In Arthur Andersen LLP v. United States, 125 S.Ct. 2129, a unanimous Supreme Court overturned an obstruction of justice conviction for Enron’s chief auditor, Arthur Andersen. The accounting firm allegedly shredded documents during an ongoing SEC investigation in violation of 18 U.S.C. §§ 1512(b)(2)(A) and (B), which make it a crime for “Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to … cause or induce any person to … withhold testimony, or withhold a record, document, or other object, from an official proceeding [or] alter, destroy, mutilate, or conceal an object with intent to impair the object’s integrity or availability for use in an official proceeding…”
In August of 2001, following the unexpected resignation of Enron’s CEO, Jeffrey Skilling, and after an article appearing in the Wall Street Journal suggested improprieties at Enron, the SEC opened an informal investigation. By early September, Andersen formed an Enron “crisis-response” unit, which included Nancy Temple, an in-house counsel. Temple’s notes during that time period indicated that “some SEC investigation” was “highly probable.” On October 10, at a general meeting, an official for Andersen urged employees to comply with the company’s document retention policy which stated that “in cases of threatened litigation, … no related information will be destroyed.” At the same meeting, however, employees were told “[I]f it’s (a document) destroyed in the course of [the] normal policy and litigation is filed the next day, that’s great … [W]e’ve followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable.”
Despite similar meetings reiterating compliance with the company’s document retention policy, widespread destruction of documents continued. For example, on October 31, a day after the SEC had opened a formal investigation and requested Enron’s accounting documents, the lead of Andersen’s “engagement team” for Enron, David Duncan, destroyed a document labeled “smoking gun,” commenting “we don’t need this.” According to the brief for the United States, Andersen permitted Enron to inflate earnings through accounting practices which were in clear violation of Generally Accepted Accounting Principles.
Subsequently, in March 2002, Andersen was indicted in the Southern District of Texas on a count of obstruction of justice. A jury later convicted. The instructions to the jury read, in part, “even if [petitioner] honestly and sincerely believed that its conduct was lawful, you may find [petitioner] guilty.” The jury was told to convict if it found petitioner intended to “subvert, undermine, or impede” the SEC investigation by suggesting to its employees that they shred documents. The Court of Appeals for the Fifth Circuit affirmed.
In reversing the decision, Chief Justice Rehnquist opined that the jury instructions failed to convey the proper meaning of the statutory text, specifically the terms “knowingly…corruptly persuade.” He found the lack of culpability required in the instructions “striking,” remarking that, with regard to similar statutory language, the Court had previously found that the mens rea “at least applies to the acts that immediately follow, if not to other elements down the statutory chain.” Moreover, the Court held that the term “corruptly” had broader connotations beyond “subvert” or “undermine,” noting that the term is normally associated with wrongful, depraved, or evil behavior. The Court also found error in the instructions failure to include any nexus requirement. By lacking a nexus element, the jury was wrongfully led to believe “that it did not have to find any nexus between the ‘persuasion’ to destroy documents and any particular proceeding.” According to the Court, the statutory text mandates that the “official proceeding,” in the very least, has to be foreseeable.
Despite the apparent malfeasance of Andersen in the Enron collapse, the Supreme Court’s decision to reverse and remand was sound. The jury instructions securing the conviction were a veritable distortion of the statutory text. The instructions rendered the language in 18 U.S.C. §§ 1512(b)(2)(A) and (B) irrelevant, virtually making the shredding of documents a strict liability crime. And, in so doing the instruction failed to require the usual culpability needed in order to impose criminal liability.
In Dura Pharmaceuticals, Inc., v. Broudo, 125 S.Ct. 1627, the Supreme Court considered the heightened pleading requirements found in the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and the necessity for “loss causation.” Congress passed the PSLRA in an effort to insulate corporations from expensive litigation which often arose following a decline in stock price. The perception was that many of the securities fraud claims were mere fishing expeditions, initiated in the hope that some impropriety would be found during the discovery stage.
Two salient features of the PSLRA have curbed, possibly over-curbed, potential securities fraud litigation. First, a safe harbor exists for any forward-looking statement made by a corporation or its executives. As a result, overstated growth and earnings projections often no longer serve as a basis for a lawsuit. The exact scope of the forward-looking safe harbor remains in question; however, recent cases brought before the 7th Circuit indicate a steady expansion of the safe harbor. Indeed, corporations appear able to escape liability by merely couching their words in the future tense.
Second, the PSLRA requires a plaintiff at the pleading stage to (1) identify each statement alleged to be misleading; (2) specify the reasons why the statement is misleading; and (3) “state with particularity all facts on which that belief is formed” if “an allegation regarding the statement or omission is made on information and belief.” 15 U.S.C §78u-4(b). In addition, the plaintiff must allege with particularity sufficient facts creating a “strong inference” that the defendant acted with scienter, or an intent to deceive. As a result, and as Dura illustrates, potential 10b-5 securities fraud claims often do not survive a motion to dismiss.
