December 12, 2025 • 27 mins
Securities law expert James Park, a professor at UCLA Law School, discusses Supreme Court oral arguments over whether to let investors use an 85-year-old law to sue funds over their management decisions. Then death penalty litigation expert Andrea Lyon, of the Chicago firm of Lyon & Kerr, discusses Supreme Court oral arguments over the death penalty in cases of intellectual disabilities. June Grasso hosts.
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Speaker 1 (00:02):
This is Bloomberg Law with June Grosseo from Bloomberg Radio.
Speaker 2 (00:08):
I think this case is extremely close. I'll just put
cards out there on that.
Speaker 3 (00:14):
And that deduction by Justice Brett Kavanaugh seemed correct because
Wednesday's eighty 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 eighty five year old law to sue
(00:34):
funds over their management decisions. A lower court had allowed
activist investors led by SABA Capital Master Fund to sue
eleven closed end funds, including some affiliated with FS Credit
Opportunities and Blackrock. Justice Sonya Soto Mayor pointed to the
legislative history of the Investment Company Act to show that
(00:56):
Congress intended to allow private rights of action.
Speaker 4 (01:00):
I know that many of my colleagues don't believe in
statutory history, but here we have both a House and
a Senate reports accompanying the nineteen eighty amendments to the ICA,
and in both the House and the Senate reports, it
says that quote private rights of action for violations of
(01:23):
the Federal securities Laws are a necessary adjunct to the
SEC's and form enforcement efforts.
Speaker 3 (01:30):
But in recent decades, the Supreme Court has avoided finding
private rights of action unless Congress expressly authorizes them in
a statute, and conservative Justice Neil Gorsich was critical of
allowing so called implied rights of action.
Speaker 2 (01:47):
Pretty disastrous for our system of government, where the people
are supposed to write the laws that govern them, not judges.
Speaker 3 (01:55):
The Trump administration is backing the mutual funds. I mean,
is securities law expert James Park, a professor at UCLA
Law School, Jim tell us about this legal fight.
Speaker 5 (02:07):
Start 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.
And the idea on the strategy is you buy a
substantial stake and you influence the governance of the fund.
(02:29):
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,
(02:52):
you know, 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. And this is,
you know, 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 is
(03:14):
passed in nineteen forty, 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 SABA Capital was arguing is
that we have a private right of action to sue
and the remedy should be recision, which means basically, we
(03:35):
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 and
so the only way you can say they have a
right to sue is to say there's something called an
(03:56):
implied remedy here, sort of an implicit right to sue
that the court can basically say is evident from the law.
Speaker 3 (04:04):
The Second Circuit Court of Appeals, which handles a lot
of these kind of financial cases and is well respected,
do it allow a private right of action?
Speaker 5 (04:15):
They did, They basically did in a different case. And
Judge Laval, 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 recision when there is a
(04:36):
violation of the Investment Company Act, And he mainly based
his argument on the text. The text of the law says,
you know, if you hihilated 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,
(04:57):
recisions should not be denied a party if the benefit
of recision 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
(05:19):
circuits had held the opposite and said that there is
not an implied right to sue under the Investment Company Act.
And the Supreme Court generally has not favored these implicit rights,
which are not straightforward in the text of the statute.
Speaker 3 (05:35):
And what were the concerns of the justices about allowing
a private right of action?
Speaker 5 (05:41):
There were, you know, a number of concerns, and they
mostly focused on the statutory interpretation argument as opposed to
broader policy concerns. And you know, I think that they
were concerned that the language was not completely straightforward and
that there were some really difficult issue of interpreting what
the statute meant. Justice Kavanaugh went so far as to
(06:04):
say this was a very close case, that there are
good arguments on both sides. Some 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
in house reports which said that the envisioned investors could sue.
But a lot of the more conservative justices, as you
(06:26):
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, and that's basically what
the argument was mainly about.
