Securities law in the Roberts court: agenda or indifference?

• Author: Pritchard, A.C.

1. Introduction II. Statutory Interpretation and Legislative Intent A. SLUSA 1. Merrill Lynch, Pierce, Fenner & Smith v. Dabit 2. Kircher v. Putnam Funds Trust B. Statute of Limitations C. Statutory Interpretation and the Securities Laws III. The Administrative State A. Antitrust v. Securities Regulation B. Separation of Powers C. Securities Laws and the Administrative State IV. The Class Action Menace? A. Judicial Gatekeeping: The Pleading Standard, Materiality, and Class Certification 1. Pleading Scienter 2. Materiality 3. Class Certification B. Mutual Fund Litigation C. Secondary Liability 1. Central Bank 2. stoneridge 3. Janus D. Foreign Class Actions E. Anti-Plaintiff Court? V. Conclusion I. INTRODUCTION

   To outsiders, securities law is not all that interesting. The body of the law consists of an interconnecting web of statutes and regulations that fit together in ways that are decidedly counter-intuitive. securities law rivals tax law in its reputation for complexity and dreariness. Worse yet, the subject regulated--capital markets--can be mystifying to those uninitiated in modern finance. Moreover, those markets rapidly evolve, continually increasing their complexity. If you do not understand how the financial markets work, it is hard to understand how securities law affects those markets.

   Nothing in the biographies of the current members of the supreme Court suggest they are likely to be well equipped to deal with the federal securities laws or modern financial markets. This lacunae of securities expertise is a relatively recent phenomenon. For most of the first 50 years after the federal securities laws were adopted, the Court had at least one Justice with a background in the securities laws, either as a regulator--William O. Douglas (1)--or as a practitioner--Lewis F. Powell, Jr. (2)

   Powell's retirement left the Rehnquist Court with a void in securities expertise for most of its tenure, and his departure marked a significant decline in the Court's securities caseload, as demonstrated by Table 1 below. Usually the Justices' collective lack of familiarity with the securities laws means that few petitions for certiorari are granted in securities cases; the Court simply does not decide that many cases in the field. As Table 1 below demonstrates, the Rehnquist Court averaged slightly more than one securities case per term during its nearly 20 year run, a figure consistent with the average number heard by the Warren Court.

   The first six years of the Roberts Court have departed from that long-term pattern. The Roberts Court has decided 12 cases in the field of securities law, a whopping 2.6% of its docket. That increase suggests the Justices have taken a new interest in the field, despite the lack of a Justice with a background in securities law.

   Does this upsurge in securities cases reflect a new agenda for the supreme Court in the field of securities law? A closer examination of the cases suggests that the numbers may deceive. As Table 2 demonstrates, no single Justice has stepped forward to take charge of the field of securities regulation as Powell did during his time on the Burger Court. Only Chief Justice Roberts and Justice Breyer have written more than one majority opinion in the area. Before his retirement, Justice stevens appears to have been engaged with the field, but most of his seven opinions in the field were dissents or concurrences; his interest does not translate into influence, as it did for Powell.

   When one turns to the substance of the opinions written in these cases, one finds little effort to grapple with the relation between the financial markets and the securities laws. There are vigorous debates among the Justices in some of these cases, but they revolve around questions of statutory interpretation and the relationship between the judiciary and the administrative state. The dominant theme is judicial modesty.

   One exception would appear to be the topic of securities class actions. The passage of the Private Securities Litigation Reform Act (PSLRA) in 1995, (3) and its follow-on, the Securities Litigation Uniform Standards Act (SLUSA) in 1998, (4) have generated a number of interpretive opportunities for the Roberts Court. Most of these cases have revolved around straightforward issues of statutory interpretation, but on occasion these statutes raise issues that have forced the Justices to grapple with the policy implications of their decisions for securities class action practice. Those decisions have caused critics to label the Roberts Court as "pro business." (5) Does the "pro business" Roberts Court have a negative attitude toward securities class actions? An examination of the overall pattern of the Court's decisions in this area suggests a bias not toward business, but rather, the status quo, resisting attempts to both restrict--and expand--the reach of Rule 10b-5 class actions.

