Abstract

In his Texas Gulf Sulphur concurrence, Judge Henry J. Friendly coun- seled the federal district courts concerning the numerous pending satellite class actions that had been filed under Section 10(b) of the Securities Ex- change Act and Rule 10b-5. In the course of so doing, he argued forcefully that private Rule 10b-5 litigation should be curtailed. Finding his argument convincing, the Supreme Court issued four major decisions restricting the Rule between 1975 and 1994, while nonetheless expanding it in Basic Inc. v. Levinson. Congress responded by blessing both aspects of the Court’s jurisprudence – imposing its own set of restrictions in the Private Securities Litigation Reform Act of 1995 (the PSLRA) and the Securities Litigation Uniform Standards Act of 1998 as well as deciding to leave Basic intact after contemplating an override.

Emboldened by Congress’s double ratification, the Court has since restricted private Rule 10b-5 litigation on three separate occasions with monumental consequences. Judge Friendly would not have approved of these restrictions, since they rest on misreadings that ought to have been discerned. In Morrison v. National Australia Bank Ltd., for example, the Court extracted from Section 10(b) a “transactional test” designed to curb the Section’s extraterritorial reach. The test assumes that Section 10(b) ex- tends to over the counter transactions due to the unavailability of exchange venues for the transactions in unregistered securities to which the Section refers. But that analysis ignores the reality that exchanges could serve as hosts for such transactions when Section 10(b) was enacted, as the face of the original Exchange Act makes apparent.

Thereafter, in Janus Capital Group, Inc. v. First Derivative Traders, the Court imposed an “ultimate authority test” to determine who can “make” a materially misleading misstatement or omission that violates Rule 10b-5(b) and Section 10(b). The test typically attributes “ultimate authority” to a single maker, thereby conflicting with the PSLRA’s proportionate liability provision. That provision assumes that many cases will involve multiple violators by deeming each violator liable only for the percentage of damage that the jury found it to have caused.

Finally, in California Public Employees’ Retirement System v. ANZ Securities, Inc., the Court denied securities class action plaintiffs access to an equitable tolling doctrine available to their antitrust counterparts. That denial assumed that when drafting the antitrust limitation provision, Congress knew that a “statute of repose” bars equitable tolling but that a “statute of limitation” does not. That assumption is flawed. Although Congress enacted the antitrust limitation provision in 1955, it did not become aware of the statute of repose/statute of limitation distinction until 1982, according to a Supreme Court decision issued three years prior to ANZ.

Any prospect of a course correction may turn on whether securities law academics become more vigilant overseers of the Court’s Rule 10b-5 restrictions. There is also the possibility that Justice Sonia Sotomayor, the only current Justice with experience on securities regulation’s “Mother Court,” will put that experience to use by guiding her fellow Justices through the securities law thicket.

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