Speaker 3 (06:41):
I thought it was interesting that Justice Sodo Mayor prefaced
her remarks about the statutory history by saying, I know
many of my colleagues don't believe in statutory history. She
also referred to these private lawsuits as being in conjunction
with the secs and five enforcement efforts. But if you
(07:02):
have private investors bringing their own lawsuits, does that interfere
with the SEC's enforcement plans.
Speaker 5 (07:10):
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.
(07:32):
There are a lot of these mutual funds out there,
a lot of potential violations and having private attorney generals
who are able to bring these suits maybe 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
(07:55):
it's really the sec that should be bringing enforcement actions
in this space.
Speaker 3 (08:00):
What about suing in state court rather than federal court.
Here's what Justice Kavanaugh said.
Speaker 2 (08:07):
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.
Speaker 5 (08:13):
There 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
(08:34):
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
(08:57):
brought in state court as opposed to federal court if
you want to have this be an effective remedy. In
my view, the.
Speaker 3 (09:06):
Supreme Court is considering whether they'll let investors use the
nineteen forty 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
(09:26):
each side here on the merits of the case.
Speaker 5 (09:29):
On one side, the investors might argue, we need some remedy,
We need a clear remedy when there are violations, and
recision 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
(09:52):
in the mutual fund because you know, only a few
investors might be interested in suing I'm only a few investors,
maybe pursuing an activist strategy with the fund, and so
the other investors may not be all that interested. And
it's costing to defend these lawsuits, and those costs come
out of the pockets of the other mutual fund shareholders.
Speaker 3 (10:16):
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?
Speaker 6 (10:30):
It's close.
Speaker 5 (10:31):
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 recision.
(10:53):
I think the more liberal justices will be persuaded by
both the text, the legislative history, and policy consideration. 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. If I felt like Saba Capital
might have had a bit of a better argument in
(11:14):
terms of the text on the statutory interpretation issue.
Speaker 3 (11:17):
This case really doesn't present activists, investors and their motivations
in the best light.
Speaker 5 (11:24):
This is an ongoing debate as to whether or not
you think activists are you know, are positive for corporations
and mutual funds. And 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.
(11:47):
And there's one, you know, one argument that perhaps you know,
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, you know, we need to scrutinize the governance
of the mutual funds. On the other hand, there's another
(12:10):
view that some scholars have expressed that you know, 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.
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 you know,
(12:33):
iconic cases that you did with you know, Rule ten
B five and suits against public companies like we don't
have the en runs and World comms where there was
a demonstrated need for shareholders to be able to sue
and bring an action to recover funds. You know, haven't
seen as many examples of that in the mutual fund space.
(12:53):
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 as scrutiny of the governance
of mutual funds because it's a very competitive industry, right
There are thousands of these funds that you can choose,
and you know, if one of them is being mismanaged,
you can shift your funds to another one.
Speaker 3 (13:11):
And do you think that it's the correct decision to
allow the private investors to.
Speaker 5 (13:16):
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 for non Restreppo 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
(13:37):
on the mutual fund industry. These are preliminary results, he
tells me, So he may 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 than 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
(14:00):
activist funds are targeting public corporations rather than mutual funds. Now,
it might be that if you know you have more
rights and more leverage, that more funds may get into
this space. But 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
(14:20):
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
(14:42):
necessarily be true with respect to mutual funds. And you know,
the other thing to keep in mind is the implied
right of action is also just for recision, 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 lot of lawsuits for violations of the
investment company ASTs.
Speaker 3 (15:03):
What's an investor lawsuit without damages? Thanks so much, Jim.
That's Professor James Park of UCLA Law School. The Supreme
Court decided twenty three years ago that sentencing a mentally
disabled person to death violates the Eighth Amendments ban on
cruel and unusual punishment, but it left it up to
(15:25):
the states to decide how to determine that disability, and
this week, the Justice is 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
(15:45):
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. This is Katanji,
Brown Jackson, Elena Kagan, and Brett Kavanaugh.
Speaker 1 (16:04):
The district court did here was look not only at
the IQ scores holistically, but also other evidence of adaptive functioning.