   I proceed as follows: The Justices' debates over the appropriate method of interpreting statutes are analyzed in Part II. Part III looks at the perspective on the administrative state offered in the Roberts Court's securities decisions. Part IV assesses whether the Roberts Court has taken a hostile attitude toward securities class actions. Part V concludes.

2. STATUTORY INTERPRETATION AND LEGISLATIVE INTENT

   Three of the securities cases decided during Chief Justice Roberts's tenure have turned exclusively on questions of statutory interpretation. More precisely, these cases have turned on the Court's assumptions about what Congress intended when it used specific statutory language. That language was adopted against a backdrop of judicial interpretations of similar language; the opinions purport to erect a predictable framework of interpretation. These opinions betray no indication that the Roberts Court is attempting to push the securities laws in a particular direction. The lack of an agenda in the opinions is reinforced by another common thread; in each case, the petitions for certiorari were granted by the Court only after a clear conflict had arose in the circuits over the particular question of statutory interpretation. These cases were decided because the Justices felt obligated to resolve the split, not because any member of the Court had a particular interest in the securities topic presented.

   1. SLUSA

      Chief Justice Roberts' first term brought two securities cases to the Court's docket, both involving interpretive issues arising out of SLUSA. A brief introduction to SLUSA is necessary to set the stage for these cases. Congress adopted SLUSA in 1998, three years after enacting the PSLRA. The PSLRA made it more difficult to allege securities fraud by: (1) adopting a more stringent pleading standard, including heightened requirements for pleading scienter, i.e., state of mind; (6) and (2) creating an automatic stay of discovery. (7) Those restrictions under federal law gave rise to an exodus of securities class actions to state court; state "blue sky" anti-fraud provisions generally lack the procedural protections that the PSLRA affords defendants in federal securities class actions. (8) The goal of SLUSA was to preempt state law securities cases, thereby pushing plaintiffs back to federal court where the restrictions of the PSLRA would apply. (9)

      Congress did not, however, preempt the substantive law of state securities fraud or its remedies. Instead, it preempted state courts from adjudicating securities fraud class actions. (10) In preempting only class actions, Congress left state law to provide a cause of action for securities fraud, albeit one that can only be pursued individually. SLUSA preempts class actions:

      based upon the statutory or common law of a State or subdivision thereof ... by any private party alleging--

      (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or

      (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. (11)

      Although the language is not identical, SLUSA's preemption language tracks closely the general federal anti-fraud prohibition found in Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and the SEC's Rule 10b-5. (12) Rule 10b-5 is the typical basis for federal securities class actions.

      1. Merrill Lynch, Pierce, Fenner & Smith v. Dabit

         Merrill Lynch, Pierce, Fenner & Smith v. Dabit (13) raised the question of the scope of SLUSA's preemption. The case arose out of the securities analyst scandals of the early 2000s, in which the New York Attorney General and the SEC alleged that securities analysis provided by the major investment banks was biased as a result of those banks' conflict of interest. Essentially, the government alleged that the banks were hyping the common stock of their investment banking clients to garner more investment banking business. A host of private claims followed the government enforcement actions. Plaintiffs asserted private claims in both federal securities class actions and arbitration proceedings. The scandal also gave rise to the claim in Dabit: plaintiffs alleged that they were induced to hold securities that they would have sold if the analyst research that they relied upon had been accurate. (14)

         Plaintiffs' complaint was a transparent attempt to evade SLUSA's restrictions, but it gave rise to an interpretive difficulty. SLUSA preempts only claims that are "in connection with the purchase or sale of a covered security." (15) Plaintiffs claimed that they had not sold their securities. Moreover, the claim being asserted could not have been raised under federal law. In Blue Chip Stamps v. Manor Drug Stores, the Supreme Court held that plaintiffs must have sold or purchased securities in order to have standing under

         Rule 10b-5. (16) Would Blue Chip's narrow interpretation of "in connection with the purchase or sale of a security" undercut the...