Shariah’s Black Box

Based upon a consensus of legal authorities, which Coughlin carefully documents by traversing the full history of Shariah’s development across all extant legal schools, this study places the Law of Jihad in a milieu permeated by the consequences of the jurisprudential rule of consensus and indisputably establishes three fundamental points relevant to this memorandum’s analysis:

[1] The goal of Jihad to convert or conquer the entire world and the methodology to achieve this end by persuasion, by force and subjugation, or by murder is extant doctrine and valid law by virtue of a universal consensus among the authoritative Shariah scholars throughout Islamic history.

[2] The doctrine of Jihad is foundational because it is based upon explicit verses in the Qur’an and the most authentic of canonical Sunna and it is considered a cornerstone of justice: until the infidels and polytheists are converted, subjugated, or murdered, their mischief and domination will continue to harm the Muslim nation. And,

[3] Jihad is conducted primarily through kinetic warfare but it includes other modalities such as propaganda and psychological warfare.

These three points will serve as the background for the analysis below but will be stress-tested when the factual case studies are examined in Section III. If Coughlin’s thesis is correct, there should be immediate evidence that contemporary Shariah authorities both embrace the Law of Jihad as an extant doctrine for action by Shariah-adherent Muslims and base their rulings on the classical Shariah authorities who fully embraced the consensus on the Law of Jihad.

3.       The legal analysis: applying the endogenous elements of Shariah to the specific duty to disclose

As noted previously, the SCF industry in the U.S.includes a panoply of businesses which fall within the regulatory sphere of the securities laws. Mutual funds tracking one of the Islamic indexes, publicly traded bond issuances and the trading of securitized bond issuances on a secondary market, and even U.S.public companies announcing their commitment to conducting their business according to the principles of Shariah are some of the more obvious examples. Do the facts of Shariah – representing the overriding purposes of Shariah and the methods authorized to achieve those purposes – require disclosure under the securities laws?

Failure to disclose a material fact (or the material misrepresentation of an asserted fact) is the basis for administrative, civil, and criminal actions under all of the securities laws requiring disclosure. The breach of this duty might arise in a registration, prospectus or other required filing with the SEC or far more broadly “in connection with” a purchase or sale of securities. For example, the 1933 Act imposes a number of requirements upon issuers, underwriters, and dealers to make full and fair disclosures in securities offerings.[168] Section 11 of the 1933 Act (“Section 11”) provides that purchasers of securities may sue for material misrepresentations or omissions in registration statements as long as they did not know of the misrepresentation or omission at the time of purchase.[169] The dragnet under Section 11 for potential defendants is fairly wide and includes: (1) any person who signed the registration statement; (2) any person who was a director or partner of the issuer at the time of the filing of the registration statement; (3) any person listed in the registration statement as a soon-to-be director or partner; (4) every accountant, engineer, appraiser, or other expert named in the statement after having consented, but only as to any liability arising from the portion of the statement attributed to the specific expert; or (5) any underwriter of the securities.[170] In addition, Section 12 of the 1933 Act (“Section 12”) authorizes a purchaser of securities to sue the offeror or seller for any material misrepresentation or omission in a prospectus and adds “oral communications” to the landscape.[171] The depth of the exposure for both of these provisions is the fact that a private plaintiff need not allege or show actual reliance on the misrepresentation or show that the absence of the material omission was in fact a contributing element.[172]

The pre-eminent statutory authority for civil and criminal liability exposure for failure to disclose in securities transactions is Section 10(b) of the 1934 Act and its regulatory offspring Rule 10b-5. This is so partly because it has been the source for most of the litigation due to its breadth and the fact that it includes an implied private right of action thereby adding private plaintiff and class action claims to the enforcement suits by the SEC and by DOJ criminal prosecutions.[173] The essential elements of a Rule 10b-5 action are:

(1) a misstatement or omission; (2) of material fact; (3) with scienter; (4) in connection with the purchase or the sale of a security; (5) upon which the plaintiff reasonably relied; and (6) that the plaintiff’s reliance was the proximate cause of his or her injury. [174]

Once these elements of the Rule 10b-5 cause of action are established, a criminal penalty can be imposed under section 32(a) if the government satisfactorily proves a willful violation of the 1934 Act.[175]

While a thorough analysis of each of the fraud elements relative to the particulars of the situation[176] would be critical for the practitioner to undertake, this memorandum will examine two of the unique elements to most fraud claims based upon allegations that the defendant omitted material information about Shariah in various public filings and representations: materiality and scienter. Because the discussion regarding materiality in a federal securities fraud action are also applicable in the main to fraud claims alleged under the common law, the state blue sky laws, or other anti-fraud federal and state statutes, the discussion of materiality will not treat the latter separately. These two elements of the fraud action are carved out for special attention in this memorandum because a failure to consider these particular elements properly will likely contribute to the conclusion that the Shariah black box poses no great risk to U.S. companies involved in SCF. This conclusion, if reached without due consideration of the matters raised herein, would be faulty and quite likely very costly. There will be a natural tendency by practitioners to treat materiality and scienter as high hurdles for a government prosecution, an SEC enforcement action, or a private civil claim because these lawyers have treated Shariah as a black box into which they have refused to peer. They will then consider the contents of that black box either immaterial in and of itself or irrelevant since they will insist that there was no requisite intent on the part of their clients to embrace the endogenous elements of Shariah.