Legal Docket: Degrees of truth

JENNY ROUGH, HOST: It’s Monday, February 26, and you’re listening to The World and Everything in It from listener-supported WORLD Radio. Good morning! I’m Jenny Rough.

NICK EICHER, HOST: And I’m Nick Eicher. It’s time for Legal Docket.

Two oral arguments and two opinions to cover today.

The opinions are quick, so let’s tackle those first. Both of them were unanimous decisions. One held that the double-jeopardy clause of the Fifth Amendment prevents the state of Georgia from retrying a man for killing his mother.

The other had to do with so-called choice-of-law clauses in maritime contracts. The court ruled that these provisions spelling out where to litigate the disputes are valid and generally enforceable.

Now the oral arguments. One case involves securities law and the second, a drug bust.

ROUGH: And I think there’s a common thread here even though they may seem unrelated. But here’s what jumped out at me: These cases are connected by the question, What is a lie? And is it ever okay to tell one?

The question almost seems to answer itself: Is it ever right not to do right? Of course not.

But what about extreme circumstances? Did Corrie ten Boom, for example, owe the Nazis the truth? Wasn’t she not only right, but courageous, to lie about the Jewish people she was hiding during the Holocaust?

My favorite so-called “good lie” is in Les Mis. I’m talking about the incident in which Jean Valjean steals silver from the bishop. The bishop gets on board with the false story that the silver wasn’t stolen. It was a gift.

He did it to give Jean Vajean the chance to become an honest man. Love the irony!

EICHER: But aren’t there different types of lies? I mean, let’s get to the realm of the law where one type of lie might be a false statement made, another might be a true statement withheld. Lies by omission.

ROUGH: Exactly! And that’s at the heart of the securities case.

It involves a dispute between investors and a publicly-traded company, Macquarie Infrastructure.

The investors say Macquarie lied by omission. It withheld the truth.

Here are the facts: Macquarie is a conglomerate. It’s made up of many companies. And one of those companies owns storage tanks that hold fuel for ships.

EICHER: Specifically, that hold a very dirty fuel oil known as Number 6, with a high concentration of sulfur. It contains around 3 percent of that pollutant.

But a new environmental regulation was in the works that would ban fuels with sulfur content that exceeds zero-point-five percent, not three.

Some predicted that if the regulation went into effect, it would be okay, because emerging technologies could reduce the sulfur content. Others predicted the new environmental regulation would drive down demand for dirty oil.

And that’s exactly what happened. Demand plummeted. It hurt Macquarie’s business and drove down demand for its stock.

ROUGH: Investors argued Macquarie was required to disclose to them that this environmental law was on the way and the effect would be significant. Macquarie didn’t do that.

So investors brought their suit under a broad, age-old securities law called 10(b). An anti-fraud statute.

Rule 10(b)5 is a regulation under that statute. It says companies that buy and sell securities can’t make false or misleading statements.

EICHER: That’s what companies can’t do. What the rule prohibits. And other securities rules [that govern disclosures] say what companies are required to do. Turns out there are very high expectations on publicly traded companies.

PAUL KISSLINGER: There’s a lot of things. Page after page of things they have to tell investors in their public statements.

ROUGH: That’s Paul Kisslinger, a lawyer in private practice who has expertise in securities law. I got in touch with him because he used to work for the SEC, and so he’s handled both sides of cases like these.

KISSLINGER: They have to have balance sheets, they have to have all this stuff.

Important for our Supreme Court case today is a special disclosure requirement called MD&A.

KISSLINGER: Management Discussion and Analysis. … It’s supposed to be a plain and clear narrative where the company is explaining trends in the marketplace, what they see upcoming on the horizon. How things could impact your businesses.

The requirement to disclose something called “known trends and uncertainties.”

KISSLINGER: So like if you’re Amazon, you’re going to tell the public COVID is really hurting our business because it’s backing up all the shipping.

EICHER: And any retailer like that would know full well the effects of government COVID regulations, so the company would have to make known to investors what it knows.

But let’s return to the legal claims in this case. When does a false disclosure—or a true disclosure withheld—amount to fraud that allows investors to sue?

And a quick point of clarification here: The federal SEC does have the power to bring cases for fraud. But this is private investors seeking their own redress. In other words: the question presented here is, when can investors bring a private suit for fraud?

