Posted 9:03 AM by Robert

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.

Posted 8:51 PM by Robert

German Pope?

Joseph Cardinal Ratzinger of Germany became Pope Benedict XVI today (Tuesday). It has been widely reported in the English-speaking world that he is the first German pope since Victor II (1055-1057).

But is he?

Whether Victor II was the last German pope depends on how one interprets nationality - a curious issue since "Germany" as we know it did not exist in the middle ages. What did exist was the German Empire. The last non-Italian pope was Hadrian VI (1522-1523), born in Utrecht which was then part of the German Empire. In Germany, he is generally considered German, in Holland, Dutch. And, as Taranto has pointed out, according to this list, Joseph Ratzinger is the first pope since Adrian Dedal (Adrian VI's pre-pope name) whose surname ends with a consonant. (Interestingly, the list also reveals that Benedict XIV's (Nov 12, 1425-?) pre-pope surname, Bernard Garnier, also ended in a consonant - but he was an anti-pope!)

Hadrian VI's predecessor and namesake, Hadrian IV, was the only "English" pope. His pre-pope surname (he was origially named Nicholas Breakspear) also ended in a consonant - just for the record.

Posted 9:57 AM by Robert

Legislate In Haste And Hysteria, Repent At Leisure

From the Wall Street Journal:

[W]e already know is that [Sarbanes Oxley (Sox)] is more burdensome than its critics imagined. The most notorious part of the law is Section 404... Section 404 demands that companies demonstrate that their "internal controls" -- from computer facilities to their chain of command -- are sound enough to prevent fraud. ... Section 404 makes no distinction between internal controls that matter and those that don't. ... Worst of all, 404 forces companies to re-document their efforts every year, regardless of circumstances. No surprise, then, that the number of companies missing financial filing deadlines has at least doubled compared with a year ago. ... One conservative estimate puts the national 404 tab at $35 billion, or some 20 times what the SEC predicted. ... The American Electronics Association estimates that while Section 404 costs the average multibillion-dollar company about 0.05% of revenue, the figure can approach 3% for small companies.

One result is that many companies are rethinking their decision to tap the public equity markets -- 21% of all those surveyed in a 2004 Foley and Lardner study. Foreign companies are threatening to delist from U.S. stock exchanges...

The greatest Sox irony is that its main beneficiaries are the same big accounting firms. ... The feds killed Arthur Andersen... but its offending partners simply scooted to one of the other firms and are laughing all the way to their new vacation homes. The tort bar also stands to gain ... securities lawsuits seeking class-action status was up 16% in 2004 ... Internal controls accounted for only 8% of fraud detection, or less than half of the 18% detected "by accident."

The larger issue here is balancing shareholder confidence against the business risk-taking that creates jobs and wealth. ... Turnover among Fortune 500 chief financial officers -- who may incur steep fines and even criminal penalties if even the slightest thing goes wrong -- was up 23% in 2004, a sign that the smartest executives may realize they don't need the Sox hassle. ...

Posted 6:47 PM by Robert

Apples ... Oranges ...

From the Timbro, June 2004 study EU versus USA by Fredrik Bergström and Robert Gidehag:

IF THE EU WERE A PART of the United States of America, would it belong to the richest or the poorest group of states?

At the beginning of the 1990s, there was no need to ask. Europe’s economic future was a subject of growing optimism. Productivity growth had for some decades been higher than in other countries of similar standing, and that growth was now going to be hugely accelerated by the elimination of trade barriers and the closer economic integration resulting from the Single Market. The EU as an institution was – and was undoubtedly seen as – a vehicle for growth and economic liberalisation. In other words, the EU was able to do what politicians in several member countries had wished for but had failed to achieve: to increase economic openness, to strengthen the process of competition, and harness the political process behind a liberal reform agenda.

Today, the perspectives on the EU, and the outlook on its future, are radically different. Economic growth during the 1990s never became what many had wished for. Some countries performed reasonably well, most notably Ireland, but on the whole the EU was lagging far behind other countries during the whole decade. Productivity growth decreased and by mid-decade the EU was running behind the US in this respect. The process of convergence in productivity, a much talked-about process since the 1970s, had once again become a process of divergence.

The Timbro study begins with comparisons of per capita GDP, which the study correctly notes is probably the best measure of comparative wealth - although it is not a perfect measure. While per capita GDP does not include some aspects of what some people might consider to be included in overall "wealth," such as political freedoms, environmental quality and government-enforced leisure - GDP does include the value of government services - including welfar spending. For some reason, it is curiously common for skeptics of such trans-border studies to deny that GDP includes the value of European-style welfare state programs.