Supreme Court Update for Banking and Financial Services Professionals

by Charles W. Prueter

The Supreme Court of the United States is open to the public from 9 a.m. to 4:30 p.m., Monday through Friday. (That includes the gift shop, where you can buy any number of gavel-shaped trinkets, including a gavel-headed pencil with two erasers on the hammer end!)  But the Supreme Court’s docket is more exclusive. In fact, the Court is asked to review more than 7,000 cases each year but accepts only about 100 of them. This means that 99 percent or so of the parties that seek Supreme Court review are turned away at the courthouse door, so to speak. Today’s Update briefly looks at the mechanics of how the Supreme Court decides which cases to “take” and then turns to an interesting bank case currently waiting for acceptance by the Supreme Court.

The process generally begins with whoever loses in the lower court — be it a federal court of appeals or one of the state supreme courts. That party — we will call him “Peter Petitioner” — has a right to file a “petition for a writ of certiorari” with the Supreme Court. In essence, this a filing that says to the justices: “You should take this case because it presents a really interesting and important question of federal or constitutional law.” The Supreme Court does not decide the case at this point — only whether it wants to decide the case. Typically, the winner in the lower court does not want the Supreme Court to decide the case because that party, whom we will call “Roger Respondent,” wants to enjoy the victory without having to worry about the justices taking it away. So Roger Respondent might file a brief that says: “Nothing to see here, really. We won, and there is no reason to question our victory.” Other interested parties — say a trade association or an industry group — might file “amicus briefs,” supporting one side or the other. “Amicus” is Latin for “friend,” so the idea is that these parties are just friendly observers offering their takes, even though they are not involved in the case.

Armed with these piles of papers, the justices and their law clerks (each justice hires four law clerks, who are lawyers who serve as the justices’ assistants) then write memorandums back and forth and discuss the cases. Eventually, the justices will meet for a formal closed-door conference, where they will all vote on whether to take the case. While a majority, of course, is needed to decide who wins and who loses a case, only four votes out of nine are required to take a case. Thus, if four justices think the case is worthwhile for a full review, the Court will issue an order “granting” the petition for a writ of certiorari. (Usually, the orders granting petitions come out on Monday mornings.) While this is certainly a huge step in the right direction for Peter Petitioner, not all is lost for Roger Respondent. It is not uncommon for the Supreme Court to affirm a respondent’s victory in the lower court.

Readers may be intrigued by one of these cases currently somewhere in the justices’ and their law clerks’ piles of papers: AER Advisors Inc. v. Fidelity Brokerage Services, LLC, No. 19-347. This is a Bank Secrecy Act case, involving a Suspicious Activity Report (SAR), something with which banking and financial services professionals surely are familiar. But this SAR was bogus, and that’s the rub. In short, a father and son duo, William and Peter Deutsch, respectively the chairman and CEO of a billion-dollar company, acquired a whole bunch of shares of a Chinese company known as “China Medical.” The Deutsches were clients of AER Advisors, which utilized the investment technologies of Fidelity. After the Deutsches had acquired all these shares, Fidelity approached them about participating in a “lending program.” Under the proposal, the Deutsches would lend their China Medical shares to Fidelity for a fee, and then Fidelity would turn around and make money by lending the shares to other investors in a short-selling operation. But the Deutsches declined because they had no interest in lending their stock.

Fidelity allegedly charged ahead with step two of that plan despite never getting the Deutsches’ agreement to step one. That is, Fidelity is alleged to have surreptitiously lent 1.8 million of the Deutsches’ shares and made money on that lending. The Deutsches claimed they knew nothing about this and didn’t make any money on it, even though, they claimed, it was their own shares were being shuffled around for a profit by Fidelity. Then, the chickens came home to roost. Fidelity got itself in a jam because the market looked ripe for a “short squeeze” — in other words, a situation in which the stock price goes up and the investors with the short positions have to buy stock to cover those positions, leading to a snowballing surge in the stock price. Long story short: Fidelity allegedly took the Deutsches’ shares of China Medical without permission and then made a terrible debt with those shares.

Having made this mistake, Fidelity pressed on. Indeed, Fidelity filed a SAR with the Treasury Department Financial Crimes Enforcement Network (FINCEN), accusing the Deutsches of unlawfully manipulating China Medical’s stock price! Nevermind that the Deutsches never knew anything about Fidelity’s scheme, making it nearly impossible for the Deutsches to have manipulated anything.

FINCEN and the SEC did their jobs and investigated the SAR. Although none of the authorities pursued any enforcement action against the Deutsches, the Deutsches and AER were forced to incur hundreds of thousands of dollars to defend themselves against the wrongful accusation.

Seeking a remedy in court, the Deutches and AER sued Fidelity for this fraudulent report. Enter the Bank Secrecy Act. As readers know, SARs are highly confidential, and federal law forbids the disclosure of their existence to anyone. Moreover, to further incentivize open and honest reporting of “suspicious” activity, federal law provides immunity for whoever makes a disclosure. Specifically, the Bank Secrecy Act provides that a “financial institution that makes a voluntary disclosure of any possible violation of law or regulation to a government agency . . . shall not be liable to any person under any law or regulation of the United States.” Voila, said Fidelity, this immunity provision bars the Deutsches’ and AER’s lawsuit because the SAR was a voluntary disclosure of “possible” unlawful stock price manipulation.

Not so fast. The Deutsches and AER argue that the Bank Secrecy Act’s immunity is available only to those who make “good faith” reports and that Fidelity made a “bad faith” report. Fidelity, they contend, knew that it was objectively impossible for the Deutsches to have manipulated the stock price and further knew that it was Fidelity’s own misconduct that created the jam in the first place. In sum, the Deutsches and AER argue that the Bank Secrecy Act’s immunity provision is not designed to provide cover to financial institutions that file knowingly false reports.

But the U.S. Court of Appeals for the First Circuit disagreed, holding that the immunity provision is absolute and does not have any carve-out for “bad faith” reports. In other words, the court explained, if a financial institution files a SAR, the financial institution is immune from a private civil suit based on that SAR. Period.

The Deutsches and AER have now petitioned for a writ of certiorari, asking the Supreme Court to decide the meaning the immunity provision: Does it provide absolute immunity? Or does it provide immunity only if the disclosure is made in good faith and is not fraudulent? If four justices think this issue is worth considering, we will find out about it on a Monday morning sometime in early 2020.

Happy Holidays!

Charles W. Prueter is an appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at