Also known as:entanglements · excessive entanglement
Written by attorneys — see sources below.
A judge's financial connection to a party in pending litigation that creates an appearance of impropriety or conflict of interest. The connection triggers a duty to avoid such dealings even without actual participation in the affected decision.
See Our Sources· 2 primary sources
Cases
How its tested
Common Examples
2
Judge's Bond Holdings Trigger Discipline
Edith Eberhardt owned municipal bonds issued by the city of Riverton while presiding over a contract dispute in which the city was a defendant. She continued to purchase additional notes after the case was assigned to her docket. The judicial conduct commission imposed discipline because her ongoing financial position created an appearance of impropriety and potential conflict, regardless of whether she participated in any ruling affecting the city's obligations.
Analyst Report Creates Primary Liability
Echo Systems supplied detailed revenue projections to an outside analyst who then published a report repeating those figures. Investors who relied on the report sued Echo for securities fraud. Echo was held primarily liable because its repeated private communications with the analyst demonstrated entanglement sufficient to treat the published statements as its own.
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Test Yourself
10
Practice Questions5
Coopers & Lybrand v. Livesay437 U.S. 463, 468 (1978)
Coopers & Lybrand is an accounting firm that certified the financial statements in a prospectus issued in connection with a 1972 public offering of securities in Punta Gorda Isles for an aggregate price of over $18 million. Respondents purchased securities in reliance on that prospectus. In its next annual report to shareholders, Punta Gorda restated the earnings that had been reported in the prospectus for 1970 and 1971 by writing down its net income for each year by over $1 million. Thereafter, respondents sold their Punta Gorda securities and sustained a loss of $2,650 on their investment.
Respondents filed this action on behalf of themselves and a class of similarly situated purchasers. They alleged that petitioner and other defendants had violated sections 11, 12(2), and 17(b) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934. The District Court first certified, and then, after further proceedings, decertified the class.
Respondents did not request the District Court to certify its order for interlocutory review under 28 U.S.C. § 1292(b). Rather, they filed a notice of appeal pursuant to § 1291. The Court of Appeals regarded its appellate jurisdiction as depending on whether the decertification order had sounded the “death knell” of the action. After examining the amount of respondents’ claims in relation to their financial resources and the probable cost of the litigation, the court concluded that they would not pursue their claims individually. The Court of Appeals therefore held that it had jurisdiction to hear the appeal and, on the merits, reversed the order decertifying the class.
Because there is a conflict in the Circuits over this issue, the Supreme Court granted certiorari.
What conduct by a judge creates improper entanglement with a litigant's securities?
Owning or continuing to acquire municipal bonds or notes of a city that is a party in pending litigation creates the prohibited entanglement. The rule applies even if the judge does not participate in any decision affecting the city's financial obligations.
Supporting sources
Does the entanglement doctrine in securities cases require the issuer to have expressly adopted the analyst's statement?
No. Primary liability can attach when the issuer has entangled itself with the analyst through the provision of information that forms the basis of the published statement, even without formal adoption.
Supporting sources
TortsProducts liability based on the design, manufacture, and distribution of products and defenses to such claims · Products liability based on the design, manufacture, and distribution of products and defenses to such claimsNEXTGENFoundational