On Wall Street, they say, a hold is as good as a buy, and in the coming weeks a Supreme Court judge might decide whether that's a fact of law, too.
A class-action lawsuit that's been rattling around in the nation's legal system for nearly three years, Kircher v. Putnam Funds could determine which investors have a right to sue for damages in cases of securities fraud, according to leading legal scholars. That right is currently reserved to active traders and excludes long-term investors.
The thinking is that active traders are damaged most in securities fraud because they earn their money buying and selling. Long-term investors are holders and therefore insulated from fraud.
Like the circuitous route that Kircher v. Putnam took to get to the Supreme Court, however, it will likely take a similar undertaking to overturn a Federal securities law that's been on the books for more than 30 years. Not surprisingly, experts are divided.
"The Kircher case won't have any future impact," said Becky Jackson, a partner at Bryan Cave in St. Louis. Jackson defended Boston-based Putnam Investments in the original case in state court, where it was dismissed and admits, "To say this case has a troubled proceedings history is an understatement."
Richard Booth, the Marbury research professor of law at the University of Maryland School of Law in Baltimore, thinks the case could set a precedent.
"Whichever way this goes, things will change," Booth said.
But to try and grasp the complexity that is Kircher v. Putnam, it's best to start at the beginning.
When the mutual fund scandal first broke in September 2003, investors Carl Kircher and Robert Brockway filed a suit in state court in Illinois against Putnam, as well as a number of other funds implicated in the market-timing mess. Kircher and Brockway argued that their investments were diluted by the actions of market timers. They also claimed that the boards of the fund allowed the market timing to occur.
Putnam settled with state and Federal regulators without admitting or denying guilt. Its $40 million penalty included reimbursement to shareholders harmed by the malfeasance.
Putnam and its fellow defendants, which at the time included Janus Group and Evergreen Investments among others, did not want to litigate at the state level, so they asked that the case be moved up from its Madison County court to a Federal court and dismissed on the grounds that it violates the Securities Litigation Uniformity Standards Act, or SLUSA. SLUSA is designed to minimize frivolous investor lawsuits. But since the Putnam investors were holders and not buyers, the judge ruled that the case was outside of SLUSA's jurisdiction and remanded it back to the state level.
In 2005, Putnam's legal team appealed the decision to the Seventh Circuit Court of Appeals in Chicago, which had previously ruled that a circuit court has the authority to review remands handed down by district courts. The circuit court interpreted SLUSA more broadly and decided that the Putnam investors were indeed within the authority of SLUSA and dismissed the case.
In fact, Judge Frank Easterbrook called the plaintiffs' case a "flop," according to court documents. He said they were merely trying "to litigate a securities class action in state court in the hopes that a local judge or jury may produce an idiosyncratic award. It is the very sort of maneuver that SLUSA is designed to prevent."
The plaintiffs, who by this time had absorbed about 15 other cases against Putnam and had grown to more than 50 investors, appealed that decision to the Supreme Court.
David Frederick, an attorney with Kellogg Huber in Washington who represents the plaintiffs, did not return calls prior to deadline. But Frederick has previously said that allowing appeals courts the latitude to review remands denies everyday investors affected by market timing a speedy resolution to their claims.
On April 24, the Court heard arguments from both sides. It's now in the hands of a judge to decide whether the Seventh Circuit was within its authority to dismiss the case. An opinion could come within six weeks, or take up to 12 weeks, experts say.
The opinion, however, will not decide whether the investors deserve an award. It is only concerned with the argument whether a circuit court can overrule a district court.
Jackson thinks the Court will dismiss Kircher v. Putnam largely on the influence of a similar case. In Dabit v. Merrill Lynch, a stockbroker alleged that he was induced into holding stocks that he had wanted to sell, and he lost money. As a holder, he also tried to circumvent SLUSA by filing in state court. The Court dismissed that case unanimously last month.
"The Dabit case has laid out the limits of what is allowed," Jackson said. But even if it were to get bounced all the way back to state court, Jackson doesn't think the case will be heard. "The ultimate decision will be the same. It will just take a long time to get there and a lot of lawyers and a lot of money."
However the Court decides, Booth thinks it will result in more securities regulation. If the Court decides that it cannot be appealed from state to circuit, district courts will be hearing many more fraud cases in the future. If the Court says it can be appealed, every defendant in a securities fraud case will try to bounce their case up to circuit court for dismissal.
Booth thinks that if the case gets sent back to the Seventh Circuit, the investors might someday get their day in court.
"If they just affirm and say the Seventh Circuit was right, it will leave the circuits free to decide the question of whether there is a Federal claim," Booth said. "So, yeah, it may well come back."
That's why Booth is hoping that the Supreme Court offers more than a yes or no.
"It is my hope that they offer some guidance about who has standing to sue in Federal court," he said. In other words, are they holders or are they buyers?
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