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.”