The Collision Between the First Amendment and Securities Fraud
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Presented at the Law and Society Annual Conference, May 31, 2013
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The Collision Between the First Amendment and Securities Fraud
- 1. The Collision Between the First Amendment and Securities Fraud Wendy Gerwick Couture 65 ALA. L. REV. __ (forthcoming 2014). Law and Society Annual Conference Panel -- Corporate Law: Securities Litigation May 31, 2013 A Work in Progress
- 2. Example: Research analyst publishes unduly negative research about a public company
- 3. Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud
- 4. Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review
- 5. Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Breathing Space
- 6. Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Breathing Space
- 7. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review
- 8. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = =/ Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review
- 9. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = =/ Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review =/
- 10. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = =/ CHILLING EFFECT Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review =/
- 11. Interest in Compensating Injury to Reputation New York Times v. Sullivan Interest in Encouraging Non- Defamatory Speech
- 12. New York Times v. Sullivan TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage Interest in Compensating Injury to Reputation Interest in Encouraging Non- Defamatory Speech
- 13. New York Times v. Sullivan • Society’s interest in a “multitude of tongues,” especially about public figures TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage Interest in Compensating Injury to Reputation Interest in Encouraging Non- Defamatory Speech
- 14. New York Times v. Sullivan • Public figures are more likely to be able to engage in self- help • Public figures are more likely to have assumed the risk of defamation by thrusting themselves into the limelight TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage Interest in Compensating Injury to Reputation Interest in Encouraging Non- Defamatory Speech • Society’s interest in a “multitude of tongues,” especially about public figures
- 15. • Society’s interest in a “multitude of tongues,” especially about public figures Reputational Interest Gives Way New York Times v. Sullivan • Public figures are more likely to be able to engage in self- help • Public figures are more likely to have assumed the risk of defamation by thrusting themselves into the limelight TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage Interest in Compensating Injury to Reputation Interest in Encouraging Non- Defamatory Speech
- 16. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = =/ CHILLING EFFECT Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review =/
- 17. Public company = “public figure” Media v. non-media defendants Commercial v. non-commercial speech
- 18. “In connection with” purchase or sale of securities Research analystIssuer Scope of Securities Fraud Liability
- 19. “In connection with” purchase or sale of securities Non- commercial speech Research analystIssuer Scope of Securities Fraud Liability
- 20. New York Times v. Sullivan standard for “public figure” defamation: • Actual malice • Proven by clear and convincing evidence • Subject to independent appellate review Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud = =/ CHILLING EFFECT Breathing Space § 10(b) liability standard: • Scienter • Proven by a preponderance of the evidence • Subject to deferential appellate review
- 21. Securities Fraud Context Interest in Compensating Injured Investors Interest in Encouraging Non- Commercial Speech About Companies
- 22. Securities Fraud Context Interest in Compensating Injured Investors TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage Interest in Encouraging Non- Commercial Speech About Companies
- 23. Securities Fraud Context Interest in Compensating Injured Investors TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage • Society’s interest in promoting fair and honest markets via a “multitude of tongues” Interest in Encouraging Non- Commercial Speech About Companies
- 24. Securities Fraud Context Interest in Compensating Injured Investors TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage • Society’s interest in promoting fair and honest markets via a “multitude of tongues” • Investors can protect themselves from losses via hedging / diversification Interest in Encouraging Non- Commercial Speech About Companies
- 25. Securities Fraud Context Interest in Compensating Injured Investors TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage • Society’s interest in promoting fair and honest markets via a “multitude of tongues” • Investors can protect themselves from losses via hedging / diversification Interest in Deterring Fraud to Promote Fair and Honest Markets Interest in Encouraging Non- Commercial Speech About Companies
- 26. Securities Fraud Context Interest in Compensating Injured Investors TENSION because erroneous statements are inevitable and thus there is a risk of chilling speech that we want to encourage • Society’s interest in promoting fair and honest markets via a “multitude of tongues” • Investors can protect themselves from losses via hedging / diversification Interest in Deterring Fraud to Promote Fair and Honest Markets Interest in Encouraging Non- Commercial Speech About Companies Interest in Imposing Liability Gives Way
- 27. • Is “fraud” per se devoid of any First Amendment protection? SEC v. Pirate Investor LLC, 580 F.3d 233 255 (4th Cir. 2009) (“Punishing fraud, whether it be common law fraud or securities fraud, simply does not violate the First Amendment.”)
- 28. • Is “fraud” per se devoid of any First Amendment protection? Illinois v. Telemarketing Associates, Inc., 538 U.S. 600, 620-21 (2003) (“Of prime importance, and in contrast to a prior restraint on solicitation, or a regulation that imposes on fundraisers an uphill burden to prove their conduct lawful, in a properly tailored fraud action the State bears the full burden of proof. False statement alone does not subject a fundraiser to fraud liability. As restated in Illinois case law, to prove a defendant liable for fraud, the complainant must show that the defendant made a false representation of a material fact knowing that the representation was false; further, the complainant must demonstrate that the defendant made the representation with the intent to mislead the listener, and succeeded in doing so. . . . Heightening the complainant's burden, these showings must be made by clear and convincing evidence. . . . As an additional safeguard responsive to First Amendment concerns, an appellate court could independently review the trial court's findings.”).
- 29. Anticipated Conclusion: The New York Times v. Sullivan protections (“actual malice” shown by clear and convincing evidence and subject to independent review) should apply in securities fraud cases where (a) the subject of the communication is a “public figure;” and (b) the speech is non-commercial.
- 30. Example: Research analyst publishes unduly negative research about a public company Covered company Injured investor Defamation Securities fraud Anticipated Conclusion: The New York Times v. Sullivan protections (“actual malice” shown by clear and convincing evidence and subject to independent review) should apply in securities fraud cases where (a) the subject of the communication is a “public figure;” and (b) the speech is non- commercial.