We have on this Blog taken issue with activist courts that rely on policy analysis in place of legal reasoning. Nowhere has this been more clear than with respect to the view of the conservative majority on the Supreme Court concerning private actions under the antifraud provisions, particularly Rule 10b-5.
In Stoneridge, for example, the majority decreed that henceforth, Rule 10b-5 would not be allowed to be "extended beyond its present boundaries." The approach was not based upon principles of common law fraud, congressional intent, or the language of the statute. Instead, it was a policy decision. Unhappy that a private right of action existed at all, the Court all but announced that henceforth the guiding principle would be to restrict and narrow the reach of the action.
As if the point was missed, the conservative majority repeated the point in Janus. As the Court stated:
- Our holding also accords with the narrow scope that we must give the implied private right of action. Id., at 167. Although the existence of the private right is now settled, we will not expand liability beyond the person or entity that ultimately has authority over a false statement.
In justifying the policy decision, the Court reasoned that the restrictions on antifraud actions would have little impact because of the looming presence of government regulators. As the Court noted in Stoneridge:
- Secondary actors are subject to criminal penalties, and civil enforcement by the SEC. The enforcement power is not toothless. Since September 30, 2002, SEC enforcement actions have collected over $ 10 billion in disgorgement and penalties, much of it for distribution to injured investors.
Commissioner Walter at the SEC recently gave a talk that called this analysis into question. In a speech before the FINRA Institute at Wharton, she examined the Court's "hostility towards private rights" and the importance of these actions in protecting the securities markets. The speech is here.
Commissioner Walter traced the development of the private right of action under the antifraud provisions, noting early efforts by the Supreme Court in cases like Blue Chip Stamps to cut back on the right. Congress, however, sought to correct many of the abuses associated with private actions through the adoption of the Private Securities Litigation Reform Act. Nonetheless, these congressional limitations did not constrain the Court. As she noted: "Despite the broad sweep of the Litigation Reform Act, to this day the Supreme Court continues to demonstrate what I would characterize as hostility towards private rights."
To support the view, she gave three recent examples: Stoneridge, Morrison and Janus. While the first two had little impact on Commission actions (Stoneridge requires evidence of reliance, an element not present in Commission actions and Morrison was overturned by Congress in Dodd-Frank), Commissioner Walter expressed concern over the impact of Janus. The reasoning regarding the relationship between the advisor and the fund was, in her opinion, "shockingly out of line with the realities of the marketplace." More important was the potential impact on Commission actions.
- In its recent Janus decision, the Supreme Court focused simply on the language of Section 10(b) and Rule 10b-5, which of course apply to Commission actions as well as private actions. This change may have the unfortunate and ironic result of throwing the proverbial baby out with the bathwater. What I mean is that by limiting implied private rights through strict statutory interpretation, the Court has also potentially limited the express public rights of action contained in the statute.
The approach taken by the Court effectively limits private enforcement. Without adequate enforcement, a statute is "merely a suggestion, rather than a mandate". Moreover, in making the statute meaningful, both "public and private aspects of securities enforcement are critical".
So what is the consequence of these limitations on private enforcement actions? For one thing it increases the burden placed on regulators, particularly the Commission.
- I believe that the trend away from private rights of action under the securities laws has placed more and more pressure on the Commission and other regulators to be the sole guardians of the statutes. It is a vast understatement to say that the Commission has a big job to do. If private rights are cut back further, or further constrained, that puts an increasing burden on already scarce governmental resources.
Leaving matters to the Commission means that enforcement of the securities laws becomes subject to the vagaries of budgetary constraints.
- The ebbs and flows of our appropriations process mean that the Commission has been faced repeatedly with budgetary constraints. The Commission is quite adept at using the resources it is given, and has and will rise to the occasion. But, it is far from clear that we will be able to reach an optimal level of enforcement where both private rights of action are contracting and public rights are limited unduly, and quite artificially, by resource deficiencies—both technological and in terms of number of staff.
Nor does the Commission precisely stand in the shoes of injured investors. While the agency can seek penalties, it is not empowered to recover damages. "Thus, while the agency can require wrongdoers to give up the benefits they have received from violations, it cannot necessarily make the victims whole." Moreover, the agency's priorities and the priorities of private parties vary. The result, "that there is both a long-term contraction in private rights and an inherent limited ability to maximize public enforcement should be a cause for significant concern."
The Commission, as the speech points out, routinely files amicus briefs in important securities cases filed at the US Supreme Court. Perhaps the next one should flesh out the views in this speech and emphasize that judicially imposed limitations on private actions under the antifraud rules are not, at the Court apparently thinks, inconsequential to the securities markets.