WASHINGTON -- The Supreme Court will take a second crack at the question of whether securities fraud cases dismissed by lower courts under a 1991 high court ruling can be reopened under a law designed to overturn the ruling.
The high court yesterday agreed to take a new case raising the issue, Plaut v. Spendthrift Farms, after it was deadlocked in another case in which Justice Sandra Day O'Connor recused herself because she owned some stock in one of the parties.
The court last month reached an unusual 4-4 impasse in Morgan Stanley & Co., et al., v. Pacific Mutual Life Insurance Co. As a result, it let stand without setting a precedent a ruling by the U.S. Court of Appeals for the Fifth Circuit. The appeals court upheld the reopening of municipal bond and other securities fraud cases that were dismissed in response to the court's 1991 ruling in Lampf v. Gilbertson.
The Lampf decision shortened to three years the period of time in which investors can file certain fraud suits from the date of the alleged fraud.
In response to the ruling, Congress sought to protect in vestors by adding a new provision, Section 27A(b), to the Securities Exchange Act of 1934. The provision allows lower courts to reopen cases they already dismissed in response to the Lampf ruling, as long as the cases are procedurally valid under state statutes of limitations.
Investors have argued in the Plaut, Morgan Stanley, and other cases that the provision violates the constitutional separation of powers by allowing the legislature to reverse a decision by the judiciary.
The high court yesterday said it would limit its review of the Plaut case to the constitutionality of Section 27A(b) under the doctrine of separation of powers, or the Fifth Amendment's due process clause.
In the Plaut case, the U.S. Court of Appeals for the Sixth Circuit ruled that the provision violates the separation of powers doctrine. The Tenth Circuit also has issued a separate ruling that the provision is unconstitutional.
Investors Ed and Nancy Plaut and John Grady sued Spendthrift Farm Inc. in 1988 for allegedly selling fraudulent common stock the year before. The case was dismissed by a lower court in 1991 after the Lampf ruling, but the investors moved to reinstate it after Congress amended the securities law.
In other action yesterday, the high court let stand a ruling by the U.S. Court of Appeals for the Fourth Circuit that school systems violate the First Amendment's free speech and free exercise rights if they charge a market rental rate to long-term church users of school facilities.
The court ruling calls for retroactive reimbursement of rent overcharges, thus subjecting school districts to "significant retroactive damages" and high litigation costs, according to the National Association of School Boards.
The case, Fairfax County School Board v. Fairfax Covenant Church, involved a Fairfax County, Va., school board regulation calling for schools to charge a non-commercial rental rate to church users for up to five years.
Under the regulation, if a church wants to use a school facility for a longer period, schools must raise the rent each year until the market rental rate for commercial users is reached in the ninth year of use.
School officials believed that charging the higher market rate for long-term use would obviate concerns that they were violating the First Amendment's establishment clause, which prohibits direct governmental support of religion.
But the appeals court said charging the lower non-commercial rental rate does not violate the establishment clause when the state pays for maintaining a public forum that is equally available for religious and non-religious discussion. The court affirmed a lower court injunction against charging a higher rate to long-term church users than would be charged to civic and cultural groups.
Fairfax Covenant Church's weekly use of West Springfield High School did not dominate the school board's rental capacity, and there was no evidence that the community interpreted the church's long-term use of the school as a religious endorsement by the school board, the court said.
The appeals court's retroactive application of the decision subjects the Fairfax school board to more than $1 million in rent-reimbursement claims from long-term church users, the school board said in a brief.
In a joint brief, the school boards association and the state of California said the conflict between the free speech and establishment clauses "has caused excruciating controversy in the public schools over the past decade."
It is difficult "for school districts to decide which constitutional provision should prevail," and they wind up getting sued no matter which provision they choose, the state and association said. "It is unfair to school boards and to the taxpayers in their communities to require them to pay damages and attorneys' fees to plaintiffs because the board made a good faith mistake in deciding which clause of the First Amendment should prevail in a particular case," they said.