And that's precisely what our case law says that the
courts are supposed to do.
Speaker 6 (16:18):
That's totally within a state court's discretion to say, there
are a lot of scores here on the plus seventy
side that's despositive for us, as long as they've given
a person this is the only requirement that seems to
me that comes out of whole. And more, they have
to give the person with the with the seventy or
(16:39):
minus score the opportunity to come in with adaptive evidence
suggesting the opposite.
Speaker 2 (16:46):
Fall upon 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.
Speaker 3 (17:03):
The Eleventh 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 seventy two.
Alabama is appealing that decision to the Supreme Court. Joining
(17:25):
me is an expert in death penalty litigation, Andrea Lyon
of the Chicago firm of Lyon in Kerr. She's taken
nineteen capital cases through the penalty phase. Andrew tell us
about Joseph Smith and the course of his death penalty litigation.
Speaker 7 (17:43):
Well, mister Smith is intellectually disabled. The question is is
whether or not he meets the standard that was drawn
up by the United Supreme Court in a case called
Atkins versus Virginia quite some time ago at this point,
and they just said that someone who was intellectually disabled,
which used to be called mental retardation, had a lower
(18:06):
level of moral culpability, not lower level of 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 mister
Smith fits into the categories that have been worked out
(18:28):
through various cases in the United States Supreme Court. It
used to be that it was like, if your IQ
was seventy or lower, you fit in the category, and
if it was above that you didn't. And that has
changed because part of what gets looked at and what
psychologists say should be looked at, is adaptive behavior. You
(18:49):
know how well the person is adjusted, how well they're functioning.
One thing, mister Smith, as I understand it, his IQ
was variously seventy two to seventy eight, which which is
quite low and puts them in what is called the
mildly mentally retarded or mildly intellectual disabled. But when I
(19:10):
say mildly, I think it might be helpful to know
that someone with an IQ of seventy two functions at
the same level as a nine to ten or eleven
year old child, and I think that helps put things
in perspective. I mean, a child knows that they're not
supposed to hurt someone, But if a child does something,
(19:32):
we don't hold them to the same standard that we
would hold an adult to because we recognize that they
are have limitations and that their decision making isn't very
good and all of those sorts of things. So mister
Smith is functioning at that level, and I think that
(19:53):
what the Court is struggling with here is how to
define things and how much to get in the weeds themselves.
Speaker 3 (20:03):
The US Court of Appeals for the Eleventh Circuit, which
is one of the more conservative circuits in the country,
found that he met the standard, and the Eleventh Circuit
said its finding was based on a holistic approach and
review of evidence, not just a single low score. So
do you think that the justices took this case because
(20:25):
they're not happy with that holistic view?
Speaker 7 (20:29):
I would think not, given the decisions that have been
made since Atkins, where the courts are directed to take
a look at all of the things that make you
qualify someone that way, that this has to have happened
or be evident prior to the person reaching their majority.
There's a number of things that the American Psychological and
(20:49):
the American Psychiatric associations say that you need to look at,
and so courts were encouraged to take a holistic approach.
It is difficult to know what this Supreme Court will
make of that. They are remarkably uninterested in precedent. I
think that's the polite way to put it. If they
follow precedent, then they will affirm the Eleventh Circuit, which,
(21:11):
as you mentioned, is a conservative court. And if a
conservative court found it to be the case, it's probably
the case because they don't necessarily want to help people
that are on death row. But it's very difficult to
know whether the Court will follow its own precedent or not,
and what some of the justices who say that they
(21:34):
are originalists, which is another whole conversation we can have
another time. But you know they're going to say, well,
we didn't do that in you know, seventeen seventy six.
We didn't care what the IQ was, you know, but
we also chopped off the hands of thieves and hung
people for stealing bread. So the question is, you know
whether or not what the Supreme Court has identified as
evolving standards of decency that caused the decision in Atkins
(21:58):
and its progeny should still apply. I imagine that there are
members of the Court who think, not.
Speaker 3 (22:06):
What does Alabama want just a strict, rigid let's look
at the IQ scores and stop there.
