Friday, October 7, 2005
Bruce Carton on the Securities Litigation Watch blog has an interesting post (here) about the Eleventh Circuit's dictum in SEC v. Smyth (here) that calls into question the Commission's use of broad "sin no more" injunctions in settled cases. In Smyth, which concerned whether the defendant was entitled to a hearing on the amount of disgorgement in a securities fraud case, the panel included a footnote at the end of the opinion stating that the broad injunction entered by the district court (to which the defendant had agreed) would be unenforceable because it lacked sufficient specificity regarding what conduct was being prohibited by the court order. The SEC filed a brief requesting that the panel remove the footnote because the issue of the scope of the injunction was not before the court, and therefore not argued by either party, and the analysis is incorrect (the Commission brief is available below). The effect of footnote 14 in Smyth would be to require the SEC to draft its injunctions with a bit more precision by identifying the types of misconduct that are prohibited under the broad anti-fraud provisions of the federal securities laws.
I suspect the Eleventh Circuit will agree with the SEC's request and remove the footnote from the final published version of the case. The panel's statement is so clearly dictum, and the unfairness of calling into question an important regulatory tool of a federal agency without even a hint that it was an issue in the case, will likely impel the court to drop the discussion. Whether or not the Commission's brief is right that the footnote is wrong substantively, a proposition on which there can be much disagreement, the fact that the court provided what is effectively an advisory opinion without giving the SEC the benefit of an opportunity to argue its position is not something that appellate courts should do, regardless of the merits of the statement.
The interesting question will be whether the footnote propels the SEC to change is approach to broad injunctions in settled cases even if the final published opinion in Smyth does not contain footnote 14. The Commission is on notice that at least one group of judges perceive a problem, and the securities bar is certainly aware of it and may press the issue in other cases. Dictum or not, the Eleventh Circuit may have started a change in the drafting of injunctions even if it can make the footnote disappear. (ph)