UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 95-55747, 95-56467

ALAN RICHARDS, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

JOHN NORTON, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

On Appeal from the United States District Court

for the Southern District of California

MEMORANDUM OF THE SECURITIES AND EXCHANGE

COMMISSION, AMICUS CURIAE, ON PETITION FOR

REHEARING AND SUGGESTION FOR REHEARING EN BANC

RICHARD H. WALKER

General Counsel

JACOB H. STILLMAN

Associate General Counsel

ERIC SUMMERGRAD

Principal Assistant General Counsel

JOHN W. AVERY

Attorney Fellow

Of Counsel Securities and Exchange Commission

PAUL GONSON Washington, D.C. 20549

Solicitor

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 95-55747, 95-56467

ALAN RICHARDS, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

JOHN NORTON, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

On Appeal from the United States District Court

for the Southern District of California

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION FOR

LEAVE TO FILE MEMORANDUM AS AMICUS CURIAE, ON PETITION FOR

REHEARING AND SUGGESTION FOR REHEARING EN BANC

The Securities and Exchange Commission moves for leave to file the accompanying memorandum, as amicus curiae, in response to defendant Lloyd's of London's petition for rehearing and suggestion for rehearing en banc. In support of this motion, the Commission states as follows:

1. The Securities and Exchange Commission is the agency principally responsible for the administration and enforcement of the federal securities laws. This case involves the question whether, when a foreign company has committed violations of the federal securities laws in the United States in selling its securities to American investors, antiwaiver provisions in the federal securities laws prohibit a United States court from giving effect to contractual provisions that would preclude the purchasers from obtaining relief under those laws.

2. The Commission filed a brief as amicus curiae, and participated in the oral argument, addressing this issue before the panel in this case. The panel held, as the Commission had urged, that choice of forum and law clauses in contracts between Lloyd's and the plaintiffs investors in Lloyd's -- which would require litigation of all disputes in England under English law -- are void under the antiwaiver provisions to the extent they would bar the plaintiffs from raising federal securities law claims.

3. Lloyd's has petitioned for rehearing of that decision. On May 2, the Court ordered the plaintiffs to respond to the petition. The Commission wished to file the accompanying memorandum to respond to what it believes are erroneous arguments in Lloyd's rehearing petition and in the amicus briefs supporting that petition. We believe that the Court would benefit from the Commission's views on those arguments.

For the foregoing reasons, the Commission requests leave to file the accompanying memorandum, as amicus curiae, in response to defendant Lloyd's of London's petition for rehearing and suggestion for rehearing en banc.

Respectfully submitted,

RICHARD H. WALKER

General Counsel

JOHN W. AVERY

Attorney Fellow

Securities and Exchange Commission

450 5th Street, N.W. (Stop 6-6)

Washington, D.C. 20549

(202) 942-0816 (Avery)

May 22, 1997

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 95-55747, 95-56467

ALAN RICHARDS, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

JOHN NORTON, et al.,

Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, et al.,

Defendants-Appellees.

On Appeal from the United States District Court

for the Southern District of California

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.

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 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, Lloyds and the amicus California commissioner of Insurance make a number of incorrect arguments. We will address each in turn.

The panel expressly refrained from deciding whether the plaintiffs purchased securities Op. 2469-70. Instead, it "assume[d] the truth of the names' allegation that Lloyd's was engaged in the offer and sale of securities" (Op. 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." Op. 2470. Lloyd's attacks this approach with two new arguments, neither of which supports upholding the choice clauses.

Lloyd's first argues (Pat.) 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" (Pat.) that the plaintiffs bough 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 antiwiaver provisions -- a defendant who wants a court to follow that approach can raise the issue of whether there is a security when moving from 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 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.

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.

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 time 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 likewise argued (Op. 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 is used in the McCarran-Ferugson 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, the 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." Id. at 460.

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 securityholders from whom it raised money.

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):

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 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.

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. 11 n.6; 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 the defendants would be severe.

A broad decision that the choice clauses are valid would, moreover, have sweeping effects far beyond 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.)

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 deprive 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 417 I.S. at 519 n.13. As the Court later explained in Shearson/American Express, Inc. v. McMahom, 482 U.S. 220, 229 (1987):

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 Lloyds argues (Pet. 15-16) that Mitsubishi should be disregarded as inconsistent with Scherk, it in fact merely reinforces the fact the Scherk did not involve the operation of choice of law and forum clauses, working in tandem to deny plaintiffs their statutory rights under federal law.

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

Of Counsel Principal Assistant General Counsel

PAUL GONSON

Solicitor JOHN W. AVERY

Attorney Fellow

May 1997

Securities and Exchange Commission

Washington, D.C. 20549