Big guns roll out to defend securities class actions as SCOTUS amici
Conventional wisdom has it that the future of most securities fraud class actions will come down to U.S. Supreme Court Chief Justice John Roberts (and possibly Justice Samuel Alito, who, as a judge on the 3rd Circuit Court of Appeals, wrote quite interesting decisions about fraud-on-the-market reliance). Last term, in dissents in Amgen v. Connecticut Retirement Plans, Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy made clear their skepticism about the court’s 1988 precedent in Basic v. Levinson, the case that made securities fraud class actions possible via its holding that shareholders may be presumed to have relied on corporate misstatements about a stock that trades in an efficient market. Based on the Amgen majority opinion, Justices Ruth Bader Ginsburg, Stephen Breyer, Elena Kagan and Sonia Sotomayor seem disinclined to overturn Basic when the court once again takes up the issue of classwide shareholder reliance on March 5 in Halliburton v. Erica P. John Fund.
Presumably with Chief Justice Roberts in mind, the Erica P. John Fund and its lawyers at Boies, Schiller & Flexner made deference to Supreme Court precedent a major theme of the merits brief they filed last week. As I told you, Boies Schiller cast Basic as a decision rooted in the 80-year-old history of this country’s securities laws, entwined with government regulation of the securities markets and implicitly endorsed by Congress, which has had multiple opportunities over the last 25 years to roll back the presumption of reliance and has repeatedly declined to do so.
As of late Wednesday, it’s not only Boies Schiller saying so to the Supreme Court. Erica P. John – and, by extension, the securities class action industry – has received powerful support in amicus briefs from (among many others) the Justice Department; two former chairmen of the Securities and Exchange Commission (one Republican, one Democrat); 11 current and former members of Congress; and scholars of the doctrine of stare decisis, whose filing was authored by Harvard Law professor Charles Fried – the onetime U.S. solicitor general who wrote the Justice Department brief supporting investors in the original Basic case at the Supreme Court.
As a group, these briefs provide compelling legal and policy justifications for leaving Basic alone, arguing, in essence, that this Supreme Court would be overstepping its judicial bounds if it reversed its own precedent, defied Congress, and undermined the regulation and enforcement of the securities laws. Is that really the proper role of the Supreme Court? As Professor Fried’s brief acknowledges, Basic and its predecessors read an implied right of private actions into the securities laws, which didn’t specify that investors (as opposed to the SEC) can sue for fraud under the Exchange Act of 1934. The implied right of action has legions of critics, but it’s entrenched. So the choice for the Supreme Court in reconsidering Basic is stark, according to Fried’s brief. It can abide by its own principles of deference under stare decisis, in which the court has always been particularly reluctant to overturn statutory interpretations best left to Congress to refine. Or it can meddle with policy and politics, where it doesn’t belong.
“The court is thus left with either re-entering the political fray or leaving revisions to the political branches,” the brief said. “The rule of statutory stare decisis provides the wisest answer, avoiding the appearance that both the substance of the law, and the choice to revise it, depend more on the proclivities of the court’s current membership than on neutral principles.”
The Justice Department and former SEC chairs’ briefs document the policy implications of overturning Basic. Enforcement of the securities laws is balanced between Justice, the SEC and private litigation, according to the DOJ brief, which cites the Supreme Court’s own 2007 ruling in Tellabs v. Makor Issues in arguing that “meritorious private securities-fraud actions are ‘an essential supplement to criminal prosecutions and civil enforcement actions brought by the Department of Justice and the SEC.’” Undoing Basic’s fraud-on-the-market presumption, Justice argues, would undermine private investors’ ability to recover compensation when public companies breach their faith in the public markets and would eliminate the deterrent value of the threat of private litigation. (The DOJ brief also features a really well-written history of the securities laws, dating back to common-law fraud, and a cogent explanation of why the eyeball reliance required from private investors in one provision of the Exchange Act shouldn’t be regarded as relevant evidence of the standard Congress intended to impose for broad securities fraud cases.)
Former SEC chairmen Arthur Levitt and William Donaldson argue that many of the SEC’s disclosure requirements rest on the premise that markets are broadly efficient, so share prices reflect publicly available information. That efficient-market theory also underlies the Supreme Court’s precedent in Basic. So if the Supreme Court rejects it, the former officials assert, the SEC’s entire disclosure regime might have to be revamped. “The SEC has long based disclosure requirements – as well as limitations on those requirements to make them less burdensome – on the well-founded premise that the prices of actively traded securities generally reflect publicly available information,” the brief says. “But if it were now to be rejected, the consequence would logically be a movement toward an increased and more burdensome set of regulatory and disclosure requirements to ensure the integrity of the securities markets and investor confidence in them.” Disclosures affecting shelf registrations, municipal securities, and swaps ownership would all become much more rigorous, the brief argues, if the Supreme Court undercuts the premise of Basic. (The filing, like the Justice brief, also explains why the former SEC officials don’t regard the eyeball reliance requirement in another provision of the Exchange Act as relevant evidence of congressional intent.)
