SCOTUS on Suits Against Investment Firms & Death Penalty

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2:00This is Bloomberg Law with June Grosso from Bloomberg Radio. I think this case is extremely close. I'll just put cards out there on that. And that deduction by Justice Brett Kavanaugh seemed correct because Wednesday's 80-minute oral argument at the Supreme Court didn't give a clear indication about the likely outcome. Wall Street is watching the case over whether to allow investors to broadly use an 85-year-old law to sue funds over their management decisions. A lower court had allowed activist investors led by Saba Capital Master Fund to sue 11 closed-end funds, including some affiliated with F.S.

2:46Credit opportunities and BlackRock. Justice Sonia Sotomayor pointed to the legislative history of the Investment Company Act to show that Congress intended to allow private rights of action. I know that many of my colleagues don't believe in statutory history, but here we have both the House and the Senate reports accompanying the 1980 amendments to the ICA. And in both the House and the Senate reports, it says that, quote, private rights of action for violations of the federal securities laws are a necessary adjunct to the SEC's enforcement efforts. But in recent decades, the Supreme Court has avoided finding private rights of action unless Congress expressly authorizes them in a statute.

3:38And conservative Justice Neil Gorsuch was critical of allowing so-called implied rights of action. Pretty disastrous for our system of government where the people are supposed to write the laws that govern them, not judges. The Trump administration is backing the mutual funds. Joining me is securities law expert James Park, a professor at UCLA Law School. Jim, tell us about this legal fight. It starts sort of from the beginning. You have a hedge fund, Saba Capital, and one of its strategies is it buys stock in mutual funds, mutual funds that are closed-ended, which means that they have stock trading in secondary markets.

4:21And the idea behind the strategy is you buy a substantial stake and you influence the governance of the fund. You might think that it has poor governance and then that should increase the price of the stock. That's what activist stock investors typically do. And then you hopefully sell at a profit. And so they did this for a number of mutual funds. And the funds basically tried to take away their right to vote. There was a state law in the state where they were formed, which said that if you pass a resolution, you can take away a shareholder's right to vote unless a majority of the other shareholders basically give it back.

4:59And this is almost a takeover defense sort of thing. It reduces their influence on the company's governance. And so what Saba Capital is arguing is that that violates a law, a federal law called the Investment Company Act, which was passed in 1940, which is meant to regulate mutual funds. The Investment Company Act basically says that shareholders are supposed to have votes proportionate to the number of shares that they own. And so what Sabah Capital was arguing is that we have a private right of action to sue, and the remedy should be rescission, which means basically we get our money back. And so there's a question as to whether the Investment Company Act authorizes a lawsuit like this because the language does not come out and say in a very straightforward way that you have the right to sue for violations of the Investment Company Act.

5:51And so the only way you can say they have a right to sue is to say there's something called an implied remedy here, sort of a implicit right to sue that the court can basically say is evident from the law. The Second Circuit Court of Appeals, which handles a lot of these kind of financial cases and is well-respected, did allow a private right of action? They did. They basically did in a different case. Judge LaValle, who is a very prominent, respected Second Circuit judge, said that the statute has language that can be read to indicate that Congress intended for private parties to be able to bring suit for rescission when there is a violation of the Investment Company Act.

6:38And he mainly based his argument on the text. The text of the law says, you know, if you violated the Investment Company Act, then the various agreement that you entered into with the mutual fund is unenforceable. It talks about, you know, in certain circumstances, rescission should not be denied by a party if the benefit of rescission outweighs some of the downsides. So there is language that indicates that Congress might have envisioned these private lawsuits happening, but it's not said in a straightforward way. And I think that's what made the question ambiguous. And in fact, the Third Circuit and a number of other circuits have held the opposite and said that there is not an implied right to sue under the Investment Company Act.

7:25And the Supreme Court generally has not favored these implicit rights, which are not straightforward in the text of the statute. And what were the concerns of the justices about allowing a private right of action? There were a number of concerns, and they mostly focused on the statutory interpretation argument as opposed to broader policy concerns. And I think that they were concerned that the language was not completely straightforward and that there were some really difficult issues of interpreting what the statute meant. And Justice Kavanaugh went so far as to say this was a very close case, that there were good arguments on both sides.