Speaker 7 (22:13):
I think they would like more guidance as to what
to look at. But I think there's a pretty clear
consensus among courts that do this kinds of reviews, both
federal and state, that you have to do a holistic
approach that the number alone doesn't tell you enough. First
of all, there's margin of error, so somebody with a
seventy two IQ could actually have an IQ of sixty seven.
(22:36):
So there's that plus or minus to five points. So
there's that. But you also have to look and see
whether the person has their adaptive behavior takes them out
of that protected category. So you could conceivably have someone
who has managed, with great teaching or great support to
(22:57):
function like a sixteen year year old rather than an
eleven year old with all of the things that are
wrong with him or her, and a court could find,
looking at all of the circumstances, that they are not
exempt from the death penalty for that reason. One of
the challenges that has been noted by many Supreme Court
justices over the years is that it's very very difficult
(23:19):
to set standards that are immutable and that coexist with
the two main concepts that are often in tension with
one another. And one of those concepts is that you
need to narrow the class of people who are eligible
for the death penalty, so adding an aggravating factor such
(23:41):
as killing a police officer in mine of duty something
like that. But you also have to have individualized consideration
of the defendant, and those things sometimes clash, but that
is the nature of the law. Everything is not always
one and clear. Some things are. You can give guidelines,
(24:05):
but you can't give you know, above this line ax
and below that line? Why? Because it does not work
with human beings. And the law is, after all about
and four fallible human beings.
Speaker 3 (24:22):
How is the Supreme Court already ruled in this area?
Have they said you can use other things besides this
rigid IQ cutoff?
Speaker 7 (24:33):
Yes, they have.
Speaker 3 (24:35):
So then I'm wondering what the point of taking this
case is when it seems to be about do we
use a rigid IQ determination or are we looking at
it holistically.
Speaker 7 (24:46):
I don't know why they took it. I don't know
if there's some justices who think that they could be
more clear than they have been in the previous three cases.
I don't know if there's some justices who want to
back away from category workly eliminating certain groups of people
such as you know, juveniles and those with intellectual disabilities.
(25:07):
You know, whether they think that was a mistake and
that that should just be presented in mitigation. I suppose
there are some justices, and I could guess who they
might be who would feel that way, But that's not
the law. And the law has been this way for
a long time, and people do seem to understand it
and seem to be able to apply it. So your
(25:27):
question as to why they took the case, I would
just be guessing.
Speaker 3 (25:31):
You've represented so many death penalty defendants. How difficult is
it to get a determination of mental disability from the courts?
Speaker 7 (25:42):
Well, it's not easy. I mean you have to investigate
the defendant's life and take a look and see if
there are you know, IQ scores from ages ago. And
we used to do that in public schools regularly. Now
I don't think we do it as much. And you
know whether the person has been in you know, education plans,
how they've been functioning, because you know, the first part
(26:02):
of things is you have to show that this is
not something that has happened as a result of a
blow to the head or something else later. So you
have to dig in and get those records. School records,
medical records, everything you possibly can. Then you have to
have your client evaluated by a competent mental health professional
and you get a report, and then you file emotion
(26:23):
to bar the death penalty. Assuming that it comes out
with your client has intellectual disabilities, you file a motion
to bar the death penlling on that basis. Now, sometimes
you end up in a big fight with an evidentiary
hearing and a judge makes a determination yes or no.
Sometimes the prosecution will take a look at what you
have and decide that this person is an Atkins excludible
(26:45):
that's how we refer to it in this world, and
that there's no reason to contest it and just agree
to take the death penalty off the table. So that's
basically what happens. It takes time and effort and resources
to determine that.
Speaker 3 (27:00):
Well, thanks so much for joining me today, Andrea. That's
Andrea Lyon of Lyon and Kerr. And that's it for
this edition of the Bloomberg Law Show. Remember you can
always get the latest legal news on our Bloomberg Law podcasts.
