Corporate Governance

Trainer v. Betz: The Supreme Court, Deregulation, and Rule 10b-5 (Part 2)

By J. Robert Brown

Why is the Supreme Court interested in this case?  It might be because Judge Kozinski and counsel for defendants have managed to convince the Court that the circuits are hopelessly divided and that the 9th Circuit is, as Judge Kozinski put it, again in left field.

But in truth, the case is not that important, as plaintiff demonstrates in her brief opposing the petition for ceriorari.  Instead, the case provides a nice vehicle for intervening into the law surrounding Rule 10b-5 and affirmatively limiting the reach of the provision.  This is effectively what Justice Kennedy promised in Stoneridge.  The Court's approach to Section 10(b) wouldn't be based upon the statutory language or common law notions but on restricting the provision's reach.  As Justice Kennedy noted:

• Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us.  Though it remains the law, the § 10(b) private right should not be extended beyond its present boundaries.

In other words, the Court is considering Trainer because it provides another opportunity to pin back a cause of action under Section 10(b).  The case presents an opportunity not only to revisit the 9th Circuit decision but to narrow the scope in all of the circuits.  The fact that most agree that the time period should begin only after inquiry notice and some reasonable period of investigation would not stop this Supreme Court from concluding that the statute begins to run at inquiry.  After all, this is the same Court, more or less, that overturned the law in all other circuits in Central Bank when it found that there was no aiding and abetting liability under Rule 10b-5.

Moreover, in asking for the Solicitor General's opinion now, the Court deliberately requested the opinion from the Bush Administration rather than holding over the case and waiting until the Obama Administration took office.  Why?  The brief that will be filed by the lame duck office in the Bush Administration is far more likely to provide the views the conservative rump of Justices wants to hear.  The brief is far more likely to be hostile to Rule 10b-5 and favor an interpretation that effectively shortens the statute of limitations.

We will follow this case and see what happens, particularly once the Solicitor General's Office weighs in.  This is the same office that was unduly influenced by Henry Paulson and the Department of the Treasury in the Stoneridge case.  The SEC wanted a brief filed upholding the position of investors; the deregulatory Treasury took the opposite view and won out.  We shall see if Treasury, despite its new found respect for regulation, pushes the Solicitor General to once again take a position hostile to investors.  We will further see whether the Supreme Court takes this case, in the waning days of the Bush Administration, as one more effort to rewrite the terms of Section 10(b).

Full post as published by The Race to the Bottom on November 19, 2008 (boomark / email).