8:07Some of the more liberal justices pointed to the legislative history. And the legislative history actually indicates that Congress thought that there would be an implied right of action. And there were some reports, Senate and House reports, which said that they envisioned investors could sue. But a lot of the more conservative justices, as you may know, they don't really like to look at legislative history. They like to look at the text of the statute. And so a lot of the oral argument was puzzling through how we read this language. That's basically what the argument was mainly about. I thought it was interesting that Justice Sotomayor prefaced her remarks about the statutory history by saying, I know many of my colleagues don't believe in statutory history.

8:51She also referred to these private lawsuits as being in conjunction with the SEC's enforcement efforts. But if you have private investors bringing their own lawsuits, does that interfere with the SEC's enforcement plans? Definitely. The mutual fund industry has taken the position that the statute is meant to be enforced by the SEC rather than private plaintiffs. and that the SEC can come in if there's a violation of the Investment Company Act and bring various enforcement actions. And, you know, I think the response to that is the SEC has limited resources. There are a lot of these mutual funds out there, a lot of potential violations.

9:34And having private attorney generals who are able to bring these suits may be a more effective way of enforcing these provisions. That was not really discussed much in the oral argument. I think that argument has fallen a bit out of favor with the more conservative justices. But definitely the mutual fund industry believes that it's really the SEC that should be bringing enforcement actions in this space. What about suing in state court rather than federal court? Here's what Justice Kavanaugh said. So it's a federal court, state court issue, as I see it. Like this is going to happen. It's just going to happen in federal court or state court.

10:12There was also a lot of discussion about that possibility that maybe what the statute means is that the contract is unenforceable if there's a violation of the Investment Company Act. And so then there would be litigation in state court about the enforceability of the contract. And so that was seen as a possibility. Have there ever been suits like that? I don't know. And I think there would be a little bit complicated, you know, especially the types of theories that you might want to bring. Federal courts may have a bit of an advantage over state courts in hearing these types of issues. And so it would be a bit awkward to say that these claims would mainly be brought in state court as opposed to federal court if you want to have this be an effective remedy, in my view.

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12:23That's public.com slash market. And paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Running a small business takes everything you've got. But with Chase for Business, you're not alone. They bring together local support and a broad range of resources to more than 7 million customers. With a deep understanding of your day-to-day needs, they provide products and guidance built to help you thrive.

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13:37Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, NA, member FDIC. Whether you're planning a big tech event, launching a new campaign, or just stocking up on team gear, finding the right promotional products makes all the difference. 4imprint offers thousands of options, from on-trend apparel and premium drinkware to tech, totes, and giveaways, so you can find the right fit for any audience, purpose, or budget. You can customize it all. Your logo, your message, your look. And many items come with no setup charge to help you save. And if you're really watching the bottom line, you'll find standout choices at every price point so you can make a real impact while staying on budget.

14:17Plus, you'll get expert help, fast turnaround times, and their 360-degree guarantee. So you can be 4imprint certain your order will arrive on time and look exactly right. Whatever your goal, 4imprint makes it easy to find your perfect promo match. Explore the possibilities today at 4imprint.com. 4imprint, for certain. The Supreme Court is considering whether to let investors use the 1940 Investment Company Act to sue funds over their management decisions. I've been talking to securities law expert James Park, a professor at UCLA Law School. Jim, can you give us a sort of simplistic explanation of the position of each side here on the merits of the case?

15:03On one side, the investors might argue we need some remedy. We need a clear remedy when there are violations. And rescission is a pretty powerful remedy under the Investment Company Act, which was meant to regulate mutual funds. On the other hand, I think what the mutual fund industry is worried about is that you're going to get a flood of lawsuits and that that might actually be bad for most investors in the mutual fund because, you know, only a few investors might be interested in suing. Only a few investors may be pursuing an activist strategy with the fund. And so the other investors may not be all that interested.

