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E-MailBy now the holding in Stoneridge has become well known and widely discussed, including on my site, The Race to the Bottom. The five justices concluded that Section 10(b) and Rule 10b-5 did not extend to vendors. In reading the opinion, the analysis is reminiscent of Bush v. Gore, a decision that is better understood as a political rather than a legal statement.
The majority was mostly influenced by its view of the appropriate method of enforcing the securities laws. In the majority’s view, there is no real room for private enforcement, at least under Section 10(b) and Rule 10b-5. Lacking the temerity (and the votes, no doubt) to eliminate the cause of action altogether, the Court simply announced that the guiding principle for interpreting the antifraud provisions would be no “expansion.”
As a practical matter, that means that common law principles will not control. See Stoneridge, at 11 (“Section 10(b) does not incorporate common-law fraud into federal law.”). Similarly, the intent of Congress doesn’t matter. As Justice Scalia is often quick to point out, the best way to discern congressional intent is through textual analysis of the statute. But other than quoting the statute at the beginning of the legal analysis, the Court engaged in no meaningful effort to make the opinion turn on the language of Section 10(b).
Then what was the basis for the decision? “Concerns with judicial creation of a private cause of action caution against its expansion.” Note the passive nature of the sentence. Who is concerned? For purposes of statutory construction, the only one whose concern matters is Congress. But in fact the authority cited by the majority for the proposition is an isolated sentence from Virginia Bancshares that makes the unremarkable point that “as a general matter” an action under the antifraud provision shouldn’t “grow beyond the scope congressionally intended”. In other words, the Court cited no authority for the proposition and certainly didn’t demonstrate that the “concerns” emanated from Congress.
This is because the “concerns” are those not of Congress but of the majority on the Supreme Court. Legislation by the Court, in other words. The Court’s legislative efforts to restrict private law suits will have consequences, most likely pushing enforcement away from the civil arena to the criminal authorities. See Stoneridge, at 15 (“Secondary actors are subject to criminal penalties”.) But that is a topic for another day.
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Putting aside the wisdom of the result and reasoning in Stoneridge, it’s hard for me to understand criticizing the Court for acting “legislatively” in restricting 10b-5 civil suits when those suits themselves were creations of the courts in the first place. The courts giveth, the courts taketh away (or refuseth to add).
As usual, Larry Hamermesh has it right. The real “legislative” action by the federal courts was implying private rights of action in cases, such as the 1934 Act, where Congress was silent on the subject. In 1975, in Cort v. Ash, the Court wisely moved decisively away from liberal implication of private rights not explicitly provided by Congress in an opinion by Justice Brennan (not exactly an enemy of the common law or a “stict constructionist”). Robert Brown would like to turn back the clock to the pre-1975 world of easy implication, and ready expansion of rights once implied. That train was derailed long ago, and nostalgia, and a romantic view of the supposed Robin Hood-like virtues of the wealth transfer experts in the plaintiffs’ bar, won’t bring it back.
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[…] the global economy. It was not to be. Maybe the narrow reading of the law was appropriate. The Harvard Corporate Governance blog, via J. Robert Brown of the Race to the Bottom blog, explains it for non-lawyers like me. But […]