Appendix — Richards v. Lloyd's of London

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APPENDIX M

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 95-55747, 95-56467

ALAN RICHARDS, et ai.,

Plaintiffs-Appellants,

V.

LLOYD’S OF LONDON, et ai.,

Defendants-Appellees.

JOHN NORTON, et ai.,

Plaintiffs-Appellants,

v.

LLOYD’S OF LONDON, et ai.,

Defendants-Appellees.

On Appeal from the United States District Court

for the Southern District of California

2a

Appendix M

MEMORANDUM OF THE SECURITIES AND EXCHANGE

COMMISSION, AMICUS CURIAE, ON PETITION FOR

REHEARING AND SUGGESTION

FOR REHEARING EN BANC

* *

TABLE OF CONTENTS

PAGE

RNY 4.0500 ckbeb dsuvdesd squeabkiwssuass 2

I ANY “UNCERTAINTY” AS TO WHETHER

LLOYD’S SOLD SECURITIES IS NO

JUSTIFICATION FOR ALLOWING LLOYD’S

TO CONTRACT AWAY STATUTORY

PROTECTIONS FOR PERSONS ACQUIRING

GUAR EMD oc i cicesevasece PeTirse yer 3

Il. THE ALLEGED EFFECTS THIS SUIT MIGHT

HAVE ON LLOYD’S BUSINESS PROVIDE NO

BASIS FOR IGNORING THE ANTIWAIVER

PROVISIONS OF THE FEDERAL

eee re ee reer 5

A. A Securities Lawsuit Does Not Involve

Federal Regulation of the Business of

ES © bance crude Xe eusedwensass 5

B. Lloyd’s Desire for “Orderliness and

Predictability” Cannot Excuse it from

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Complying With United States Law When it

Solicits Investors in the United States.

Ke Mk eis we eked Rie eee es: 7

C. The Possible Effects of a Private Securities

Lawsuit on Lloyd’s Business Do Not Justify

Ignoring the Antiwaiver Provisions of the

Federal Securities Laws. ............... 9

Ill. THE SUPREME COURT’S HOLDING IN

SCHERK 1S NOT CONTRARY TO THE

PANEL’S DECISION, AS LLOYD’S ASSERTS.

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SE EN ounces oe ea oe a 13

TABLE OF AUTHORITIES

CASES PAGE

Des Brisay v. Goldfield Corp.,

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Fox Midwest Theatres v. Means,

ee We APU TOPO ng ks occ sscanwcscace 12

Gaines v. Carrollton Tobacco Board of Trade, Inc.,

ae Fe GE, FOTEED 5 vb vc cbc cdwesbccune 12

Grunenthal GmbH v. Hotz,

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Appendix M

Lawlor v. National Screen Service Corp.,

Re Sr ree renee epee 12

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

eps St: Rape a a Sas ree amen 11,12

Redel’s Inc. v. General Electric Co.,

GOT ee ee BP obo es k cees I 12

SEC v. National Securities, Inc.,

Sao The TE 6555 oO Sk 8c 60 i va cooks bans 6

SEC v. United Benefit Life Insurance Co..,

Pe Ga ET 6:5 s Gas So can chee cteeupats 6

SEC v. United Financial Group, Inc.,

SIO FDR FS, COE eo a heb sk ee ees eees s

SEC v. Variable Annuity Life Insurance Co.,

pk Ree ere eee eer 6

Scherk v. Alberto-Culver Co.,

See ST ccs And sckAdkivceswusunre 10,11, 12

Shearson/American Express Inc. v. McMahon,

— otk &- 1), | ; bcieh oitiasd waa ll

Tcherepnin v. Knight,

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Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer,

SE Oh Ses EE V5 0 <b oa we kaka oeeieenctus ll

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Appendix M

Wilko v. Swan,

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STATUTES PAGE

Securities Act of 1933, 15 U.S.C. 77a et seq.

ee I PO 2

Securities Exchange Act of 1934, 15 U.S.C. 78a et seq.

Section 29(a), 15 U.S.C. 78cc(a)

McCarran-Ferguson Act

15 U.S.C. 1012(b)

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Appendix M

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 95-55747, 95-56467

ALAN RICHARDS, et ai.,

Plaintiffs-Appellants,

V.