15:41And it's costly to defend these lawsuits. And those costs come out of the pockets of the other mutual fund shareholders. It was hard to read the argument, although it did seem like the liberal justices and perhaps the chief justice and Justice Kavanaugh might favor allowing the private lawsuits. But what was your take? It's close. I mean, my guess is I actually think that they will find that there is a right of action based upon the text of the statute. I think there is enough in the text of the statute to persuade at least some of the conservative justices that Congress intended for there to be a private right of action for rescission.

16:26I think the more liberal justices will be persuaded by both the text, the legislative history and policy considerations. So I think they'll need to get a couple of the Republican justices to decide with them, which I think is very possible. It's not a sure thing, but just my sense of the argument, I felt like Saba Capital might have had a bit of a better argument in terms of the text on the statutory interpretation issue. This case really doesn't present activist investors and their motivations in the best light? This is an ongoing debate as to whether or not you think activists are, you know, are positive for corporations and mutual funds.

17:09And, you know, this is interesting because it's an activism in a space where we don't necessarily see a lot of activism. And, you know, there's a question as to do we need it for mutual funds? And there's one argument that perhaps mutual funds may have weak corporate governance. The boards are controlled by the managers of the fund, and so they don't push back enough on the fund managers. There's a view that we need to scrutinize the governance of the mutual funds. On the other hand, there's another view that some scholars have expressed that if you're unhappy with the governance of mutual funds, you can sell your shares, you can exit very easily and find another mutual fund, and that would create some pressure on funds.

17:56And so maybe litigation is not all that necessary. And so I think with shareholder litigation with respect to mutual funds, you know, we don't have kind of the iconic cases that you did with, you know, Rule 10B-5 and suits against public companies. Like we don't have the Enrons and WorldComs where there was a demonstrated need for shareholders to be able to sue and bring an action to recover funds. haven't seen as many examples of that in the mutual fund space. That doesn't mean that there aren't examples of egregiously bad corporate governance, but I think there's an argument that maybe we don't need as much scrutiny of the governance of mutual funds because it's a very competitive industry, right?

18:39There are thousands of these funds that you can choose, and if one of them is being mismanaged, you can shift your funds to another one. And do you think that it's the correct decision to allow the private investors to sue? As a policy matter, I think the risk that it's going to lead to a flood of lawsuits may be low. We'll have to see, though. And my colleague at UCLA, Fernand Restrepo, actually has a study that he just completed that looked at what happened after the Second Circuit allowed these lawsuits. And he didn't find a flood of cases, and he didn't find a big impact on the mutual fund industry.

19:13These are preliminary results, he tells me. So he may, you know, find something different as he delves into the data. And his study only, I think, looks at the Second Circuit. So, you know, maybe a Supreme Court ruling would have a greater impact on the number of suits that have been brought. My sense is that, you know, Saba Capital is a little bit of an outlier in terms of pursuing a strategy like this. Most activist funds are targeting public corporations rather than mutual funds. Now, it might be that if, you know, we have more rights and more leverage that more funds may get into this space.

19:45But it is a strategy that does require you to make a pretty substantial investment in the mutual funds so that you have significant votes. And it's a little bit different than some of the shareholder lawsuits we see with public companies, which have been criticized because, you know, you have plaintiffs who own only a few shares, who have a right to bring a private action represented by an attorney in a class action. And so that might be the reason we see a lot of litigation in the public company space. I don't know if that will necessarily be true with respect to mutual funds. And the other thing to keep in mind is the implied right of action is also just for rescission, which means the remedies you get your money back as opposed to damages that may also have some impact on the incentives of plaintiffs to bring a lot of lawsuits for violations of the investment company acts.

20:37What's an investor lawsuit without damages? Thanks so much, Jim. That's Professor James Park of UCLA Law School. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies.

21:15Chances are there isn't an ETF that fits your exact criteria. But on public, you just type in a prompt and their AI screens thousands of stocks and builds a one of a kind index. You can even backtest it against the S &P 500. Then you can invest in a few clicks. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Add paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. Sample prompts are for illustrative purposes only, not investment advice.