Congressional intent will be a key issue in the reconsideration of Basic. As the stare decisis brief explains, when the Supreme Court issues a decision that interprets a statute, the general assumption is that it’s then up to Congress to change the statute if lawmakers don’t like the implications of the court’s decision. There are exceptions in some narrow areas, like maritime law, in which Congress has basically ceded lawmaking to the Supreme Court. And procedural and evidentiary rulings by the Supreme Court aren’t accorded the same deference as substantive statutory interpretations. But Basic’s supporters argue that those exceptions don’t apply in this case, when the court is being asked to overturn a major interpretation of the law. (For more technical legal discussion of why Basic shouldn’t be overturned, you can check out yet another amicus brief filed Wednesday, this one by an eminent collection of experts on civil procedures who cite the Rules Enabling Act to assert that the procedural rules for class actions should not trump Basic’s precedent.)
It’s undisputed that Congress has reconsidered private securities laws on several occasions since Basic was issued in 1988, and has never acted to reverse the ruling’s fraud-on-the-market theory or the presumption of classwide reliance on stocks trading on an efficient market. But in a brief mustered by Basic detractors, several former Republican members of Congress, all of whom were involved in reforming the securities laws in the 1990s, argued that the Supreme Court shouldn’t assume Congress’s failure to overturn Basic means that lawmakers have implicitly endorsed its holdings. “Congress was simply silent in response to those various requests, and this court should not take Congress’s silence as implicit acceptance or rejection of Basic’s fraud-on-the-market theory,” the brief argued.
That’s not true, according to a brief by 11 current and former members of Congress who urge the Supreme Court to leave Basic alone. Most of the amici opposed the Private Securities Litigation Reform Act of 1995, though some supported it. Either way, they contend, the House and Senate duly considered the fraud-on-the-market presumption in debating and drafting various reform proposals. The omission of any discussion of Basic from the final law – and indeed, the fraud-on-the-market assumptions that are baked into some of the law’s provisions – proves Congress’s implicit acceptance of the Supreme Court’s holding. “The legislative history thus shows that both chambers of Congress and various congressional committees considered abolishing or modifying the fraud-on-the-market presumption,” the brief says. “The extended debate over Basic was a key part of the congressional debate that culminated in the PSLRA. But in enacting the PSLRA, Congress chose to leave the fraud-on-the market presumption untouched.”
In contrast to Basic’s detractors, who argue that congressional inaction can’t be interpreted as congressional endorsement, the brief asserts that Congress took action on securities laws when it passed reforms in 1995, when Basic had been in place for seven years and its implications were well known to lawmakers. Those facts indicate that Congress deliberately left Basic intact: When Congress, this court, or a federal agency takes a position on an important legal issue and that position reflects the settled state of the law, it is understood that further Congressional action occurs against that legal background,” the brief says. “Thus, when Congress takes action in that area but does not overturn that settled legal position, it is deliberately preserving that position.”
The Supreme Court would be thwarting congressional intent were it to overturn Basic, according to the brief, especially because the court itself has acknowledged in its own post-Basic rulings on private securities litigation in Amgen and in Stoneridge Partners v. Scientific-Atlanta that Congress implicitly endorsed fraud-on-the-market theory. According to the brief, Congress has continued to leave Basic intact in the many securities laws it has passed even after PSLRA, including Sarbanes-Oxley and Dodd-Frank. That’s further evidence that Congress wants Basic to remain good precedent.
That brings me back to the stare decisis brief, which makes that point that regardless of what the justices think of the original Basic decision – even if they’re skeptical of its economic underpinnings and hate the idea of a judicially created cause of action – it is not the Supreme Court’s prerogative to undo the damages. “Statutory stare decisis leaves the task of modifying decisions like Basic to the branch of government that is best suited to evaluate the often complicated factual claims underlying the call for its repeal and the unavoidable political judgments those requests entail,” the brief says. “It might, of course, be argued that because the court waded into these debates when it first decided Basic, it is therefore appropriate to consider them afresh now. That is a palpable non sequitur…. Strict adherence to statutory stare decisis avoids both unnecessary additional entanglements with issues best decided by legislators and the appearance that the decision whether to reconsider a statutory precedent is driven by changes in the Court’s composition or policy perspective.”
Will that admonition sway Chief Justice Roberts? We’ll find out on March 5.
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