LLOYD’S OF LONDON, et ai.,

Defendants-Appellees.

JOHN NORTON, e¢ al.,

Plaintiffs-Appellants,

v.

LLOYD’S OF LONDON, et ai.,

Defendants-Appellees.

On Appeal from the United States District Court

for the Southern District of California

Ta

Appendix M

MEMORANDUM OF THE SECURITIES AND EXCHANGE

COMMISSION, AMICUS CURIAE, ON PETITION FOR

REHEARING AND SUGGESTION

FOR REHEARING EN BANC

The Court has directed the parties to respond to the petitions

seeking rehearing of the panel decision of March 6, 1997, and

suggesting rehearing en banc, in this action brought to obtain

relief for alleged violations of the registration and antifraud

provisions of the federal securities laws. The Securities and

Exchange Commission participated before the panel as amicus

curiae by filing a brief and appearing at oral argument. The

Commission submits this memorandum to respond to arguments

in the rehearing petition of the defendant, Lloyd’s of London,

and in the amicus briefs supporting that petition.

DISCUSSION

The panel correctly held, as the Commission had urged, that

the Lloyd’s choice of forum and law clauses are void, under the

antiwaiver provisions of the Securities Act of 1933 and Securities

Exchange Act of 1934,' to the extent they preclude Lloyd’s

investors from pursuing whatever claims they may have under

1. The antiwaiver provisions state:

Any condition, stipulation, or provision binding any person

acquiring any security to waive compliance with any provision of

this title or of the rules and regulations of the Commission shall be

void.

The quoted language is from Section 14 of the Securities Act, 15 U.S.C. 77n.

The parallel provision in Section 29(a) of the Exchange Act, 15 U.S.C. 78ce(a),

is identical in all respects material to this case.

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Appendix M

those laws. The panel correctly concluded that it need not

determine whether preclusion of such claims would be contrary

to public policy, since Congress has made that determination in

the antiwaiver provisions. It also correctly held that even if a

policy analysis were appropriate, public policy would preclude

enforcement of the clauses because the remedies available under

English law are not adequate substitutes for those under the federal

securities laws.

In seeking rehearing of the panel’s decision, Lloyd’s and the

amicus California Commissioner of Insurance make a number of

incorrect arguments. We will address each in turn.

I. ANY “UNCERTAINTY” AS TO WHETHER LLOYD’S

SOLD SECURITIES IS NO JUSTIFICATION FOR

ALLOWING LLOYD’S TO CONTRACT AWAY

STATUTORY PROTECTIONS FOR PERSONS

ACQUIRING SECURITIES.

The panel expressly refrained from deciding whether the

plaintiffs purchased securities. Opp. 2469-70. Instead, it

“assume[d] the truth of the Names’ allegation that Lloyd’s was

engaged in the offer and sale of securities” (Opp. 2470), noting

that “[d]etermining whether the Names can prove this allegation

will require further development of the record in the district court

at trial or on summary judgment.” Opp. 2470. Lloyd's attacks

this approach with two new arguments, neither of which supports

upholding the choice clauses.

Lloyd’s first argues (Pet. 9) that the choice clauses cannot

be overcome by “the mere assertion that the federal securities

laws apply to the parties’ dispute,” and “the mere allegation”

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(Pet. 9) that the plaintiffs bought a security.? Under this argument,

presumably, the panel as a threshold matter should have required

proof that Lloyd’s offered and sold securities, and should have

decided whether Lloyd’s did so. Quite inconsistently, Lloyd’s

then argues (Pet. 11-13) that the panel should not be allowed to

decide the question of whether Lloyd’s activities involved a

security — that the choice clauses should be upheld precisely

because there is “uncertainty” as to whether the plaintiffs bought

a security.

With respect to Lloyd’s first argument — that a court must

first decide whether there is a security before applying the

antiwaiver provisions — a defendant who wants a court to follow

that approach can raise the issue of whether there is a security

when moving for dismissal or summary judgment. Lloyd’s chose

not to do so and the issue is not before this Court.’

Lloyd’s second argument — that the choice clauses should

be enforced if there is uncertainty about whether securities were

sold — would strip persons who do purchase securities of the

protections of the securities laws. If the plaintiffs purchased

securities, the antiwaiver provisions protect their rights under the

2. Likewise, the dissenting member of the panel expressed concern (Op.

2481) that under the Court’s decision, “just because the Appellants alleged in

their complaint that they were persons acquiring any security,’ United States

securities law renders void the carefully written terms of the {choice clauses].

