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January 3, 2024

Actions in the Federal Courts – Month in Review Newsletter – December 2023

If you want to see the full list of cases we’re following, view our Case Tracker here.

Better Markets Weighs in with Amicus Briefs in the Supreme Court and the Fifth Circuit

Standing up for investors claiming they were deceived by a company’s failure to disclose key information.

On December 20, 2023, Better Markets joined an amicus brief filed in the U.S. Supreme Court, supporting investors who allege they suffered damages after a company deliberately and repeatedly failed to disclose important information about its business prospects in reports required to be filed with the SEC.  Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165.  The reality is that omissions of material information can be just as damaging to investors as outright lies and the law should protect investors from both forms of deceit.

Our amicus brief, led by the American Association for Justice along with Public Justice, made three key points in support of the investors.  First, as the Supreme Court has long recognized, private actions are essential for making injured investors whole, deterring misconduct, and supplementing the government’s limited ability to police the markets alone. Second, the legal theory being advanced in this case falls squarely within the established scope of the antifraud provisions embodied in Section 10(b) of the Exchange Act.  And third, the defendants’ dire predictions are – again – unfounded. Based on existing law and actual experience, we know that a ruling in favor of the plaintiffs will neither open a floodgate of frivolous litigation nor overwhelm investors with too much disclosure.  As explained in the brief, disclosure of key facts is the lifeblood of our robust securities markets, and the Court should reaffirm that principle in this case.

Defending SEC’s private funds reforms that benefit all investors, not just the wealthy.

On December 22, 2023, we filed an amicus brief in the Fifth Circuit, defending the SEC’s rule requiring more transparency and fairness in the world of private funds.  The case is National Association of Private Fund Managers v. SEC, No.  23-60471, another in a series of industry attacks to preserve their profitable status quo by trying to nullify rules designed to protect investors and improve our markets.  The SEC’s well-crafted rule requires that private fund advisers disclose more information about the funds they manage, including basic information about fund performance, fees, and expenses – which, obviously, investors want and deserve to know.  It also limits certain unfair advisor activity, such as giving preferential treatment to some investors in the fund.

The private fund advisors claim that the investors in private funds are wealthy and sophisticated and therefore don’t need such key information or protection.  In our brief, however, we show that even supposedly sophisticated investors need disclosure to make sound investment decisions and that they are vulnerable to abusive practices like all investors.  We also show that these reforms will benefit millions of everyday investors through their retirement funds, since many pension funds have poured trillions of dollars into private funds, representing the savings of the teachers, firefighters, and policemen who serve our communities.

The Industry’s Wave of Legal Challenges Continues, But It Isn’t Stopping Important Reforms.

On December 14th, the National Association of Private Fund Managers filed another legal challenge in the Fifth Circuit, this time targeting the SEC’s short position and securities lending disclosure reforms.  National Association of Private Fund Managers v. SEC, No. 23-60626.  As the cases against the SEC mount up, it’s important to put them in context.  The reality is that the SEC has finalized dozens of important new rules under Chairman Gensler’s leadership, with more to come next year, and relatively few get challenged in court.  Moreover, the SEC successfully defends against many of the claims that are brought.  The resulting court decisions sometimes unwind important reforms designed to protect investors and make our securities markets more fair, and they needlessly drain a substantial share of the SEC’s scarce resources.  But on balance, investors and the markets are benefiting hugely from the SEC’s work, as is the case in this matter.

The Fifth Circuit Adds Insult to Injury

As we reported earlier, the Chamber of Commerce won a partial victory in its attack on the SEC’s stock repurchase disclosure rule, designed to help investors understand whether share buybacks were in the best interest of the company and its shareholders or instead a maneuver intended to increase executive compensation.  Chamber of Commerce v. SEC, No. 23-60255 (5th Cir.). The court rightly rejected most of the challengers’ claims as we urged in our amicus brief, but it nonetheless second-guessed the SEC and decided that it had failed to respond to issues raised by commenters and had thereby failed to conduct a proper cost-benefit analysis.  In what may have appeared to be a hopeful sign, the court declined to immediately nullify the rule and instead remanded the rule to the SEC to address the problems.   But the court gave the SEC just 30 days to do so, which is an impossibly short period of time and probably would have required the SEC to violate the administrative procedures act. The SEC sought an extension of time to respond, but the court summarily denied the request.  The court thus revealed that the apparent opportunity it was providing to the SEC to address the issues it raised was really an empty gesture. That was confirmed in the court’s needlessly sharply-worded December 19th decision formally vacating the rule and criticizing the SEC for coming back to court “empty-handed,” with “nothing to show for its efforts”—even though the court itself deprived the SEC of a reasonable amount of time to address the court’s concerns.  This is yet another decision by the 5th Circuit that raises very serious questions about it judicial temperament and industry bias.



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