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Speaker 1: This is Bloomberg Law with June Grosseo from Bloomberg Radio.
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Speaker 2: I think this case is extremely close. I'll just put cards out there on that.
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Speaker 3: 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 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 Congress intended to allow private rights of action.
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Speaker 4: 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 the Federal securities Laws are a necessary adjunct to the SEC's and form enforcement efforts.
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Speaker 3: 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.
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Speaker 2: Pretty disastrous for our system of government, where the people are supposed to write the laws that govern them, not judges.
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Speaker 3: 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.
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Speaker 5: 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. 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, 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 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 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 implied remedy here, sort of an implicit right to sue that the court can basically say is evident from the law.
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Speaker 3: 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?
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Speaker 5: 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 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, 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 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.
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Speaker 3: And what were the concerns of the justices about allowing a private right of action?
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Speaker 5: 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 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 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.
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Speaker 3: 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 have private investors bringing their own lawsuits, does that interfere with the SEC's enforcement plans.
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Speaker 5: 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. 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 it's really the sec that should be bringing enforcement actions in this space.
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Speaker 3: What about suing in state court rather than federal court. Here's what Justice Kavanaugh said.
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Speaker 2: 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.
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Speaker 5: 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 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 brought in state court as opposed to federal court if you want to have this be an effective remedy. In my view, the.
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Speaker 3: 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 each side here on the merits of the case.
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Speaker 5: 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 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.
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Speaker 3: 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?
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Speaker 6: It's close.
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Speaker 5: 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. 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 terms of the text on the statutory interpretation issue.
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Speaker 3: This case really doesn't present activists, investors and their motivations in the best light.
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Speaker 5: 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. 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 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, 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. 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.
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Speaker 3: And do you think that it's the correct decision to allow the private investors to.
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Speaker 5: 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 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 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 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 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.
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Speaker 3: 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 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 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.
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Speaker 1: 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.
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Speaker 6: 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 minus score the opportunity to come in with adaptive evidence suggesting the opposite.
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Speaker 2: 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.
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Speaker 3: 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 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.
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Speaker 7: 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 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 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 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 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, 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 what the Court is struggling with here is how to define things and how much to get in the weeds themselves.
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Speaker 3: 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 they're not happy with that holistic view?
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Speaker 7: 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 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, 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 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 and its progeny should still apply. I imagine that there are members of the Court who think, not.
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Speaker 3: What does Alabama want just a strict, rigid let's look at the IQ scores and stop there.
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Speaker 7: 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. 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 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 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 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, 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.
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Speaker 3: How is the Supreme Court already ruled in this area? Have they said you can use other things besides this rigid IQ cutoff?
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Speaker 7: Yes, they have.
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Speaker 3: 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.
00:24:46
Speaker 7: 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. 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 question as to why they took the case, I would just be guessing.
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Speaker 3: You've represented so many death penalty defendants. How difficult is it to get a determination of mental disability from the courts?
00:25:42
Speaker 7: 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 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 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 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.
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Speaker 3: 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 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
Speaker 1: This is Bloomberg Law with June Grosseo from Bloomberg Radio.
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Speaker 2: I think this case is extremely close. I'll just put cards out there on that.
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Speaker 3: 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 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 Congress intended to allow private rights of action.
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Speaker 4: 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 the Federal securities Laws are a necessary adjunct to the SEC's and form enforcement efforts.
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Speaker 3: 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.
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Speaker 2: Pretty disastrous for our system of government, where the people are supposed to write the laws that govern them, not judges.
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Speaker 3: 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.
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Speaker 5: 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. 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, 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 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 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 implied remedy here, sort of an implicit right to sue that the court can basically say is evident from the law.
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Speaker 3: 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?
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Speaker 5: 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 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, 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 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.
00:05:35
Speaker 3: And what were the concerns of the justices about allowing a private right of action?
00:05:41
Speaker 5: 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 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 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.
00:06:41
Speaker 3: 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 have private investors bringing their own lawsuits, does that interfere with the SEC's enforcement plans.
00:07:10
Speaker 5: 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. 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 it's really the sec that should be bringing enforcement actions in this space.
00:08:00
Speaker 3: What about suing in state court rather than federal court. Here's what Justice Kavanaugh said.
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Speaker 2: 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.
00:08:13
Speaker 5: 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 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 brought in state court as opposed to federal court if you want to have this be an effective remedy. In my view, the.
00:09:06
Speaker 3: 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 each side here on the merits of the case.
00:09:29
Speaker 5: 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 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.
00:10:16
Speaker 3: 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?
00:10:30
Speaker 6: It's close.
00:10:31
Speaker 5: 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. 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 terms of the text on the statutory interpretation issue.
00:11:17
Speaker 3: This case really doesn't present activists, investors and their motivations in the best light.
00:11:24
Speaker 5: 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. 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 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, 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. 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.
00:13:11
Speaker 3: And do you think that it's the correct decision to allow the private investors to.
00:13:16
Speaker 5: 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 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 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 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 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.
00:15:03
Speaker 3: 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 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 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.
00:16:04
Speaker 1: 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.
00:16:18
Speaker 6: 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 minus score the opportunity to come in with adaptive evidence suggesting the opposite.
00:16:46
Speaker 2: 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.
00:17:03
Speaker 3: 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 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.
00:17:43
Speaker 7: 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 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 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 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 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, 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 what the Court is struggling with here is how to define things and how much to get in the weeds themselves.
00:20:03
Speaker 3: 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 they're not happy with that holistic view?
00:20:29
Speaker 7: 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 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, 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 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 and its progeny should still apply. I imagine that there are members of the Court who think, not.
00:22:06
Speaker 3: What does Alabama want just a strict, rigid let's look at the IQ scores and stop there.
00:22:13
Speaker 7: 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. 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 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 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 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, 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.
00:24:22
Speaker 3: How is the Supreme Court already ruled in this area? Have they said you can use other things besides this rigid IQ cutoff?
00:24:33
Speaker 7: Yes, they have.
00:24:35
Speaker 3: 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.
00:24:46
Speaker 7: 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. 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 question as to why they took the case, I would just be guessing.
00:25:31
Speaker 3: You've represented so many death penalty defendants. How difficult is it to get a determination of mental disability from the courts?
00:25:42
Speaker 7: 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 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 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 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.
00:27:00
Speaker 3: 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 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