* * * An American could simply allege she had purchased a security, and thus

repudiate any contractual obligations entered into around the world.”

3. Lloyd’s conceded before the panel that the issue of whether the Names

purchased securities was “not before this Court on this appeal.” Appellees’

Answering Brief at 5 n.5. The Commission expresses no view on whether the

Names purchased a “security” within the meaning of the federal securities laws,

or whether they otherwise have valid claims under the federal securities laws.

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Appendix M

federal securities laws. They cannot be deprived of those rights

on the mere possibility that they did not buy securities. At some

point in the proceedings, the plaintiffs will have to demonstrate

that they did buy securities, but if the choice clauses are enforced,

the plaintiffs will be denied any opportunity to do so.

Ii. THE ALLEGED EFFECTS THIS SUIT MIGHT HAVE ON

LLOYD’S BUSINESS PROVIDE NO BASIS FOR

IGNORING THE ANTIWAIVER PROVISIONS OF THE

FEDERAL SECURITIES LAWS.

Lloyd’s argues that a securities lawsuit would improperly

impair its insurance business. It argues that allowing such a lawsuit

would contravene federal policy against interference with the

insurance business, and that it would frustrate the need for an

international insurance business to have orderliness and

predictability in the application of the law. None of Lloyd’s

contentions justify overriding the dictate of the antiwaiver

provisions that rights under the federal securities laws cannot be

waived.

A. A Securities Lawsuit Does Not Involve Federal

Regulation of the Business of Insurance.

Lloyd’s argues (Pet. 1) that the Court’s decision “contravenes

important federal policy of non-interference in the insurance

business.” This is hardly a novel argument. United States insurance

companies have at times claimed that regulation under the federal

securities laws is barred by the McCarran-Ferguson Act, 15 U.S.C.

§1012(b), which provides that no federal law may “impair, or

supersede any law enacted by any State for the purpose of

regulating the business of insurance.” Lloyd’s is seeking precisely

the same sort of protection (see Pet. 11 n.6). The dissenting judge

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Appendix M

likewise argued (Opp. 2482) that the majority “ignore[d] the

century of historic success the nation’s insurance lobby has

enjoyed in keeping federal law largely out of the insurance

business.”

The Supreme Court has addressed this issue in a series of

cases and has repeatedly held that federal securities regulation of

the capital-raising activities and investment offerings of insurance

companies is permissible since it does not involve regulating “the

business of insurance” as the term in used in the McCarran-

Ferguson Act. See SEC v. National Securities, Inc., 393 U.S.

453 (1969) (merger of insurance companies accomplished through

securities fraud); SEC v. United Benefit Life Insurance Co., 387

U.S. 202 (1967) (deferred annuities having both investment and

insurance features); SEC v. Variable Annuity Life Insurance Co.,

359 U.S. 65 (1959) (variable annuities having both investment

and insurance features).

The Court has made clear that relations between insurance

companies and their investors properly are the province of the

federal securities laws. For instance, in National Securities, the

Court referred to the McCarran-Ferguson Act as “an attempt to

* * * assure that the activities of insurance companies in dealing

with their policyholders would remain subject to state regulation.”

393 U.S. at 459 (emphasis added). Since the issue in National

Securities — alleged misrepresentations in seeking shareholder

approval of a merger — implicated the relationship between an

insurance company and its stockholders, the Court had no trouble

determining that “[t]his is not insurance regulation, but securities

regulation.” Jd. at 460.

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Here, as in National Securities, the gravamen of the

complaint involves alleged securities transactions, not the

insurance business. The complaint arises out of the relationship

between Lloyd’s and the alleged security holders from whom it

raised money.

B. Lloyd's Desire for “Orderliness and Predictability”

Cannot Excuse it from Complying With United States

Law When it Solicits Investors in the United States.

