# Appendix — Richards v. Lloyd's of London

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_1480%3A6

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1998
- **Citation:** 525 U.S. 943

## Text

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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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Appendix M

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.
C4 5 RAR OEY de ne a Ra he 6.kk Ak ws 10
SE EN ounces oe ea oe a 13
TABLE OF AUTHORITIES
CASES PAGE
Des Brisay v. Goldfield Corp.,
POW Fe SP INGEE, BOFED ogc ccccccnccnssceei, 8
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,
Femmes CO BORED go oc cnn cn ccncccdncne 8

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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,
EES wc bc eccneeaskabeus bene ore 10

Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer,
SE Oh Ses EE V5 0 <b oa we kaka oeeieenctus ll

Sa

Appendix M
Wilko v. Swan,
A ee ll
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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Appendix M

(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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Appendix M

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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Appendix M

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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Appendix M

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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Appendix M

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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Appendix M

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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Appendix M

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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Appendix M
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_1480%3A6. Public record. Not legal advice.