21:52All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Running a small business takes everything you've got. But with Chase for Business, you're not alone. They bring together local support and a broad range of resources to more than 7 million customers. With a deep understanding of your day-to-day needs, they provide products and guidance built to help you thrive. Right now, earn$500 when you open a new Chase Business Complete Checking account for new business checking customers with qualifying activities. Offer expires June 18, 2026. Chase Business Complete Checking has the flexible tools you need to accept payments, make deposits, and manage your finances with confidence.

22:30Learn more at chase.com slash podcast biz offer. Chase, make more of what's yours. These may apply to Chase Business Complete Checking accounts. The$500 offer is available for new business checking accounts with qualifying activities through June 18, 2026. Eligibility and qualification requirements must to be met. Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, NA, member FDIC. Whether you're planning a big tech event, launching a new campaign, or just stocking up on team gear, finding the right promotional products makes all the difference.

23:054imprint offers thousands of options, from on-trend apparel and premium drinkware to tech, totes, and giveaways, so you can find the right fit for any audience, purpose, or budget. You can customize it all. Your logo, your message, your look. And many items come with no setup charge to help you save. And if you're really watching the bottom line, you'll find standout choices at every price point so you can make a real impact while staying on budget. Plus, you'll get expert help, fast turnaround times, and their 360-degree guarantee. So you can be 4imprint certain your order will arrive on time and look exactly right.

23:40Whatever your goal, 4imprint makes it easy to find your perfect promo match. Explore the possibilities today at 4imprint.com. 4imprint. 4certain. As a restaurant genius, I know the experience starts long before the food hits the table. Genius by Global Payments makes it easy. Digital menus and price updates in real time. No reprints. No surprises. The kitchen and floor stay perfectly in sync. So every dish arrives exactly as it should. From game day crowds to memorable meals, big league reliability for any business. That's genius. The Supreme Court decided 23 years ago that sentencing a mentally disabled person to death violates the Eighth Amendment's ban on cruel and unusual punishment.

24:33But it left it up to the states to decide how to determine that disability. And this week, the justices struggled with whether to allow Alabama to execute a man with low cognitive function who'd gotten varying results on multiple IQ tests. In past decisions, the court has said that defendants are permitted to offer additional evidence of cognitive impairment if their IQ scores fall below the threshold. And several justices said that Alabama's dependence on the IQ score was too rigid. Here are Justices Ketanji Brown-Jackson, Elena Kagan and Brett Kavanaugh. The district court did here was look not only at the IQ scores holistically, but also other evidence of adaptive functioning.

25:23And that's precisely what our case law says that the courts are supposed to do. That's totally within a state court's discretion to say there are a lot of scores here on the plus 70 side. That's dispositive for us. As long as they've given a person, this is the only requirement, it seems to me, that comes out of Hall and Moore. They have to give the person with the minus, with the 70 or minus score, the opportunity to come in with adaptive evidence suggesting the opposite. A follow-up on Justice Kagan's question, what's the logic or the rationale or the sense behind not having a district court or a trial court or a state court have the ability in those circumstances to go on and look at more?

26:13The 11th Circuit Court of Appeals had found that Joseph Clinton Smith was intellectually disabled and said its decision was based on a holistic approach that considered Smith's deficits in everyday skills, along with the IQ score of 72. Alabama is appealing that decision to the Supreme Court. Joining me is an expert in death penalty litigation, Andrea Lyon of the Chicago firm of Lyon & Kerr. She's taken 19 capital cases through the penalty phase. Andrea, tell us about Joseph Smith and the course of his death penalty litigation. Well, Mr. Smith is intellectually disabled. The question is whether or not he meets the standard that was drawn up by the United States Supreme Court in a case called Atkins v.

27:04Virginia quite some time ago at this point. And the justices said that someone who was intellectually disabled, which used to be called mental retardation, had a lower level of moral culpability, not lower level legal culpability, they could still be convicted, but a lower level of moral culpability because of their inability to reason very well. And so the question here is whether or not Mr. Smith fits into the categories that have been worked out through various cases in the United States Supreme Court. It used to be that it was like if your IQ was 70 or lower, you fit in the category. And if it was above that, you didn't.