Lloyd’s argues (Pet. 14) that its forum selection clause not

only creates ‘orderliness and predictability essential to any

international business transaction’, but also is critical to Lloyd’s

ability to exercise its regulatory authority over an international

insurance market with members from over eighty countries.” The

dissent likewise states (op. 2484):

Subjecting Lloyd’s to the varying requirements of the

different countries in which Names might reside would

inject counterproductive uncertainty into the operation

of the Lloyd’s marketplace. * * * Lloyd’s structured

its system to avoid this uncertainty and to create

predictability through use of forum selection and

choice-of-law clauses. * * * [W]ithout the certainty

of the Choice Clauses, it is unlikely that Lloyd’s would

engage to underwrite, at premiums anyone would pay,

the kind of risks in the various venues of the earth in

which losses could occur.

International companies, wherever headquartered, do

business in many countries of the world. Part of the

“predictability” of their business planning must take into account

the possibility that they will be subject to the domestic laws of

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those countries. An international company that seeks to raise

money in the United States cannot be surprised that the laws of

the United States, including provisions that prevent waiver of the

coverage of those laws, will apply to those efforts.

Moreover, it is difficult to understand how a failure to enforce

the antiwaiver provisions in this private damage action would

make Lloyd’s conduct of its business more orderly and

predictable. Regardless of whether the choice clauses are

enforced, Lloyd’s capital raising activities in the United States

will be subject to the federal securities laws to the extent securities

are offered and/or sold. Even if it were to be held that the Lloyd’s

Names waived their right to sue under the federal securities laws,

Lloyd’s would remain subject to possible law enforcement action

by the Commission (or even, in appropriate circumstances, to

criminal prosecution) should Lloyd’s violate those laws.* Thus,

regardless of the effect of the choice clauses, Lloyd’s will have

to conform its securities activities in this country to United States

law. We do not understand Lloyd’s to assert that it is not subject

to that law.

4. Although Lloyd’s is a foreign enterprise, it is subject to the federal

securities laws, and to an SEC enforcement action, so long as its activities

produced the requisite “effects” within the United States, or involved the requisite

“conduct” in the United States. We do not understand anyone to be making the

argument that the activity of coming into the United States and soliciting investors

does not have either the requisite “effects” within the United States, see Des

Brisay v. Goldfield Corp., 549 F.2d 133 (9th Cir. 1977); SEC v. United

Financial Group, Inc., 474 F.2d 354 (9th Cir. 1973), or involve the requisite

“conduct” in the United States, Grunenthal GmbH v. Hotz, 712 F.2d 421 (9th

Cir. 1983), to allow application of the federal securities laws.

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C. The Possible Effects of a Private Securities Lawsuit

on Lloyd's Business Do Not justify Ignoring the

Antiwaiver Provisions of the Federal Securities Laws.

Lloyd’s and the California Commissioner of Insurance predict

that if the investors are allowed to proceed with their securities

claims, and are allowed to rescind their obligations under their

contracts with Lloyd’s, it “would ‘wreak havoc’ on policyholders,

third-party claimants, and ceding insurers in both American and

world insurance markets” (Pet. 1 1n.6; CCI Br. 9-14).

These predictions are based on the assumptions that if the

United States Lloyd’s names are allowed to sue under the federal

securities laws, and if they are found to have purchased securities,

and if they can establish that the defendants’ violated the securities

laws, and if a court grants relief allowing them to withdraw from

their insurance obligations, there may be insufficient money to

pay insured persons, or third party claimants, or other insurers.

Whatever the merits of this scenario — and we believe it is

well within the discretion of a district court effectively to deal

with the concerns raised’ — the proper solution is not to be

found in ignoring the antiwaiver provisions, upholding the choice

clauses, and preventing the assertion of securities claims. Nothing

in the antiwaiver provisions suggests that purchasers must be

held to waive their rights to sue if the effect on defendants would

be severe.

5. The California Insurance Commissioner states (CCI Br. 12) that the

interests of defrauded stockholders and of policyholders could be reconciled. It

is difficult to see why the same would not hold true for claims by defrauded

purchasers of other types of securities.

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A broad decision that the choice clauses are valid would,

moreover, have sweeping effects far beyond the atypical facts of

this case. Such a decision would, for example, deprive investors

who are offered or sold stock in a foreign insurance company,

and who agree to contractual provisions like the choice clauses,

of their rights under the federal securities laws. Yet the California

Insurance Commissioner concedes (Br. 12) that suits by such

stock purchasers would not present the risks to policyholders he

predicts here.

