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Ribstein on Stoneridge: Policy Concerns Dominate SCOTUS’ Securities Jurisprudence

Larry Ribstein offers up a most interesting perspective on the Stoneridge decision:

I’m very sympathetic with the result. ... My problem is that, instead of focusing on the type of conduct that should get a defendant into trouble under the securities laws, the Court focused on reliance. This is a weak theory once you accept, as the Court does, that 10b-5 liability can be based on conduct rather than misstatements.  Given the fraud-on-the-market presumption of reliance, it’s far from clear why reliance was missing here, as the dissent pointed out.  ...

Unfortunately, the Court seems to have gotten its conclusion from politics rather than jurisprudence. The majority says:

Overseas firms with no other exposure to our securities laws could be deterred from doing business here. . . . This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings awayfrom domestic capital markets.

I agree with Elizabeth Nowicki when she says “I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years.”

While I’m sympathetic with these concerns, and indeed have written extensively about them, I question their role in this opinion. It’s not the Court’s business to decide the appropriate level of liability under the securities laws, and whether this does or doesn’t deter foreign issuers from listing here—a matter on which there is considerable empirical and theoretical disagreement. Instead, the Court should be delineating the fact situations that would unduly extend whatever level of liability Congress has defined, and leave any such extensions to Congress.

Well, yes, but.... It’s not like this is the first time the Court has pulled this sort of stunt. As I wrote in my article Securities Act Section 12 (2) After the Gustafson Debacle:

Gustafson is merely the latest of a series of recent cases in which the Supreme Court has proven quite willing to overturn apparently well-settled securities doctrine, even including doctrines assumed by its prior holdings. In particular, the Court has been willing to narrow the scope of securities liability in quite unexpected ways.  …

There was a time, not so very long ago, when the Supreme Court quite explicitly took public policy concerns into account in deciding securities cases.  In recent years, however, the Court has sometimes denied the propriety of doing so.  Yet, as Gustafson illustrates, the Court still does so, albeit somewhat less explicitly. What does appear to have changed are the policy preferences of the Courts members. The consensus goal once was inventor protection though expansive interpretations of the liability provisions.  Identifying the current justices’ policy preferences is a vital question, on which Gustafson sheds some light.

Stated most crudely, the policy preference that seems to run through this opinion is the desire to have fewer securities lawsuits. More charitably, we might refer to this as a desire to prevent excessive, vexatious, often frivolous litigation. As evidence for this conclusion, consider the majority’s references to the “vast” and “extensive” liability that might arise if prospectus was defined broadly.  In addition, both dissents concluded that this policy concern drove the majority decision.  Finally, some believe the same policy was at work in the Court’s other recent decisions … trimming the scope of liability under the securities laws.

If the Court’s securities jurisprudence in fact is policy-driven, that should not surprise us. The court is, after all, institutionally incompetent to decide securities cases on their doctrinal merits. In lieu thereof, the Court thus might rely on crude policy goals.

I found this troubling in the Gustafson context:

If there is anything left of neutral principles, however, one ought to object to decisions, such as Gustafson, which narrow the scope of an express cause of action in ways that arguably are counter to Congressional intent. As both dissents argued, that seems to me to be a task more appropriately left to Congress.

On the other hand, however, Stoneridge was a case about liability in the context of an implied private right of action. As I wrote in my article on Gustafson:

This essay is not an appropriate occasion for an extended discourse on the merits of securities litigation reform. Suffice it to say that it is a project with which I am in substantial sympathy. The Supreme Court for many years was in the business of expanding the scope of securities liability through the ready creation and broad interpretation of the implied private rights of actions. If the current Court has decided to rewrite some of that history, I would not object.

The court was driven by public policy considerations in creating the implied private rights of action - most notably those associated with the larger private attorneys general project of the 1960s - so it should not be surprising or disquieting that such considerations continue to inform the court’s jurisprudence under Rule 10b-5 and its ilk.

Larry replies.