Man Without Qualities

Wednesday, April 20, 2005

9-To-0 Against The 9th, Again

Defenders of the often almost inconceivably incompetent and willful United States Ninth Circuit Court of Appeals are loathe to acknowledge the now huge collection of cases in which the Supreme Court reverses the Ninth Circuit without a single Supreme Court Justice in dissent. But that collection is there, and it is rapidly expanding all the time - and not just in cases dominated by an apparent "political" element. Today brings another such example: Dura Pharmaceuticals, Inc. V. Broudo reverses (without dissent) a unanimous Ninth Circuit panel opinion. The Ninth Circuit panel included two usual class clowns - Harry Pregerson and Stephen Reinhardt - but left the actual decision writing to Glenn L. Archer, Jr. who was placed on the obscure Federal Circuit (not the D.C. Circuit, but the other lower US Appeals Court that sits in Washington D.C.) by President Reagan. The now-overturned Ninth Circuit decision had held that an accusation that a company's misrepresentations caused an inflated share price was itself sufficient to maintain a lawsuit alleging fraud under federal securities law - without any need for a plaintiff to provide a defendant with some indication of the loss and the causal connection between the misrepresentation and loss that the plaintiff has in mind. Put another way: where a plaintiff buys stock in a "stock bubble" in which all or many stock pricess are inflated, the Ninth Circuit decision would have allowed a plaintiff to (1) maintain an action against the issuer merely by alleging that the price of the plaintiff's stock was "inflated" (a formality, since by assumption all or many stock prices satisfy this condition) and that the plaintiff relied on some misrepresentation made by the issuer, even if that misrepresentation played no material role in creating the "inflated" price, and (2) obtain damages from the issuing company equal to the entire difference between the inflated and non-inflated price, if any material misrepresentation were shown, even if the misrepresentation on which the plaintiff relied had nothing to do with the inflated price. In other words, the Ninth Circuit decision would have been "stock bubble insurance" for plaintiffs. Of course, the other investors in the issuer - including its other shareholders - would have been left holding the insurance bag. This decision would have all but restored the old Lerach trick of suing every newly-public company whose stock price dipped - a trick Congress expressly and unambiguously legislated against with the Private Securities Litigation Reform Act of 1995 (the PSLRA). In fact, the Ninth Circuit decision would have hugely exacerbated and expanded the Lerach trick with the very statute Congress passed to shut that trick down.

The Dura district court understood that Congress had foreclosed the old Lerach trick, and tossed the suit out under the PSLRA. Every federal appeals court that had considered the issue agreed with the district court, indeed one can almost feel the Supreme Court exasperation with the Ninth Circuit as Clinton appointee Breyer deadpans:
Because the Ninth Circuit's views about loss causation differ from those of other Circuits that have considered this issue, we granted Dura's petition for certiorari. Compare [the Ninth Circuit decision] with, e.g., Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F. 3d 189, 198 (CA2 2003); Semerenko v. Cendant Corp., 223 F. 3d 165, 185 (CA3 2000); Robbins v. Koger Properties, Inc., 116 F. 3d 1441, 1447-1448 (CA11 1997); cf. Bastian v. Petren Resources Corp., 892 F. 2d 680, 685 (CA7 1990). We now reverse.
What Justice Breyer does not mention is that the Ninth Circuit makes no attempt whatsoever to distinguish or explain why its opinion should diverge so wildly from those of the other federal appeals courts, other than to note that the Ninth understands that it is off on its own frolic, and doesn't give a hoot when it says (in footnote 4): By contrast, other circuits are less favorable to plaintiffs and do require demonstration of a corrective disclosure followed by a stock price drop to be alleged in the complaint.

But Justice Breyer is scathing once he gets into the opinion itself:

For one thing, ... [t]he most logic alone permits us to say is that the higher purchase price will sometimes play a role in bringing about a future loss. It may prove to be a necessary condition of any such loss, and in that sense one might say that the inflated purchase price suggests that the misrepresentation (using language the Ninth Circuit used) "touches upon" a later economic loss. Ibid. But, even if that is so, it is insufficient. To "touch upon" a loss is not to cause a loss, and it is the latter that the law requires. 15 U. S. C. §78u-4(b)(4).