The effects this securities suit might have on Lloyd’s business

cannot be used as a basis to compel the plaintiffs to forgo their

rights under the federal securities laws. Cf. Tcherepnin v. Knight,

389 U.S. 332, 346 (1967) (argument that “petitioners, if they are

successful in their suit for rescission, will gain an unfair advantage

over other investors” in liquidation “at best, is a non sequitur”

that does not warrant finding they did not purchase securities).

Ill. THE SUPREME COURT’S HOLDING IN SCHERK IS

NOT CONTRARY TO THE PANEL’S DECISION, AS

LLOYD’S ASSERTS.

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974), is not

controlling. Scherk involved only the enforceability of a choice

of forum clause, not the situation presented here where a choice

of forum clause and a choice of law clause operate in tandem to

depriver investors of their statutory rights. The Scherk Court

specifically noted that the case — upholding an agreement to

arbitrate securities claims — did not present a situation where an

arbitration agreement designating “arbitration in a certain place

might also be viewed as implicitly selecting the law of that place

to apply to that transaction,” since the parties’ agreement specified

that it would be construed in accordance with Illinois law. See

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417 U.S. at 519 n.13.° As the Court later explained in Shearson/

American Express, Inc. v. McMahon, 482 U.S. 220, 229 (1987)

The decision in Scherk thus turned on the Court’s

judgment that under the circumstances of that case,

arbitration was an adequate substitute for adjudication

as a means of enforcing the parties, statutory rights.

Scherk supports our understanding that Wilko [v.

Swan, 346 U.S. 427 (1953)] must be read as barring

waiver of a judicial forum only where arbitration is

inadequate to protect the substantive rights at issue.

Here, the courts of England would not provide an adequate means

of enforcing the provisions of the Exchange Act; they would not

enforce them at all.

This case thus presents the situation the Supreme Court

warned against in Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985), where it cautioned

that “in the event the choice-of-forum and choice-of-law clauses

operated in tandem as a prospective waiver of a party’s right to

pursue statutory remedies for antitrust violations, we would have

little hesitation in condemning the agreement as against public

policy.” See also Vimar Seguros y Reaseguros, S.A. v. M/V Sky

Reefer, 115 S. Ct. 2322, 2330 (1995). While Lloyd’s argues (Pet.

15-16) that Mitsubishi should be disregarded as inconsistent with

Scherk, it in fact merely reinforces the fact that Scherk did not

6. The Supreme Court in Scherk, responding to the argument of the dissent

in Scherk that the Court’s decision would “leave American investors at the mercy

of multinational corporations,” explicitly stated that its decision had “no bearing

on the scope of the substantive provisions of the federal securities laws for the

simple reason that the question is not presented in this case.” Scherk, 417 U.S.

at 518 n.12.

ee te) ey ,

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involve the operation of choice of law and foram clauses, working

in tandem to deny plaintiffs their statutory rights under federal

law.’

7. Lloyd’s also argues (Pet. 16) that cases cited by the Mitsubishi Court

in support of its public policy statement involved cases of prospective releases

of all claims plaintiffs might have, while here the plaintiffs only gave up their

rights under the federal securities laws, retaining rights under English law. But

the cases cited by the Mitsubishi Court all explicitly rested on the public policy

objection to plaintiffs forgoing their rights under the antitrust laws. See Lawlor

v. National Screen Service Corp., 349 U.S. 322, 329 (1955); Redel's Inc. v.

General Electric Co., 498 F.2d 95, 98-99 (Sth Cir. 1974); Gaines v.

Carrollton Tobacco Board of Trade, Inc., 386 F.2d 757, 759 (6th Cir. 1967);

Fox Midwest Theatres v. Means, 221 F.2d 173, 180 (8th Cir. 1955).

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CONCLUSION

For the foregoing reasons, the panel correctly held that the

forum selection and choice of law clauses are rendered void by

the antiwaiver provisions of the federal securities laws.

Respectfully submitted,

RICHARD H. WALKER

General Counsel

JACOB H. STILLMAN

Associate General Counsel

ERIC SUMMERGRAD

Principal Assistant General Counsel

JOHN W. AVERY

Attorney Fellow

Of Counsel i

PAUL GONSON

Solicitor Securities and Exchange Commission

Washington, D.C. 20549

May 1997