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Federal Appeals Court Looks to School’s Business Law Professors to Reshape Securities Law

November 24, 2014
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Novel. Outside the box. Progressive. Those are just a few of the words used to describe the Sixth Circuit court’s approach to deciding a securities fraud case involving Omnicare, the nation’s largest provider of pharmaceutical care to elderly patients.

Omnicare was embroiled in the suit for years, until a Columbia Business Law Review article penned by two School of Business professors helped the court determine its outcome—a “middle ground” approach to assessing corporate liability—that could have an impact beyond civil securities fraud lawsuits in the years to come.

Ann Olazábal, vice dean of undergraduate business education and a professor of business law, and Patricia Abril, an associate professor of business law, wrote the article about 10 years ago when Enron and a spate of corporate scandals were brewing.

“We often asked ourselves how it could be that the law still did not have a neat and tidy way of assigning liability to a corporation,” says Abril. “After all, it is people who act and think within the corporate entity, but somehow this was not translated into the law.”

In October, the Sixth Court found a way to translate it into law, based in part on the professors’ law review article from a decade ago. Essentially, the court, as attorneys William Foley, M. Todd Scott and Jason M. Halper from Orrick wrote in an analysis, found that past approaches to deciding the case were flawed and adopted what it called a “middle ground” that “narrowed the universe of individuals whose knowledge can be imputed to the corporation.”

The Sixth Court adopted the rule proposed by Olazábal and Abril word-for-word. This is incredibly rare. Olazábal says having an actual impact on the law is the “dream” of every professor writing about the law.

“In truth, you never know with judges,” Olazábal says. “Our argument may have caught their eyes because it is a theoretical piece, yet it is grounded in reality—the reality of business, the reality of human and corporate nature, the reality of what we instinctively know to be the way things are done.”

The Sixth Circuit’s ruling means that Olazábal and Abril’s proposed rule is the law in the Midwest, including Michigan and Ohio. However, there is a “circuit split” on the issue of assessing corporate state of mind. Olazábal says this means that several of the federal circuit courts of appeal have ruled differently on the matter—and that the issue is ripe for the Supreme Court to resolve.

While they wait to see what the Supreme Court will do, the professors are continuing to explore new theories. They are currently working on a piece analyzing the assessment of recklessness in the context of civil and criminal securities law, an article forthcoming in the New York University Journal of Legislation and Public Policy

“What we’ve found is that the civil pleading standards have become so stringent (in order to dissuade a flood of civil securities suits) that it is not inconceivable for the same person, under the same facts, to be guilty criminally, yet escape with civil absolution,” Abril says. “We argue that this is evidence of a systemic error and propose a course correction.”

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