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June 13, 2011
Supreme Court Action Today - Government-Attorney Privilege, Rule 10b-5 Actions, and Conflicts of Interest
The Supreme Court issued three substantive opinions this morning, and one summary affirmance based on an equally divided Court. The first case, United States v. Jicarilla Apache Nation (10-382), concerns whether the "fiduciary exception" to discover legal advice made in the administration of a trust applies to the United States in an action against it for trust mismanagement. The case originates in the Court of Federal Claims (CFC). The Tribe sued the government for money damages resulting from the mismanagement of a trust fund generated from the development of natural resources on the Tribe's land.
The Tribe sought discovery of certain documents relating to the trust management and the government asserted that some were protected by attorney-client privilege. The CFC basically held that the fiduciary exception applied. Under that doctrine, a trust administrator who obtains legal advice related to the trust is precluded from asserting the attorney-client privilege against the trust beneficiaries. The Court of Appeals for the Federal Circuit agreed with that ruling, setting up the instant appeal.
The Supreme Court reversed, holding that the statute that sets up the obligations supersedes application of the common law operation of the fiduciary exception. The lower courts analogized the Government to the role of a private trustee. That is incorrect. The rights that flow in this relationship come from the fact that the Government is acting as the sovereign that consents to be liable to private parties. This is in distinction to rights created between private parties. The common law theory creates the exception because the trust corpus pays for the advice, with the beneficiaries as the real client. Government attorneys are instead paid by congressional appropriations at no cost to the Tribe. That structure confirms to the Court that any legal advice the Government sought was in its role as sovereign. As such, the Government's interest in managing Indian affairs is greater than the administration of tribal trusts. Justice Alito delivered the opinion of the Court, joined by Chief Justice Roberts, and Justices Scalia, Kennedy, and Thomas. Justice Ginsburg filed an opinion concurring in the judgment which was joined by Justice Breyer. Justice Sotomayor dissented.
The second case is Janus Capital Group, Inc., et al. v. First Derivative Traders (09-525). It concerns who can be held liabile under a 10b-5 private action for making false statements. First Derivative Traders (FDT) represented a class of stockholders in Janus Capital Group, Inc. (JCG). They filed suit alleging that JCG and its wholly owned subsidiary, Janus Capital Management LLC (JCM) made false statements in a mutual fund prospectuses filed by Janus Investment Fund, of which JCM was the investment advisor and administrator. These statements, FDT contents, affected the price of the parent JCG's stock. The legal status of the Janus Investment Fund is that of a separate legal entity owned entirely by mutual fund investors. The District Court dismissed the suit and the Fourth Circuit reversed, holding that JCG and JCM made the misleading statements by participating in the writing of the documents.
The Supreme Court reversed, holding that the false statements included in the prospectuses were made by Janus Investment Fund and not by JCM. As such, JCM and JCG cannot be held liable in a private action under Rule 10b-5. Precedent holds that aiders and abettors who contribute substantial assistance to the making of a statement but who do not actually make it cannot be sued in a 10b-5 private action. The Court rejects the Government's view that "make" should be equated with "create." Congress should reaportion the liability of these close relationships rather than the courts. Janus Investment Fund had the ultimate control over what was disseminated. Justice Thomas delivered the opinion of the Court in which Chief Justice Roberts joined, along with Justices Scalia, Kennedy, and Alito. Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan, dissented.
The third opinion is Nevada Commission on Ethics v. Carrigan (10-568). Nevada's Ethics in Government Law requries public officials to recuse themselves from voting on or advocating a position when their independent judgment in a private capacity is materially affected by the interests of others. The Law goes on to describe various conflicts and private capacities including a catchall clause that covers relationships and commitments similar to those explicitly mentioned. Carrigan was censured by the Ethics Commission as he voted on a hotel/casino project proposed by a company that used a long-time friend and campaign manager as a paid consultant. Carrigan challenged the censure on the grounds that the Ethics Law violated the First Amendment. The Nevada Supreme Court agreed.
The Supreme Court held that the Nevada Ethics Law is not unconstitutionally overbroad. A legislator's voice is not protected speech as the legislative power belongs to the people that legislator represents, not to the legislator personally. The United States Senate adopted conflict of interest provisions that barred a member from participating when a conflict arose as early as 1801. The House took similar action. The long-standing tradition prohibiting action when a conflict exists presumes the prohibition is constitutional. Justice Scalia delivered the opinion of the Court in which all Justices except Justice Alito joined. He filed a separate opinion concurring in part and concurring in the judgment. Justice Kennedy filed a concurring opinion.
The case in which the Ninth Circuit's decision was affirmed by an equally divided Court is Flores-Villars v. United States (09-5801). Flores-Villars challenged the the statute conferring citizenship on one born overseas if they had one U.S.-citizen parent. That parent had to reside in the United States for a certain period of time before the child was born. If the citizen-parent was the father, the period is five years. If the mother, then the period is one year. The Ninth Circuit affirmed Flores-Villars conviction for being a deported alien found in the United States after being deported. That opinion is here. Justice Kagan did not participate in the case, causing the split. [MG]