In Dura, the respondents bought stock in Dura Pharmaceutical between April 15th, 1997, and February 24, 1998. During this period, Dura allegedly made false statements concerning both its drug profits and future FDA approval of a new asthmatic spray device. On the last day of the purchase period, Dura announced a reduction in earnings and the stock fell precipitously from $39 per share to about $21. In November of 1998, Dura announced that the FDA would not approve Dura’s new asthmatic spray device. The next day Dura’s share price temporarily fell but almost fully recovered within one week.
Shortly after, investors brought a 10b-5 action against Dura before the 9th Circuit. Rule 10b-5 forbids, in part, the making of any “untrue statement of material fact” or the omission of any material fact “necessary in order to make the statements made … not misleading.” The District Court dismissed the complaint. In respect to the plaintiffs’ drug-profitability claim, it held that the complaint failed adequately to allege an appropriate state of mind. As to the plaintiffs’ spray device claim, the court found that the complaint failed adequately to allege “loss causation.” With respect to the latter claim, the Court of Appeals for the Ninth Circuit reversed, holding that the “plaintiffs establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation.”
In reversing the 9th Circuit, the Supreme Court found that the plaintiffs did not establish loss causation by simply alleging price inflation. Loss causation is the causal connection between the material misrepresentation and the loss. Or, in other words, plaintiffs must establish that the misrepresentation was the proximate cause of their loss. The Court found that the 9th Circuit’s formulation eliminated the proximate cause element from a 10b-5 cause of action, stating that when a purchaser later resells shares at a lower price “that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances…” Thus, an initially inflated purchase price “might” mean a subsequent loss, but price inflation alone does not establish proximate cause given the various factors affecting price.
As a result, the Court held that the plaintiffs’ complaint failed adequately to allege the proximate cause requirement. The Court dismissed the complaint, even while assuming for argument sake that the PSLRA does not impose any special further pleading requirement with respect to damages, beyond what is already required by the Federal Rules of Civil Procedure.
The Court’s holding that plaintiff must prove loss causation, at first blush, does not seem that extraordinary. Many practitioners believe that Broudo will simply amend his complaint to allege loss causation.
However, there are suggestions in the Court’s opinion that could prove troubling. The Court stated:
The complaint’s failure to claim that Dura’s share price fell significantly after the truth became known suggests that the plaintiffs considered the allegation of purchase price inflation alone sufficient. The complaint contains nothing that suggests otherwise.
The intimation from the above is that, since the price fell substantially after the profit disclosure but not after the spray device disclosure, there were no damages arising from the spray device misrepresentation. Were courts to so hold, this would be unfortunate.
It is likely that both misrepresentations contributed to the inflated price. The psychology of the market is that, when the enthusiasm bubble is burst by one disclosure of corporate maldisclosure, the price will fall significantly because other prior favorable disclosures will be discounted due to the company’s credibility gap. If courts do not recognize this, courts will encourage a corporate policy of serial disclosure.
For example, if one misrepresentation in Dura dealt with forward looking information and another dealt with factual information, the company would be motivated to correct the profitability forecasts in the forward looking statement and let the price drop. It would then correct the factual information. Because of the PLSRA safe harbor for the forward looking information, there would be no liability for the forward looking misrepresentation. Moreover, there would be no damages for the factual misrepresentation because, if these were no farther price drop, under an extension of Dura, there would be no loss causation.
The fallacy in this approach is that it assumes that the market separately and specifically values each bit of information and that such increments of value are determinable When a company makes a series of misstatements that affect market price, it should not be able to game the system and escape all liability by first disclosing adverse news protected by a safe harbor and then claiming that other maldisclosures had no effect on value.
Introduction
The banking industry, not unlike every other major industry in the world, has steadily progressed into becoming a virtual electronic industry. A large part of the electronic transition was the implementation and influx of automated teller machines (“ATMs”). According to one report, there are over 1.2 million ATMs in the world, and over 300,000 ATMs in the United States. What many ATM operators don’t know, but are now realizing, is that an amendment to the Electronic Funds Transfer Act (the “EFTA”) has provided savvy consumers with an opening to bring a new type of lawsuit based on the ATM operators’ oversight. Don’t lose sleep just yet, as ATMs need to have dual proper notices of any transaction fees. ATM operators and financial institutions can implement simple measures to prevent such costly litigation and the payment of significant monetary damages.
Background of the EFTA and Regulation E
In 1978, the United States passed the EFTA.1 The primary objectives of the EFTA are the “protection of individual consumers engaging in electronic fund transfers”2 and to provide “safeguards in electronic fund transfer systems.”3 The EFTA was put into regulation format in what is known as Regulation E in the Code of Federal Regulations.4
As part of the EFTA, all ATM operators who charge a fee for a transaction at the ATM are responsible for placing notice in two places pertaining to the fee that the ATM operator intends to collect.5 ATM operators are required to maintain a notice on the outside of an ATM in a conspicuous location, and an additional notice on the screen (or on paper) allowing the consumer to cancel the transaction before the fee is withdrawn from the account.6
Importantly, the EFTA’s fee disclosure requirement only applies to “automated teller machine operators,” or as the statute defines that term, the entity or person who actually operates the ATM.7 Although financial institutions who do not actually operate a particular ATM should be immune from any suit based on a “signage” violation, the law does not bar them from being named in a lawsuit as well. Therefore, all operators and owners of ATMs should comply with the requirements of the EFTA.
