Litigators

The Law Is Always Changing

And sometimes, the lawyers who practice law are the ones responsible for the changes.

By Charles Hecht  
on

New York City (photo by David Lat)

There are many aspects of practicing law. The one the public is most familiar with is the substance. But there are other aspects that impact the way we practice law and the way lawyers are perceived.

The most obvious changes in the law are new statutes adopted by the United States Congress and the various state legislatures. These result in litigation clarifying the ambiguities in new statutes and in regulations interpreting them adopted by the regulatory agencies. Another source of change is judicial opinions because judges interpret the law under the facts of the particular case, which can have the effect of changing law. Articles in law reviews are another source of change. Historically, law review articles are where new ideas about changing the law are discussed. And then, there are the lawyers who practice law and try to change the law when appropriate.

One example is Brown v. City of Covington, in which I was the lead counsel for the plaintiff class. We had settled with everyone, except Covington, and the issue was whether a municipality could be sued for violating the anti-fraud provisions of the federal securities laws. As a result of the New York City financial crisis in the mid-1970s, there was a district court opinion that interpreted the anti-fraud provisions of the Securities Exchange Act of 1934, as amended, to be inapplicable to municipalities. There were approximately five district court opinions which followed this decision. There were no decisions disagreeing with the result or the court’s reasoning.

After we reviewed these decisions, we were convinced that the original decision was inconsistent with the overarching principle that no one should be excluded from the anti-fraud provisions of the federal securities laws. In our case, we had alleged, and were able to prove, that the city knowingly participated in the preparation of a false and misleading prospectus. In describing the feasibility of the project and the related expert’s report in the prospectus, the prospectus omitted disclosing that there were two prior feasibility reports, concluding that the project was not economically feasible.

Approximately a year after the public offering of these health care facility bonds by the city, the bonds were in default because the project was not economically feasible. As a result, the bonds became worthless. We also believed that the district court judge in New York misread the statute and the underlying regulations. At that time, New York City was in a dire financial situation, and if the city could be held responsible for fraudulent offerings of its bonds, it would be put into bankruptcy. Since I lived in New York City at that time, this results-oriented decision was not surprising, and many felt that it was a major factor in saving the greatest city in the world from filing bankruptcy.

We filed an in limine motion before the federal district court judge in Kentucky, taking the position that these decisions were wrong and this was the perfect case to change the law. The district court judge wrote an opinion where he denied our motion but pointed out that although he felt that our position was correct, he felt constrained by the prior case law to deny our motion. We asked him to certify this question for review by the 6th Circuit Court of Appeals, which he did. This was an issue that had never been resolved by a federal circuit court.

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In 2-1 decision, the Sixth Circuit affirmed. But there was a well-reasoned dissent adopting our position. We then filed a petition for certiorari with the United States Supreme Court. While the petition was pending, the case with the city was settled. Very shortly thereafter, the U. S. Congress amended the Securities Exchange Act of 1934 to specifically make the anti-fraud provisions applicable to municipalities.

Municipalities were no longer above the law, and they would now be responsible for issuing fraudulent prospectuses to raise money from the public. This is just one example of how lawyers, working within the judicial system, can influence legislation that changes the law. As I write this article, I think it is time to tell my grandchildren how, in this one instance, their grandfather was able to help change the law so people who purchase municipal bonds now have the ability to sue municipalities for issuing bonds pursuant to a fraudulent prospectus. This change has also made municipalities and the persons participating in municipal bond offerings much more careful. And now I know why I became a lawyer.

Charles Hecht was a partner at Balestriere Fariello, a trial and investigations law firm which represents clients in all aspects of complex commercial litigation and arbitration from pre-filing investigations to trial and appeals. You can reach firm partner John Balestriere at john.g.balestriere@balestrierefariello.com.

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