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Stoneridge and the Supreme Court’s Dubious Track Record in Securities Cases

I recently ran across a very nice article by Professor Rodney Chrisman on the Stoneridge case, 26 QLR 839, in which he was kind enough to bring to bear a point I made about O’Hagan and extend it to Stoneridge:

Commentators describe the Court’s opinion in O’Hagan with varying degrees of criticism. Possibly the most scathing attack on O’Hagan came from Stephen Bainbridge during a recent panel discussion hosted by Case Western School of Law. During his remarks, Professor Bainbridge described O’Hagan as “a cut and paste pot job, where [Justice Ginsberg] clipped out key provisions of the ... solicitor general’s brief, reworded a few of them, but for the most part quoted it.” Professor Bainbridge went on to quip, “I assume one of the clerks called up the [Solicitor General’s] office and said, ‘it’s very nice to have this printed brief, but we need the word doc copy, you know, so we can do some cutting and pasting.”’ Stephen Bainbridge, William D. Warren Professor of Law at UCLA, Panel Discussion: Case Western Reserve School of Law Symposium on Scheme Liability, Section 10b-5, and Stoneridge Investment Partners v. Scientific-Atlanta, available at http:// law.case.edu/centers/business_law/webcast.asp?dt=20071005 (archived webcast) and http://law.case.edu/lectures/index.asp?lec_id=157 (general information). In the same discussion, Professor Bainbridge alluded to an earlier article he published criticizing the lack of business expertise on the Court. There he wrote:

In our view, this [lack of expertise] is the best explanation for the Supreme Court’s widely criticized decision in United States v. O’Hagan, which addressed the validity of the so-called misappropriation theory as a basis for imposing insider trading liability under SEC Rule 10b-5. The misappropriation theory was almost two decades old before the Court got around finally to resolving its validity. It did so only after a major circuit split had emerged. In resolving the case, the majority did essentially what the government told it to do--the misappropriation section of Justice Ginsburg’s opinion repeatedly quoted from or cited to the government’s brief and oral argument, almost always approvingly. She framed the case as one involving a “theory of liability for which the Government seeks recognition,” and adopted the central element of the government’s theory. In other words, she quite blatantly deferred to expert opinion.

Stephen M. Bainbridge & Mitu Gulati, How do Judges Maximize? (The Same Way Everybody Else Does--Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L. J. 83, 143 (2002). While perhaps not a “cut and paste job,” the Stoneridge opinion dutifully adopts every part of the Solicitor General’s argument, once again doing “what the government told it to do.” In its summary of arguments, the Solicitor General’s Brief states that:

A. The court of appeals in this case erred to the extent it held that Section 10(b) of the 1934 Act, 15 U.S.C. 78j(b), reaches only misstatements, omissions made while under a duty to disclose, or manipulative trading practices....
....
B. Although the court of appeals erred by concluding that petitioner had failed to satisfy Section 10(b)’s deception requirement, it nevertheless correctly upheld the district court’s dismissal of petitioner’s complaint, because petitioner did not sufficiently plead reliance on respondents’ deceptive conduct....
....
C. Allowing liability for a primary violation under the circumstances presented here would constitute a sweeping expansion of the judicially inferred private right of action in Section 10(b) and Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market....

Brief for the United States as Amicus Curiae Supporting Affirmance at 8-9, Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008) (No. 06-43). Perhaps Professor Bainbridge is correct that the Supreme Court does simply lack the institutional expertise to decide securities law cases, and therefore “quite blatantly defer[s] to expert opinion.” Bainbridge & Gulati, supra, at 143.

I still think it’s not a bad working hypothesis.