In individual actions, an ATM operator may be liable to a consumer for all actual damage sustained to the consumer (the amount of the transaction fee) plus a statutory amount between $100 and $1,000.8 In class action lawsuits, ATM customers may receive a refund of their transaction fees and the statutory damages of the lesser of $500,000 or 1 percent of the ATM operator’s net worth!9 Further, plaintiff’s counsel, if successful, may also recover their “reasonable” attorney fees.10
The Proper Disclosure On or Near the ATM
The EFTA requires that the notice on the machine must state that any customer that uses the ATM may be charged a fee. The on-machine notice must be placed in a “prominent and conspicuous” location “at or near” the ATM.11 And, although the EFTA and Regulation E do not specifically state the wording necessary to comply with their provisions, a machine notice that includes the following disclosure has been customarily utilized by ATM operators, without issue:
The operator of this ATM, _____________, will assess U.S. Cardholders a fee of $_____ for a cash withdrawal. This charge is in addition to any fees that may be assessed by your financial institution. The additional charge will be added to the transaction amount and deducted from your account.
Liability for ATM Operators
As stated above, most, if not all ATM operators know that they must provide disclosures on the ATM machine and on the ATM screen. Most, if not all, ATM operators know what the disclosures must say. So, how can consumers file suits against ATM operators alleging that they were not provided notice that a fee may be charged? Moreover, what happens when the transaction fee notice is defaced, vandalized or removed? The answer to both questions is simple: Most ATM operators do not know about an amendment to the EFTA which absolves them from liability after they place a notice on the ATM once.
While any consumer can file a lawsuit, generally, a party who is charged with a violation of the EFTA may have a “good faith” defense to liability if notice was in place at the time of installation and if the ATM operator had a system in place to seek out, or replace, defaced or removed ATM fee disclosure notices.12 This defense, on its face, appears difficult in the ATM disclosure case especially because the EFTA does not define what would be construed as a “reasonable” policy.
On the other hand, the Gramm-Leach-Bliley Act of 1999 carved out a potentially large, and easy to prove, exception to ATM operator liability that most ATM operators do not know about:
If the notice required to be posted pursuant to section 904(d)(3)(B)(i) by an automated teller machine operator has been posted by such operator in compliance with such section and the notice is subsequently removed, damaged, or altered by any person other than the operator of the automated teller machine, the operator shall have no liability under this section for failure to comply with section 904(d)(3)(B)(i). (emphasis added).13
In other words, if the ATM operator placed the fee disclosure in a conspicuous location at one time, and the fee disclosure is subsequently taken down or defaced by anyone other than that ATM operator, the ATM operator is not liable at all for damages. This somewhat unknown exception should provide incentive to all ATM operators to document their installation (and maintenance) of the ATM fee disclosure.
Five Steps to Avoiding Liability For Improper Disclosure of ATM Surcharges
In order to minimize liability under the EFTA and Regulation E for an improper fee disclosure, every ATM operator or owner should perform the following five simple steps as soon as possible:
1. Check every ATM that you own or operate to make sure that a written transaction fee notice is currently located in a conspicuous location.
2. Take a picture of the ATM with the date on the picture to show that you have checked the ATM for the fee disclosure. Document the information of the individual that took the picture.
3. Make sure that every new ATM that is installed includes a transaction fee notice and document the name of the installer.
4. Revise your installation checklist for all new ATMs that includes an item for the installer to verify that he or she placed a fee notice on the machine. Save this initial checklist.
5. Revise (or prepare) your replenishment checklist for all current ATMs that includes a check-off item for the individual who replenishes the money in the ATM to verify that he or she checked to see if the fee notice is present, and not defaced. Save these checklists for two years.
Conclusion
Compliance with the EFTA and Regulation E is a laborious, but simple, responsibility. In our current society, individuals are always searching for a way to make a quick buck. The possibility exists that such individuals seeking personal advantage will turn to the strict compliance guidelines from the EFTA and Regulation E as an avenue to further cash in at the expense of financial institutions and the ATM operators.
Don’t let your client’s ATM turn into A Terrible Mistake!
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1. 15 U.S.C. 1693, et al.
2. 15 U.S.C. 1693; 12 C.F.R. 205.1(b).
3. S.Rep.No. 95-915, at 1 (1978), reprinted in 1978 U.S.C.C.A.N. 9403.
4. 12 C.F.R. 205, et al.
5. 15 U.S.C. 1693b(d)(3); 12 C.F.R. 205.16(c).
6. 15 U.S.C. 1693b(d)(3)(A) and 1693b(d)(3)(B); 12 C.F.R. 205.16 (c).
7. 15 U.S.C. 1693b(d)(3)(D)(i); 12 C.F.R. 205.16(a).
8. 15 U.S.C. 1693m.
9. 15 U.S.C. 1693m.
10. 15 U.S.C. 1693m.
11. 15 U.S.C. 1693b(d)(3)(B)(i).
12. 15 U.S.C. 1693m(d)
13. 15 U.S.C. 1693h(d).