You can find them on Apple Podcasts, Spotify, and at
www dot bloomberg dot com. Slash podcast slash law, and
(27:20):
remember to tune into The Bloomberg Law Show every weeknight
at ten pm Wall Street Time. I'm June Grosso and
you're listening to Bloomberg
This is Bloomberg Law with June Grosseo from Bloomberg Radio.
Speaker 2 (00:08):
I think this case is extremely close. I'll just put
cards out there on that.
Speaker 3 (00:14):
And that deduction by Justice Brett Kavanaugh seemed correct because
Wednesday's eighty 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 eighty five year old law to sue
(00:34):
funds over their management decisions. A lower court had allowed
activist investors led by SABA Capital Master Fund to sue
eleven closed end funds, including some affiliated with FS Credit
Opportunities and Blackrock. Justice Sonya Soto Mayor pointed to the
legislative history of the Investment Company Act to show that
(00:56):
Congress intended to allow private rights of action.
Speaker 4 (01:00):
I know that many of my colleagues don't believe in
statutory history, but here we have both a House and
a Senate reports accompanying the nineteen eighty amendments to the ICA,
and in both the House and the Senate reports, it
says that quote private rights of action for violations of
(01:23):
the Federal securities Laws are a necessary adjunct to the
SEC's and form enforcement efforts.
Speaker 3 (01:30):
But in recent decades, the Supreme Court has avoided finding
private rights of action unless Congress expressly authorizes them in
a statute, and conservative Justice Neil Gorsich was critical of
allowing so called implied rights of action.
Speaker 2 (01:47):
Pretty disastrous for our system of government, where the people
are supposed to write the laws that govern them, not judges.
Speaker 3 (01:55):
The Trump administration is backing the mutual funds. I mean,
is securities law expert James Park, a professor at UCLA
Law School, Jim tell us about this legal fight.
Speaker 5 (02:07):
Start 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.
And the idea on the strategy is you buy a
substantial stake and you influence the governance of the fund.
(02:29):
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,
(02:52):
you know, 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. And this is,
you know, 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 is
(03:14):
passed in nineteen forty, 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 SABA Capital was arguing is
that we have a private right of action to sue
and the remedy should be recision, which means basically, we
(03:35):
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 and
so the only way you can say they have a
right to sue is to say there's something called an
(03:56):
implied remedy here, sort of an implicit right to sue
that the court can basically say is evident from the law.
Speaker 3 (04:04):
The Second Circuit Court of Appeals, which handles a lot
of these kind of financial cases and is well respected,
do it allow a private right of action?
Speaker 5 (04:15):
They did, They basically did in a different case. And
Judge Laval, 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 recision when there is a
(04:36):
violation of the Investment Company Act, And he mainly based
his argument on the text. The text of the law says,
you know, if you hihilated 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,
(04:57):
recisions should not be denied a party if the benefit
of recision 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
(05:19):
circuits had held the opposite and said that there is
not an implied right to sue under the Investment Company Act.
And the Supreme Court generally has not favored these implicit rights,
which are not straightforward in the text of the statute.
Speaker 3 (05:35):
And what were the concerns of the justices about allowing
a private right of action?
Speaker 5 (05:41):
There were, you know, a number of concerns, and they
mostly focused on the statutory interpretation argument as opposed to
broader policy concerns. And you know, I think that they
were concerned that the language was not completely straightforward and
that there were some really difficult issue of interpreting what
the statute meant. Justice Kavanaugh went so far as to
(06:04):
say this was a very close case, that there are
good arguments on both sides. Some 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
in house reports which said that the envisioned investors could sue.
But a lot of the more conservative justices, as you
(06:26):
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, and that's basically what
the argument was mainly about.
Speaker 3 (06:41):
I thought it was interesting that Justice Sodo Mayor prefaced
her remarks about the statutory history by saying, I know
many of my colleagues don't believe in statutory history. She
also referred to these private lawsuits as being in conjunction
with the secs and five enforcement efforts. But if you
(07:02):
have private investors bringing their own lawsuits, does that interfere
with the SEC's enforcement plans.