For another thing, the Ninth Circuit's holding lacks support in precedent. ... Given the common-law roots of the securities fraud action (and the common-law requirement that a plaintiff show actual damages), it is not surprising that other courts of appeals have rejected the Ninth Circuit's "inflated purchase price" approach to proving causation and loss. ... We cannot reconcile the Ninth Circuit's "inflated purchase price" approach with these views of other courts. And the uniqueness of its perspective argues against the validity of its approach in a case like this one where we consider the contours of a judicially implied cause of action with roots in the common law.

Finally, the Ninth Circuit's approach overlooks an important securities law objective. The securities statutes seek to maintain public confidence in the marketplace. ... But the statutes make these latter actions available, not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause. ... The statute thereby makes clear Congress' intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss. By way of contrast, the Ninth Circuit's approach would allow recovery where a misrepresentation leads to an inflated purchase price but nonetheless does not proximately cause any economic loss. That is to say, it would permit recovery where these two traditional elements in fact are missing.

So there you have it: Justice Breyer, a Clinton appointee and expert in regulation, says that the Ninth Circuit (1) overturned a correct district court opinion, (2) pointlessly broke with every other federal appeals court considering the issues, (3) defies logic, (4) is unsupported by precedent, (5) gets the objectives of the federal securities laws so wrong that the Ninth Circuit misconstrues those laws to be a huge social insurance system against stock market losses and (6) would allow suits without causation and loss in clear violation of controlling statutory language. And every single Supreme Court Justice agrees with him.

This is quite an accomplishment on the part of the Ninth Circuit! A reasonably bright student after the first three weeks of law school couldn't have done any worse. And let's not forget that the PSLRA was enacted because Congress thought that law suits of the type the Ninth Circuit would again authorize (and expand) were gnawing at the most important supports for the economy of the West Coast and other technology centers. Yet the Ninth Circuit did not even bother to give this ludicrous 3-judge decision an en banc review by a larger panel of that court. In other words, the Ninth Circuit thought it had bigger fish to fry than enforcing Congress's will to protect the most important supports for the economy of the West Coast.

Don Luskin hilariously notes that Paul Krugman and Brad DeLong were shillers of overpriced internet stocks back in 2000. So those two "economists" should be very happy with the new Supreme Court decision. Which all goes to show that every silver lining has a little cloud.

UPDATE: The Wall Street Journal scribes an interesting editorial today linking Dura with some of the excesses of the post-Enron "reform" and enforcement actions:
Which brings us to tomorrow's sentencing in a federal court in Houston of Daniel Bayly, the one-time Merrill Lynch investment banking chief convicted last year of fraud for his role in an energy deal with Enron. ... The more immediate issue is the Enron prosecutors' demands that Mr. Bayly receive a more severe sentence based on a bogus theory of "shareholder loss" long rejected in civil court. Whatever the sins of Enron and the others, this does not justify making bad law. ... The Enron prosecutors are ... taking the novel position that the simple fact that some shareholders bought Enron stock at an "inflated price" equals a loss. ... Nor is there much support for this leap across established law in the rest of the system. Just yesterday, the Supreme Court unanimously ruled in Dura Pharmaceuticals v. Broudo that plaintiffs who claim securities fraud must prove a connection between a misrepresentation and an investment's subsequent decline in price. As it happens, the Department of Justice and the Securities and Exchange Commission filed a joint brief in the Dura civil case in support of the proof-of-causation position.

For good reason. Blowing apart well-established, reasonable limits on corporate liability is a sure way to suppress legitimate risk-taking.
So the madness doesn't stop with the Ninth Circuit. Over reaching prosecutors are also apt to catch the fever. Of course, one function of courts is to contain fevered prosecutors. The Ninth Circuit doesn't seem able to fulfill that role wthout strict Supreme Court supervision.

Thanks to Don Luskin for drawing my attention to the WSJ editorial.

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