There is growing concern that American capital markets are becoming less competitive in the global economy. Indeed, as both the Paulson Committee and the Schumer-Bloomberg reports documented, New York financial markets, stifled by stringent regulations and high litigation risks are in danger of losing business and highly skilled workers to overseas competitors, adversely impacting not only New York, but the entire US economy.
A number of contributing factors are cited by the proponents of this view, such as the Sarbanes-Oxley legislation, the inconsistencies between US GAAP and IFRS, and so on. The liability exposure created by US securities laws, however, has come under especially close scrutiny. Indeed, Treasury Secretary Henry Paulson has called securities litigation the "Achilles heel" of the US economy. Likewise, the Schumer-Bloomberg report argued that "the highly complex and fragmented nature of our legal system has led to a perception that penalties are arbitrary and unfair."
Despite the active debate, there has been little legislative or regulatory progress in addressing these concerns. None of the 2008 presidential candidates has prominently emphasized these issues, nor have any senators or Congressman made serious efforts to push a legislative fix.
In Stoneridge vs. Scientific-Atlanta, the Supreme Court stepped into the debate, coming down hard on the side of promoting American competitiveness. The majority opined:
The practical consequences of an expansion [of the Rule 10b-5 cause of action], which the Court has considered appropriate to examine in circumstances like these, provide a further reason to reject petitioner?s approach. In Blue Chip, the Court noted that extensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies. Adoption of petitioner?s approach would exposea new class of defendants to these risks. As noted in Central Bank, contracting parties might find it necessary to protect against these threats, raising the costs of doing business. Overseas firms with no other exposure to our securities laws could be deterred from doing business here. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.
This passage elicited harsh criticism from some prominent commentators. Law Professor Jay Brown, for example, took the Stoneridge majority to task for engaging in, as he put it, "Legislation by the Court." Likewise, Law Professor Larry Ribstein complained that:
the Court seems to have gotten its conclusion from politics rather than jurisprudence.
Focusing on the passage I just quoted, Ribstein continues:
I agree with Elizabeth Nowicki when she says "I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years."
There was a time, not so very long ago, when the Supreme Court quite explicitly took public policy concerns into account in deciding securities cases. Ironically, however, in Central Bank, Stoneridge's direct antecedent, written by the very same Justice Anthony Kennedy who penned Stoneridge?the Court denied the propriety of doing so:
Policy considerations cannot override our interpretation of the text and structure of the Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result ?so bizarre? that Congress could not have intended it.
So what are we to make of all this?
In the first place, I would draw a distinction between cases like Stoneridge and another Kennedy opinion; namely, Gustafson v. Alloyd Co. You'll recall that in that case, which I have elsewhere called "the most poorly-reasoned, blatantly results-driven securities opinion in recent memory," Justice Kennedy drastically limited the scope of liability under Securities Act Section 12(a)(2).
In the Business Lawyer article to which I just referred, I posited that Gustafson demonstrated that, despite Central Bank, the Supreme Court still relied on policy considerations in deciding securities cases. I continued:
What does appear to have changed are the policy preferences of the Court's members. The consensus goal once was investor protection through expansive interpretations of the liability provisions.
[In contrast,] Gustafson is merely the latest of a series of recent cases in which the Supreme Court has proven quite willing to overturn apparently well-settled securities doctrine, even including doctrines assumed by its prior holdings. In particular, the Court has been willing to narrow the scope of securities liability in quite unexpected ways.
Stated most crudely, the policy preference that seems to run through [Gustafson and these other cases] is the desire to have fewer securities lawsuits. More charitably, this could be rephrased as a desire to prevent excessive, vexatious, often frivolous litigation. As evidence for this conclusion, consider the majority's references to the "vast" and "extensive" liability that might arise if prospectus was defined broadly.
Note that the same concern motivated Kennedy's Stoneridge opinion.
Kennedy erred in Gustafson not because policy concerns are always irrelevant, but because Kennedy was dealing with an express statutory cause of action. Kennedy invoked policy concerns in Gustafson to justify a result that was clearly contrary to the statutory language, the legislative history, and years of prior precedents. If there is anything left of neutral principles, one ought to object to decisions, such as Gustafson, which narrow the scope of an express cause of action in ways that are counter to congressional intent. As both dissents argued, that seems to me to be a task more appropriately left to Congress.
In Stoneridge, however, we are dealing with an implied private right of action. We?re dealing with a creature of the judiciary, but of statute.
Public policy considerations weighed heavily in the creation of the implied private rights of action. In J. I. Case v. Borak, for example, in which the Supreme Court created the analogous implied private right of action under Section 14(a)'s proxy rules, the Court expressly relied on the need for private attorneys general, opining that "Private enforcement of the proxy rules provides a necessary supplement to Commission action."
The Court has repeatedly quoted that passage favorably in cases arising under Rule 10b-5.