Speaker 5 (07:10):
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.
(07:32):
There are a lot of these mutual funds out there,
a lot of potential violations and having private attorney generals
who are able to bring these suits maybe 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
(07:55):
it's really the sec that should be bringing enforcement actions
in this space.
Speaker 3 (08:00):
What about suing in state court rather than federal court.
Here's what Justice Kavanaugh said.
Speaker 2 (08:07):
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.
Speaker 5 (08:13):
There 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
(08:34):
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
(08:57):
brought in state court as opposed to federal court if
you want to have this be an effective remedy. In
my view, the.
Speaker 3 (09:06):
Supreme Court is considering whether they'll let investors use the
nineteen forty 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
(09:26):
each side here on the merits of the case.
Speaker 5 (09:29):
On one side, the investors might argue, we need some remedy,
We need a clear remedy when there are violations, and
recision 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
(09:52):
in the mutual fund because you know, only a few
investors might be interested in suing I'm only a few investors,
maybe pursuing an activist strategy with the fund, and so
the other investors may not be all that interested. And
it's costing to defend these lawsuits, and those costs come
out of the pockets of the other mutual fund shareholders.
Speaker 3 (10:16):
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?
Speaker 6 (10:30):
It's close.
Speaker 5 (10:31):
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 recision.
(10:53):
I think the more liberal justices will be persuaded by
both the text, the legislative history, and policy consideration. 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. If I felt like Saba Capital
might have had a bit of a better argument in
(11:14):
terms of the text on the statutory interpretation issue.
Speaker 3 (11:17):
This case really doesn't present activists, investors and their motivations
in the best light.
Speaker 5 (11:24):
This is an ongoing debate as to whether or not
you think activists are you know, are positive for corporations
and mutual funds. And 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.
(11:47):
And there's one, you know, one argument that perhaps you know,
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, you know, we need to scrutinize the governance
of the mutual funds. On the other hand, there's another
(12:10):
view that some scholars have expressed that you know, 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.
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 you know,
(12:33):
iconic cases that you did with you know, Rule ten
B five and suits against public companies like we don't
have the en runs and World comms where there was
a demonstrated need for shareholders to be able to sue
and bring an action to recover funds. You know, haven't
seen as many examples of that in the mutual fund space.
(12:53):
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 as scrutiny of the governance
of mutual funds because it's a very competitive industry, right
There are thousands of these funds that you can choose,
and you know, if one of them is being mismanaged,
you can shift your funds to another one.
Speaker 3 (13:11):
And do you think that it's the correct decision to
allow the private investors to.
Speaker 5 (13:16):
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 for non Restreppo 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
(13:37):
on the mutual fund industry. These are preliminary results, he
tells me, So he may 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 than 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
(14:00):
activist funds are targeting public corporations rather than mutual funds. Now,
it might be that if you know you have more
rights and more leverage, that more funds may get into
this space. But 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
(14:20):
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
(14:42):
necessarily be true with respect to mutual funds. And you know,
the other thing to keep in mind is the implied
right of action is also just for recision, 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 lot of lawsuits for violations of the
investment company ASTs.
Speaker 3 (15:03):
What's an investor lawsuit without damages? Thanks so much, Jim.
That's Professor James Park of UCLA Law School. The Supreme
Court decided twenty three years ago that sentencing a mentally
disabled person to death violates the Eighth Amendments ban on
cruel and unusual punishment, but it left it up to
(15:25):
the states to decide how to determine that disability, and
this week, the Justice is 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
(15:45):
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. This is Katanji,
Brown Jackson, Elena Kagan, and Brett Kavanaugh.
Speaker 1 (16:04):
The district court did here was look not only at
the IQ scores holistically, but also other evidence of adaptive functioning.
And that's precisely what our case law says that the
courts are supposed to do.
Speaker 6 (16:18):
That's totally within a state court's discretion to say, there
are a lot of scores here on the plus seventy
side that's despositive for us, as long as they've given
a person this is the only requirement that seems to
me that comes out of whole. And more, they have
to give the person with the with the seventy or
(16:39):
minus score the opportunity to come in with adaptive evidence
suggesting the opposite.
