Superstar Judges as Entrepreneurs: The Untold Story of Fraud-on-the-Market

Margaret V. Sachs, University of Georgia School of Law

Originally uploaded at SSRN.


This Article unites two disparate subjects of profound interest to legal scholars. One is fraud-on-the-market, reaffirmed late last term in Erica P. John Fund, Inc. v. Halliburton Co. (Halliburton II). Probably the most important claim in the securities litigation universe, fraud-on-the-market is the sine qua non of almost every securities class action that is filed. The other subject consists of the work of Judges Frank Easterbrook and Richard Posner, the “superstars” of the current federal appellate bench.

My purpose is several-fold: first, to show that fraud-on-the-market’s evolution, up through and culminating in Halliburton II, has been driven in significant measure by an unheralded series of contributions by Judge Easterbrook, Judge Posner, or a combination; and second, to reveal, by the use in part of an empirical spotlight, the strategies that they employed to bring their contributions to life.

Judges Easterbrook and Posner influenced fraud-on-the-market by dominating the development of Rule 23(f) of the Federal Rules of Civil Procedure. Effective beginning more than ten years after Basic, Rule 23(f) offers a mechanism for appealing certification orders, where fraud- on-the-market issues tend to arise.

Their domination of Rule 23(f)’s development has had three dimensions. First, Judge Posner played a role in the Rule’s becoming law. Second, he or Judge Posner authored the Seventh Circuit’s first seventeen reported Rule 23(f) opinions. Those opinions, which urged active use of the Rule in general and expressed antipathy towards fraud-on-the-market in particular, helped to fuel a series of rulings in other circuits that were hostile to fraud-on-the-market. Third, Judge Easterbrook thereafter wrote a Rule 23(f) opinion supportive of fraud-on-the-market, which influenced the Supreme Court’s approach in Halliburton II and elsewhere.

Judges Easterbrook and Posner advanced their views by employing a variety of strategies, including describing precedent with less than complete accuracy to cornering the market on the authorship of Rule 23(f) opinions in their circuit. By identifying these and other strategies, I hope to highlight the importance of the superstars as entrepreneurs, an area of inquiry that offers to enlighten us greatly about how legal doctrine develops.

Two perspectives have inhibited the exploration of the superstars’ entrepreneurship. One holds that essentially all judicial activity tends to be all strategy, all the time. This perspective fails to appreciate the singular role played by the superstar judges in the formulation of the legal canon and the consequent importance of focusing on their strategies. The other perspective regards entrepreneurship as noteworthy only to the extent that it occurs at the Supreme Court. This view ignores the fact that the superstar judges approach Supreme Court justices in terms of the degree of influence that they wield.