Public policy concerns also were repeatedly invoked as the Rule 10b-5 cause of action evolved. This should not be surprising.
In Stoneridge, we are dealing with what I believe is properly understood as a species of federal common law. As Justice Rehnquist famously quipped, Rule 10b-5 is "a judicial oak which has grown from little more than a legislative acorn." We are dealing here with interstitial lawmaking in which the courts are using common-law adjudicatory methods to flesh out the bare statutory bones.
The analytical methodologies applied by the Supreme Court to federal common-law issues thus provide an appropriate mechanism for giving content to Rule 10b-5. As Judge Winter explained in Chestman, the text of Section 10(b) can be seen as "a general authorization to the SEC and to the courts to fashion rules founded largely on those tribunals' judgments as to why insider trading is or is not fraudulent, deceptive, or manipulative." The same holds true for the rest of Rule 10b-5 jurisprudence, in my opinion.
More important folk than I have been of the same opinion. As Law Professor Adam Pritchard has written, Justice Lewis Powell "considered the judge-made remedy under Rule 10b-5 to be a species of federal common law, and thus appropriate for judges to consider policy in defining its limits. Second, Powell understood, based on experience counseling corporate clients, the consequences that the phenomenon of class action lawsuits had for corporations and their officers and directors. Finally, Powell was profoundly suspicious of judicially created private causes of action not specifically authorized by Congress. From Powell's perspective, the expansion of securities fraud lawsuits based on implied rights of action was creating a litigation crisis. That perception of crisis would influence the outcome in a number of cases that came to the Supreme Court."
Indeed, as Pritchard further observes, Powell thought policy considerations "particularly relevant in 'a private cause of action . . . wholly of judicial creation.'"
The proper question is not whether Stoneridge is an example of judicial legislation, but rather whether the SCOTUS improperly deployed the tools of common law adjudication so as to reach an erroneous result.
We can debate the merits of trimming securities litigation another day.
Instead, I want to turn to the question of why the Supreme Court so often relies on policy rather than grappling with the nitty gritty of statutory interpretation.
There is general agreement that the Supreme Court has not done a very good job in the securities area, especially in recent years. Scholars operating in a wide range of paradigms have criticized the Court's recent securities opinions. Supreme Court securities law decisions frequently lack such basics as doctrinal coherence and fidelity to prior opinions.
Why does the Supreme Court not do a better job in securities cases? When deciding securities cases, the Court is faced with hard, dry, and highly technical issues. Supreme Court justices and their clerks arrive on the court with little expertise in securities law. One reasonably assumes that neither the justices nor their clerks have much interest in developing substantial institutional expertise in this area after they arrive. (Former Justice Powell being the exception that proves these rules.) Accordingly, it would be surprising if the Court's securities opinions exhibited anything remotely resembling expert craftsmanship.
Under such conditions, we would expect the Justices to take securities cases rarely, typically when there is a serious circuit split, which is in fact what we observe. When obliged to take a securities issue, the Court will seek to minimize the amount of effort required to render a decision. This observation is not intended pejoratively. To the contrary, the Justices are acting rationally.
Bounded rationality implies that Supreme Court Justices (and their clerks) have a limited ability to master legal information, including the myriad complexities of doctrine and policy in the host of areas annually presented to the Court. Specialization is a rational response to bounded rationality?the expert in a field makes the most of his limited capacity to absorb and master information by limiting the amount of information that must be processed, by limiting the breadth of the field in which he develops expertise. Supreme Court Justices will therefore need to specialize, just as experts in other fields must do. Specializing in securities law would not be rational. The psychic rewards of being a Justice--present day celebrity and historical fame--are associated principally with decisions on great constitutional issues, not the minutiae of securities regulation.
Technical statutory analysis is hard. Policy is easy. Technical statutory analysis doesn't get you a write up by Linda Greenhouse. Policy does. Indeed, Greenhouse's write up of Stoneridge focuses almost exclusively on the policy issue.
What's the practical implication of all this?
We often tend to approach Supreme Court decisions as an innerantist approaches Holy Writ. We assume that exegesis at a minute level of Supreme Court opinions in this area is both plausible and practical. Hence, we read Supreme Court decisions as though: (i) those decisions were statutes to be interpreted from strict textualist perspective, and (ii) one could ascribe intentionality to the justices' utterances.
Implicit in this approach to interpreting Supreme Court decisions is the notion that the Court is sufficiently aware of the import of the words it chooses to ascribe meaning thereto. A theory of Supreme Court decisionmaking founded on bounded rationality, by contrast, argues for declining to ascribe intentionality to the Court. Supreme Court decisions in this area should be interpreted narrowly, as reaching only the specific issues before the Court, while dictum should be largely ignored. Put another way, we need to take these cases with a rather large grain of salt.
