Corporate Governance

The Supreme Court, Rule 10b-5 and Matrixx v. Siracusano (Part 1)

By J Robert Brown Jr.

The NYT reportsed that the Roberts Court has evidenced a decidedly pro-business bias, with the Chamber of Commerce increasingly coming out on the winning side.  The article relied on a study by the Constitutional Accountability Center.   The study is here; the methodology here.  As the article noted:    

• The Roberts court, which has completed five terms, ruled for business interests 61 percent of the time, compared with 46 percent in the last five years of the court led by Chief Justice William H. Regnquist, who died in 2005, and 42 percent by all courts since 1953.

Not everyone agrees with this view.  Adam Pritchard at Michigan asserts that "[n]otwithstanding charges that the Roberts Court is 'pro business', the Court has not charted a consistent course favoring corporate defendants."

Its beyond the scope of this Blog to consider the Court's attitude towards business in every context.  But in the securities area, the Court has intruded into the area with far greater regulatory than in the past.  This can be seen from the large number of suits in the area taken by the Court.  They include Tellabs, Stoneridge, Merck, Matrixx, and Janus.  The number of cases taken this decade in the securities fraud area dwarf the 1990s. 

Moreover, some Justices have evidenced particular interest in the area.  Justice Roberts in particular went so far as to unrecuse in Stoneridge in a case that could conceivably have come out in favor of shareholders.  (With Justice Breyer also recused, the case would have been decided on the basis of Justice Alito's vote, an uncertainty at that point).  

What then does this tell us about the Court's attitude towards securities cases?  While the Court has taken a significant number of these cases (some involving procedural issues such as the statute of limitations), a consistent pro-business majority has not yet emerged.  Such a majority did come together in Stoneridge, a case that turned, in the end, not on the law but on an affirmative policy decision to limit the reach of Rule 10b-5.  

On the other hand, investors have won some of these cases.  Merck is a victory for investors; so is Tellabs.  Shareholders will probably lose Janus.  Which brings us to Matrixx, a case that will be argued tomorrow. The Court accepted certiorari in Matrixx to reexamine the standard of materiality under Rule 10b-5.  The Court did so even though there was no real conflict in the law and the existing Northway/Basic test has functioned with little difficulty for more than a quarter of a century. 

We will discuss the case in the next post.

Full post as published by The Race to the Bottom on January 10, 2011 (boomark / email).