Corporate Governance

Regime Change and Rule 10b-5: Betz v. Trainer

By J. Robert Brown

We  have been writing about Merck v. Reynolds, a case addressing the commencement of the statute of limitations under Rule 10b-5.

The same day the Supreme Court took cert in Merck, it denied cert in Betz v. Trainer Wortham. Both cases to some degree asserted that the law governing the commencement of the statute of limitations was hopelessly confused (the petitioners in Betz received an assist from Judge Kozinski who wrote a colorful dissent in the case).

The Court clearly viewed Merck as a better vehicle to consider the relevant issues.  Merck was decided on a motion to dismiss; Betz on a motion for summary judgment.  Merck, therefore, was free of factual issues since the facts alleged in the complaint could be assumed.  As the brief in Betz noted:

• First, the Amicus noted that in fact there was substantial agreement on the appropriate standard among the different circuits. "The courts of appeals generally agree that the two-year period does not begin to run until the plaintiff (1) is put on 'inquiry notice' of possible wrongdoing through information that would induce a reasonably diligent investor to undertake an investigation, and (2) has an opportunity to investigate in order to confirm or dispel those suspicions." Moreover, the 9th Circuit applied the correct standard. To the extent error occurred, it was in the application of the facts to the standard. Such an error was not enough to justify the granting of the petition. "Correction of that fact-specific error, however, is not itself a sufficient reason for this Court to grant review."

The Solicitor General recommended that the Court not take Betz, suggesting in footnote 6 that Merck might be a better vehicle.  The brief did not, however, recommend that the Supreme Court take the case.

The analysis in Betz was workman like and shorn of politics.  Indeed, it seemed motivated by a desire to point the Court away from a case that shareholders likely had little chance of winning towards one that held the promise of a more beneficial outcome.  The views likely reflect the change in administration.  The Court asked for the views of the Solicitor General while President Bush was still in office.  The response, however, came after regime change.

Contrast this with the Solicitor General's behavior in Stoneridge.  In that case, the Solicitor General apparently submitted an amicus brief reflecting the views of Treasury and the President, taking a position disadvantageous to investors.  The Office did not allow the Securities and Exchange Commission to articulate its views in the matter.  It was a critical decision.  The majority essentially tracked the reasoning in Stoneride.

In short, the government won't provide a roadmap in Merck that will faciliate an anti-investor decision, a contrast with Stoneridge.  It won't guarantee a shareholder victory but it will help.

Full post as published by The Race to the Bottom on June 26, 2009 (boomark / email).