Speaker 2 (16:46):
Fall upon 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.
Speaker 3 (17:03):
The Eleventh 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 seventy two.
Alabama is appealing that decision to the Supreme Court. Joining
(17:25):
me is an expert in death penalty litigation, Andrea Lyon
of the Chicago firm of Lyon in Kerr. She's taken
nineteen capital cases through the penalty phase. Andrew tell us
about Joseph Smith and the course of his death penalty litigation.
Speaker 7 (17:43):
Well, mister Smith is intellectually disabled. The question is is
whether or not he meets the standard that was drawn
up by the United Supreme Court in a case called
Atkins versus Virginia quite some time ago at this point,
and they just said that someone who was intellectually disabled,
which used to be called mental retardation, had a lower
(18:06):
level of moral culpability, not lower level of 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 mister
Smith fits into the categories that have been worked out
(18:28):
through various cases in the United States Supreme Court. It
used to be that it was like, if your IQ
was seventy or lower, you fit in the category, and
if it was above that you didn't. And that has
changed because part of what gets looked at and what
psychologists say should be looked at, is adaptive behavior. You
(18:49):
know how well the person is adjusted, how well they're functioning.
One thing, mister Smith, as I understand it, his IQ
was variously seventy two to seventy eight, which which is
quite low and puts them in what is called the
mildly mentally retarded or mildly intellectual disabled. But when I
(19:10):
say mildly, I think it might be helpful to know
that someone with an IQ of seventy two functions at
the same level as a nine to ten or eleven
year old child, and I think that helps put things
in perspective. I mean, a child knows that they're not
supposed to hurt someone, But if a child does something,
(19:32):
we don't hold them to the same standard that we
would hold an adult to because we recognize that they
are have limitations and that their decision making isn't very
good and all of those sorts of things. So mister
Smith is functioning at that level, and I think that
(19:53):
what the Court is struggling with here is how to
define things and how much to get in the weeds themselves.
Speaker 3 (20:03):
The US Court of Appeals for the Eleventh Circuit, which
is one of the more conservative circuits in the country,
found that he met the standard, and the Eleventh Circuit
said its finding was based on a holistic approach and
review of evidence, not just a single low score. So
do you think that the justices took this case because
(20:25):
they're not happy with that holistic view?
Speaker 7 (20:29):
I would think not, given the decisions that have been
made since Atkins, where the courts are directed to take
a look at all of the things that make you
qualify someone that way, that this has to have happened
or be evident prior to the person reaching their majority.
There's a number of things that the American Psychological and
(20:49):
the American Psychiatric associations say that you need to look at,
and so courts were encouraged to take a holistic approach.
It is difficult to know what this Supreme Court will
make of that. They are remarkably uninterested in precedent. I
think that's the polite way to put it. If they
follow precedent, then they will affirm the Eleventh Circuit, which,
(21:11):
as you mentioned, is a conservative court. And if a
conservative court found it to be the case, it's probably
the case because they don't necessarily want to help people
that are on death row. But it's very difficult to
know whether the Court will follow its own precedent or not,
and what some of the justices who say that they
(21:34):
are originalists, which is another whole conversation we can have
another time. But you know they're going to say, well,
we didn't do that in you know, seventeen seventy six.
We didn't care what the IQ was, you know, but
we also chopped off the hands of thieves and hung
people for stealing bread. So the question is, you know
whether or not what the Supreme Court has identified as
evolving standards of decency that caused the decision in Atkins
(21:58):
and its progeny should still apply. I imagine that there are
members of the Court who think, not.
Speaker 3 (22:06):
What does Alabama want just a strict, rigid let's look
at the IQ scores and stop there.
Speaker 7 (22:13):
I think they would like more guidance as to what
to look at. But I think there's a pretty clear
consensus among courts that do this kinds of reviews, both
federal and state, that you have to do a holistic
approach that the number alone doesn't tell you enough. First
of all, there's margin of error, so somebody with a
seventy two IQ could actually have an IQ of sixty seven.
