by Charles W. Prueter
The Supreme Court picked up its pace in the last week of February, issuing seven decisions in argued cases. (The Court thereby nearly tripled its entire output in such cases since the beginning of the term in October 2017.) Two of those — Digital Realty Trust, Inc. v. Somers, No. 16-1276, and Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784 — will be familiar to those who have read the January/February 2018 issue of Board Briefs. The Update discusses the Court’s decisions in those cases below. A preview of an upcoming case involving the Securities and Exchange Commission follows.
Somers
The question in Somers turned on Dodd-Frank’s definition of a “whistleblower.” Whistleblower status is important in part because, under Dodd-Frank, a “whistleblower” is protected by law from retaliation. In short, a company can’t fire an employee for blowing the whistle regarding corporate fraud or misconduct. Such protection is part and parcel of the central purpose of whistleblower statutes — i.e., providing an incentive to report wrongdoing. (Among other incentives, a whistleblower also may be entitled to a handsome monetary recovery if the information provided leads to a successful enforcement action against the company.) The catch is that Dodd-Frank does not treat just anyone as a whistleblower. On the contrary, an employee is a whistleblower if — and only if — she provides “information relating to a violation of the securities laws to the [Securities and Exchange] Commission.”
The purported whistleblower in this case reported an alleged securities violation internally but never provided the information to the SEC. Nevertheless, he contended that he was in fact a whistleblower on the dubious theory that, despite the statutory language, his act of reporting the information internally was consistent with the commonly understood concept of whistleblowing. The United States Government, through the Office of the Solicitor General in the Department of Justice, urged the Court to adopt this theory, effectively urging the Court to disregard Dodd-Frank’s text.
Justice Ginsburg, who wrote the Court’s decision, would have none of that. She explained succinctly: “Courts are not at liberty to dispense with the condition — tell the SEC — Congress imposed.” The Court’s decision therefore is a forceful pronouncement on the importance of the plain language of a statute. It should go without saying that the law is what the law says. But when the federal government itself takes the view that the statutory language should be set aside in favor of a construction that it finds more palatable, repeat players in the litigation and regulatory enforcement settings justifiably become concerned that the certainties on which they have relied might not, in fact, be certainties. Justice Ginsburg, however, has put those concerns — as they might relate to companies operating in the Dodd-Frank environment — to rest. More broadly, this case is a positive development for those attending to risk management and compliance efforts that rely on straightforward statutory and regulatory language.
A final note on Somers: While Justice Ginsburg’s focus unmistakably is on the statutory text, she also discusses how the legislative history behind Dodd-Frank supports her plain language interpretation. Legislative history, broadly speaking, refers to the committee reports and other commentary from legislators regarding the bills that become codified statutes. One school of thought, which would include Justices Ginsburg, Breyer, and Sotomayor, holds that such materials are helpful to the effort to interpret the statutory text. Another school, led by the late Justice Scalia as well as Justices Thomas and Gorsuch, holds the opposite and does not put any weight at all in legislative history. That is, the law is what the law says — period. Although all of the justices agreed on the basic reasoning and the outcome here, Justice Thomas issued a concurring opinion expressing his view that legislative history is not an appropriate source of authority when it comes to interpreting statutes. Justice Sotomayor responded with a concurring opinion of her own to make the case that legislative history can, in fact, aid judges in their understanding of the law. These concurring opinions thus reveal a clear philosophical divide on the Court — a divide that may prove to affect the outcomes in other cases to come.
Merit Management Group
Here, the question revolved around a bankruptcy statute that allows bankruptcy trustees to “avoid” certain pre-bankruptcy payments that, for example, improperly favor one creditor over another or outright defraud creditors by moving assets out of the estate. The twist here is that the law also provides an exception, or “safe harbor,” prohibiting a trustee from avoiding a transfer of securities “by or to (or for the benefit of )” a financial institution. Thus, if a financial institution purchases securities from, or sells securities to, a debtor prior to the debtor’s filing for bankruptcy, that transaction cannot be set aside; the financial institution is protected.
In this case, the debtor purchased securities from Merit Management (which is not a financial institution for purposes of bankruptcy law), and that transaction passed through a financial institution. Merit Management thus argued that the payment cannot be “avoided” — and that therefore it may keep the payment — because the payment went “to” a financial institutional before being ultimately delivered.
In our preview of the case, we noted that, at oral argument, the justices were skeptical of that theory and were inclined to see the relevant transaction not as the one to and from the financial institution intermediary but rather the overall deal between the debtor and Merit Management. This view did in fact carry the day. Justice Sotomayor wrote for a unanimous court, using a simple illustration: Where a transfer from A à D is executed via B and C as intermediaries, such that the component parts of the transfer include Aà B à C à D, the relevant transfer, to determine whether the payment either may be set aside or falls under the safe harbor, is the A à D transaction.
In the securities setting, this decision means that debtors will have less room to shelter questionable pre-bankruptcy deals that disadvantage arm’s-length creditors.
Coming Up
Coming up in April in Lucia v. SEC, No. 17-130, the SEC again will be before the Court — this time to defend the way that it selects so-called administrative law judges. As banking and financial services professionals are aware, the SEC has the authority to execute and enforce the federal securities laws, and it generally can proceed with enforcement actions either through suit in federal court, or through in-house administrative proceedings over which ALJs preside. The enactment of Dodd-Frank, which expanded the SEC’s administrative enforcement authority, has resulted in the SEC keeping more than 80% of its enforcement actions in-house, where it has won more than 90% of the time.
It is against this backdrop that an investment professional, Mr. Lucia, who was charged by the SEC in an administrative enforcement proceeding, has challenged the constitutionality of the way that the SEC picks its ALJs. In a nutshell, as relevant here, the Constitution requires that “Officers of the United States,” if they are not nominated by the President and confirmed by the Senate, be appointed by the “Heads of Departments.” Mr. Lucia argues that the SEC’s ALJs, who wield immense power over banking and financial services professionals, are Officers of the United States by virtue of their authority and that the ALJs therefore must be appointed by the “Head” of the SEC. But the ALJs are not so appointed; in fact, the ALJs are appointed in a bureaucratic process that results in SEC staff picking from a list of three candidates provided by the Office of Personnel Management. Mr. Lucia thus argues that any administrative rulings from the ALJs were invalid as a result of the failure to follow the instructions provided in the Constitution.
This case could fundamentally disrupt not only the way the SEC operates, as it could affect existing administrative hearings, but also the way various other administrative agencies operate — including the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau. Readers therefore will want to stay abreast of the developments in Lucia.
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For those curious about the work of the Supreme Court as a whole, the other five decisions in argued cases that were issued in February resolved (1) a prisoner civil rights lawsuit; (2) a dispute about the effect of a guilty plea in federal court; (3) a fascinating question about whether a group of U.S. citizens may attach a collection of Iranian antiquities at the University of Chicago to satisfy a money judgment against the Republic of Iran; (4) a land dispute involving the Pottawatomi Indians’ desire to build a casino; and (5) the rights of detained immigrants to periodic bond hearings during the course of their detention. No matter the subject matter, the methods, approaches, and philosophies of the justices shine through in each decision.
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at charles.prueter@wallerlaw.com and by telephone at 205.226.5735.