Under the anti-fraud statute and that regulation we mentioned Rule 10(b)5, investors may sue in only two circumstances. One we already talked about: A false statement.

ROUGH: The second? Well, the second is a little less straightforward.

So I’m going to quote some of the actual wording … companies may not omit a material fact that’s necessary to make another statement not misleading.

In other words, no half-truths. Meaning, tell the whole story … and don’t leave anything out … that would make an otherwise true statement untrue.

Kisslinger gives this example:

KISSLINGER: You ask your mom, “Hey, mom, can I go to a movie tonight?” And your Mom says, “Yeah, if you do all your homework.”

So you say thanks, go get yourself ready, grab your wallet and keys, head for the door, and encounter a final hurdle—Dad.

KISSLINGER: And your Dad says, “Hey, did your Mom say you could go to the movies?” And you say, “Sure. She did.”

ROUGH: You just don’t mention the homework. So what you’ve done is you’ve told a half-truth.

What you failed to disclose makes the true statement you did disclose untrue. Dad has a cause of action, I would say, and you’re probably grounded.

EICHER: So that’s one of the questions in this case. Did Macquarie tell a half-truth? If so, the investors can proceed.

But Macquarie says they can’t. Macquarie’s lawyer Linda Coberly says there’s no half-truth here. Because the plaintiffs, the investors, have failed to tie what Macquarie omitted to another statement it did make on the same subject.

LINDA COBERLY: A plaintiff must identify a specific statement. They do not refer to any specific misleading statement, any paragraph or sentence where a list was given that was incomplete, for example.

In other words, she argues the omission has no connection to a half-true statement.

A statement like, Mom said I could go to the movies.

ROUGH: But the other side says that amount of specificity isn’t necessary.

David Frederick represented the investors. He told the justices that this case involves a classic half-truth.

DAVID FREDERICK: Petitioners knew they were about to lose a substantial part of their business but kept their stock price artificially inflated by deliberately withholding information about their readiness to comply with an important rule change. When the truth emerged, their stock price fell by more than 40 percent in one day. Congress enshrined a private right of action to redress this kind of half truth.

He argued that even though the omission doesn’t tie into a specific disclosure, it does tie into the other statements in a broad sense. The entire MD&A in general! Again, that’s the section where a company must disclose known trends. He says an omission in that section is enough to constitute fraud.

The United States government also argued that day, and agreed on this point. But Justice Brett Kavanaugh struggled to puzzle through that logic.

JUSTICE KAVANAUGH: How can the MD&A as a whole be misleading, but not any single statement within it?

EICHER: That idea raises another question. Pure omissions as opposed to half-truth statements.

Macquarie argues the investors are trying to create a third circumstance to allow claims under the anti-fraud statute when it only allows two. Fraud and half-truths. Macquarie argues pure omissions are a separate category.

ROUGH: But is there a difference between pure omissions and half truths? The investors say there isn’t. And Chief Justice John Roberts seemed to agree. Earlier, he brought it up with Macquarie’s lawyer Coberly.

CHIEF JUSTICE ROBERTS: The distinction you draw between half-truths and omissions strikes me as one that might be hard to apply in practice.

EICHER: But Coberly said there has to be a difference. To allow fraud claims for “pure omissions” would set no limits. Companies would have to predict the future.

ROUGH: Whether investors can move forward with their fraud case will come down to the justices’ decision to apply a narrow test or a broad one.

Securities expert Kisslinger says a narrow test could allow companies to deceptively dance around disclosures. Like what’s allegedly happening here.

But a broad ruling could lead to disclosures that would take up a bookshelf and never be read. A tight narrative is what’s most helpful to the public, and not filings containing endless warnings.

KISSLINGER: Every trend under the sun, anything. Inflation, unemployment, ESG report, anything that could affect your bottom line. There’s going to be another pandemic 10 years down the line. So how far do you have to take this?

EICHER: Alright, let’s move onto case two: Smith v. Arizona. It’s a seemingly straightforward case. It concerns a man by the name of Jason Smith who is tried for the sale and possession of illegal drugs.

This case revolves around so-called hearsay evidence.

ROUGH: Let me explain that.

When attorneys present evidence at a trial, they can’t present statements made out of court to prove the truth of what was said. Such statements must be presented in court.