(22:36):
So there's that plus or minus to five points. So
there's that. But you also have to look and see
whether the person has their adaptive behavior takes them out
of that protected category. So you could conceivably have someone
who has managed, with great teaching or great support to
(22:57):
function like a sixteen year year old rather than an
eleven year old with all of the things that are
wrong with him or her, and a court could find,
looking at all of the circumstances, that they are not
exempt from the death penalty for that reason. One of
the challenges that has been noted by many Supreme Court
justices over the years is that it's very very difficult
(23:19):
to set standards that are immutable and that coexist with
the two main concepts that are often in tension with
one another. And one of those concepts is that you
need to narrow the class of people who are eligible
for the death penalty, so adding an aggravating factor such
(23:41):
as killing a police officer in mine of duty something
like that. But you also have to have individualized consideration
of the defendant, and those things sometimes clash, but that
is the nature of the law. Everything is not always
one and clear. Some things are. You can give guidelines,
(24:05):
but you can't give you know, above this line ax
and below that line? Why? Because it does not work
with human beings. And the law is, after all about
and four fallible human beings.
Speaker 3 (24:22):
How is the Supreme Court already ruled in this area?
Have they said you can use other things besides this
rigid IQ cutoff?
Speaker 7 (24:33):
Yes, they have.
Speaker 3 (24:35):
So then I'm wondering what the point of taking this
case is when it seems to be about do we
use a rigid IQ determination or are we looking at
it holistically.
Speaker 7 (24:46):
I don't know why they took it. I don't know
if there's some justices who think that they could be
more clear than they have been in the previous three cases.
I don't know if there's some justices who want to
back away from category workly eliminating certain groups of people
such as you know, juveniles and those with intellectual disabilities.
(25:07):
You know, whether they think that was a mistake and
that that should just be presented in mitigation. I suppose
there are some justices, and I could guess who they
might be who would feel that way, But that's not
the law. And the law has been this way for
a long time, and people do seem to understand it
and seem to be able to apply it. So your
(25:27):
question as to why they took the case, I would
just be guessing.
Speaker 3 (25:31):
You've represented so many death penalty defendants. How difficult is
it to get a determination of mental disability from the courts?
Speaker 7 (25:42):
Well, it's not easy. I mean you have to investigate
the defendant's life and take a look and see if
there are you know, IQ scores from ages ago. And
we used to do that in public schools regularly. Now
I don't think we do it as much. And you
know whether the person has been in you know, education plans,
how they've been functioning, because you know, the first part
(26:02):
of things is you have to show that this is
not something that has happened as a result of a
blow to the head or something else later. So you
have to dig in and get those records. School records,
medical records, everything you possibly can. Then you have to
have your client evaluated by a competent mental health professional
and you get a report, and then you file emotion
(26:23):
to bar the death penalty. Assuming that it comes out
with your client has intellectual disabilities, you file a motion
to bar the death penlling on that basis. Now, sometimes
you end up in a big fight with an evidentiary
hearing and a judge makes a determination yes or no.
Sometimes the prosecution will take a look at what you
have and decide that this person is an Atkins excludible
(26:45):
that's how we refer to it in this world, and
that there's no reason to contest it and just agree
to take the death penalty off the table. So that's
basically what happens. It takes time and effort and resources
to determine that.
Speaker 3 (27:00):
Well, thanks so much for joining me today, Andrea. That's
Andrea Lyon of Lyon and Kerr. And that's it for
this edition of the Bloomberg Law Show. Remember you can
always get the latest legal news on our Bloomberg Law podcasts.
You can find them on Apple Podcasts, Spotify, and at
www dot bloomberg dot com. Slash podcast slash law, and
(27:20):
remember to tune into The Bloomberg Law Show every weeknight
at ten pm Wall Street Time. I'm June Grosso and
you're listening to Bloomberg
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