Judging Securities Law

Steve Bainbridge has a new post up on the Supreme Court’s securities law “jurisprudence.” He seeks to rebut the arguments contained in Mark Loewenstein’s draft article (on SSRN here) to the effect that the Supreme Court’s “much-heralded ‘new federalism’ philosophy of the Supreme Court is not a factor in securities law cases or in business cases generally.” I’ve just downloaded the paper (but haven’t yet read it), so my reactions here are just to Bainbridge’s argument.

Basically, Bainbridge says that the Supreme Court should not be expected to demonstrate a coherent federalist philosophy in its securities cases. Indeed, expecting any coherent philosophy would be a surprise: (a) such cases come before the court rarely because the court believes them to be boring and therefore not cert-worthy; and therefore (b) the court doesn’t get the repeat-player experience or know how that would polish their work . (This summary flows from Steve’s article, co-authored with Mitu Gulati, on the bounded rationality of securities decision making. I have recently criticized this view, arguing that securities law, at least in the lower federal courts, does “push” a coherent model of “good” shareholder behavior.)

However, I do agree that the Supreme Court is institutionally pretty weakly positioned to govern federal securities law. This institutional weakness arises, however, not just out of a lack of interest by the justices. Supreme Court clerks and Supreme Court practitioners both are traditionally conlaw folks, not experts in behavioral finance, comparative financial regulation and accounting, state blue sky laws, or any of the other hot issues likely to be litigated before the court in the next decade. Even “easy” issues, like materiality, can thus be made into a mess. See Basic v. Levinson (sheesh).

But criticisms of the Court’s work in securities cases may give its work in constitutional, criminal, tax and federal statutory cases too much credit. It is my experience, listening to colleagues who live with (i.e., teach) these cases on a daily basis, that the problems of incoherence, inattention to future consequences, lack of expertise in the foundational material, and triumph of rhetoric over craft that corporate scholars see in the Court’s work are quite common. Indeed, the federalism rhetoric that Bainbridge discusses is itself an example of a missing coherence, at least according to folks like Randy Barnett. So, what makes securities law exceptional? Is it just that the cases have more at stake in dollar terms, and are not, on first glance, as politically charged?