, would be the cause for a sharp drop in Peregrine stock, causing him major losses. The merger later was completed, but the SEC filed a complaint against the company for filingfalse financial reports for a seriesof years.
A group of Peregrine stockholders filed a class-action fraud lawsuit, whichwas settled. Hildes, however, chose to sue on his own,against Peregrine executives and that companys accounting firm, Arthur Andersen, under Section 11 of the Securities Act of 1933. A federal judge dismissed the case, finding that Hildes had made a binding commitment to swap his shares before the registration statement, so any loss he suffered could not be attributed tothat statement. The U.S. Court of Appeals for the Ninth Circuit, however, ruled that Hildess lawsuit should be allowed to go forward, without any requirement that hehave relied on the registration statement. Peregrine directors are now challenging that rulingin their petition to the Supreme Court.
Responding to the Justices request for the federal governments views, Solicitor General Donald B. Verrilli argued that Section 11 does not require an investor to have relied upon a flawed registration statement, if such a statement was claimed to be the cause of that investors losses. Thus, althoughthe government agreed with the Ninth Circuits decision, it nonetheless urged the Court to grant review because the U.S. Court of Appeals for the Eleventh Circuit had reached the opposite conclusion. Resolution of that split among the circuits, the government contended,isimportant to the enforcement of Section 11 by investor lawsuits.
The Tibble case involves a dispute over the choice of investments available to some 20,000 participants in a California defined-contribution plan created by Edison International, an electricity-generating company based in California. Employees make contributions into the plan, whichare invested in a portfolio by the plan manager. The employees are entitled to the value of their own investment accounts.
The menu of options open to the employees is chosen by the plans investment committee, supervised by the plan manager. The employee contributions are invested mainly in mutual funds. The portfolio managers opted to put plan assets into funds that charged higher fees, because the fees were split with the plan, reducing its administrative costs.
Workers covered by the plan sued, contending that lower-fee fund investments were available, and the managers should have chosen those for the portfolioand gotten rid of the higher-fee investmentsfrom the pool open to the workers choices.
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U.S. urges review of investment cases