For example, say you told me it’s raining. I can’t go to court and prove it’s raining merely by saying you said so. You’d have to come in and testify about it under oath otherwise it’s hearsay. The court considers it unreliable. Rumor.

EICHER: So coming in, testifying under oath—meaning it’s the crime of perjury to lie—and allowing the jury to assess my credibility. To determine whether I’m telling the truth.

ROUGH: Right, and in a criminal case like this, a closely related concept takes things one step further.

A criminal defendant has the right to confront a witness who makes what are called testimonial statements against him. These are statements with the purpose of making criminal accusations. The accused needs to have the right to challenge the witness’s honesty and veracity. That right comes from the Sixth Amendment to the U.S. Constitution. It’s known as the confrontation clause.

It’s important because anybody can say anything. You have to probe a bit to get at the truth.

EICHER: In this case, before the trial, a forensic scientist named Elizabeth Rast performed chemical tests on the items seized during the drug bust. At the time, she worked for the Arizona Department of Public Safety. She wrote down some lab notes. And she also officially typed up her findings into a formal written report. She concluded the tests identified the items as marijuana, cannabis, and methamphetamine.

ROUGH: But during the trial, prosecutors didn’t call Elizabeth Rast to the stand. By the time of the trial, Rast had left the department. Instead, prosecutors put on a substitute expert forensic scientist Greggory Longoni.

He looked at her lab notes and her written report, and then he testified that in his opinion, the items seized were drugs.

EICHER: Defendant Jason Smith argues the state’s failure to put Rast on the stand for cross-examination violated his Sixth Amendment confrontation right.

At the Supreme Court, Smith was represented by attorney Hari Santhanam.

HARI SANTHANAM: Rast's statements were testimonial because any reasonable, objective person would understand that she prepared those statements for the primary purpose of creating evidence to use against Smith in his prosecution.

Chief Justice John Roberts pointed out that Smith’s defense lawyer could have exposed the weakness in the state’s decision to use a substitute expert.

CHIEF JUSTICE ROBERTS: Why isn’t it enough for the defense counsel to be able to ask Longoni what happened in the lab? And he’s going to have to say, “I don’t know.” … You put somebody up there like Longoni whose knowledge is very limited. It seems he’s ripe for cross-examination. It could be very effective.

Arizona argued Rast’s statements weren’t testimonial hearsay. They weren’t offered to prove the truth of them or for the purpose of accusing Smith of the crime.

Rather, the statements were introduced only to show how expert Longoni arrived at his opinion.

Here’s Alexander Samuels for Arizona:

ALEXANDER SAMUELS: Evidence offered only for the purpose of explaining the basis of an expert's opinion is not and cannot be offered for the truth of the matter asserted. … Longoni explicitly testified that he could form independent conclusions and then testified that he had formed independent conclusions.

ROUGH: But Justice Samuel Alito said that’s nonsensical. Longoni’s expert opinion is worthless if Rast’s statements are wrong. So his opinion must’ve been offered to show the truth of Rast’s report, that she performed the tests, and concluded the samples were illegal drugs.

Alito asked if any other evidence existed to prove the items seized were actually meth, cannabis, and marijuana.

SAMUELS: The three substances were admitted as physical exhibits. So they were present in the courtroom for the jury. Photos—

JUSTICE ALITO: What good does that do? The jury would taste it? Or sample these drugs?

EICHER: In other words, to prove the evidence before the jury consisted of illegal drugs, the state needs Longoni to say they are. But he had no independent knowledge at all. Not necessarily that he was lying, but how does he know? More importantly, how’s a jury supposed to know he knows?

ROUGH: Exactly. For Arizona to win, it’ll have to convince the court that Longoni wasn’t just a conduit to convey Rast’s conclusions. A high hurdle.

No one is arguing that Rast lied in her written notes and report either. But Smith maintains that under the Sixth Amendment, he has the right to confront her about it.

Now final word:

As a lawyer, I kind of feel the need to offer a disclaimer on our theme for the day. I’m not arguing for lies of any sort, whether inside or outside court, or lies by omission. But I think these seemingly dry legal cases do provide an opportunity for some juicy dinnertime discussion.

And that’s this week’s Legal Docket.

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