The Regulatory State, FinReg And "Private Attorneys General"
Posted on Mon Apr 26, 2010 at 06:14:13 AM EST
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One of the most unfortunate convergences in legal theory has been that private civil litigation is merely a "racket for lawyers" with no redeeming social value. I find myself guilty of that thinking myself. And yet it was not always so. Many, if not most, legislation which intended to reform and regulate commerce, included private litigation as part of the regulatory process. The phrase private attorneys general used to have resonance. Today, "tort reform" is the "cheap slogan" that has trumped the concept.
On the FinReg debate, one of the ideas being bandied about is making it easier to sue the rating agencies. Paul Krugman writes about it today:
The bill now before the Senate tries to do something about the rating agencies, but all in all it’s pretty weak on the subject. The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in “knowing or reckless failure” to do the right thing. But that surely isn’t enough, given the money at stake — and the fact that Wall Street can afford to hire very, very good lawyers.
Well, it's less about the "very, very good lawyers" and more about a Supreme Court that has basically rejected the "private attorneys general" concept. And not just the usual suspects. Consider for example, Tellabs v. Makor, where Justice Ginsberg wrote the majority opinion and where only Justice Stevens was in the dissent (more on that later.) Read , especially on the PLEADING requirements for scienter:
Private securities fraud actions, however, if not adequately contained, can be employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U. S. 71, 81 (2006) . As a check against abusive litigation by private parties, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737.
Exacting pleading requirements are among the control measures Congress included in the PSLRA. The Act requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e.,the defendant’s intention “to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U. S. 185 , and n. 12 (1976); see 15 U. S. C. §78u–4(b)(1),(2). This case concerns the latter requirement. As set out in §21D(b)(2) of the PSLRA, plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U. S. C. §78u–4(b)(2).
State of mind, as you can imagine, is not easily susceptible to proof at any stage, but at the pleading stage, it can seem impossible. The PSLRA was pretty daunting. But Justice Ginsburg's opinion made it worse:
Congress left the key term “strong inference” undefined, and Courts of Appeals have divided on its meaning. In the case before us, the Court of Appeals for the Seventh Circuit held that the “strong inference” standard would be met if the complaint “allege[d] facts from which, if true, a reasonable person could infer that the defendant acted with the required intent.” 437 F. 3d 588, 602 (2006). That formulation, we conclude, does not capture the stricter demand Congress sought to convey in §21D(b)(2). It does not suffice that a reasonable factfinder plausibly could infer from the complaint’s allegations the requisite state of mind. Rather, to determine whether a complaint’s scienter allegations can survive threshold inspection for sufficiency, a court governed by §21D(b)(2) must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff, as the Seventh Circuit did, but also competing inferences rationally drawn from the facts alleged. An inference of fraudulent intent may be plausible, yet less cogent than other, nonculpable explanations for the defendant’s conduct. To qualify as “strong” within the intendment of §21D(b)(2), we hold, an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.
Justice Ginsburg turned standard federal Rule 12(b)(6) burdens on their head here. Generally speaking, on a motion to dismiss, all inferences are drawn in favor of the plaintiff. Here, Ginsburg created a standard that a plaintiff's theory must be "at least as compelling as any opposing inference of nonfraudulent intent." At the pleading stage, this is an impossible standard.
Justice Stevens, in his lonely dissent, captured the problem:
As the Court explains, when Congress enacted a heightened pleading requirement for private actions to enforce the federal securities laws, it “left the key term ‘strong inference’ undefined.” Ante, at 2. It thus implicitly delegated significant lawmaking authority to the Judiciary in determining how that standard should operate in practice. [. . .] The basic purpose of the heightened pleading requirement in the context of securities fraud litigation is to protect defendants from the costs of discovery and trial in unmeritorious cases.
(Emphasis supplied.)Therein lies the rub for me. Determining what is an "unmeritorious case" at the pleading stage is most times impossible. Indeed, many times, it is impossible to tell without a trial. Indeed, the Supreme Court, unarmed with a PSLRA in the antitrust context, created its own law of antitrust summary judgment to block "privates attorneys general" in the antitrust context. [Full disclosure: I lost an appeal in this area that still rankles.]
Here armed with the PSLRA, the Supreme Court, "Left" and "Right," guts the "private attorneys general"concept. Stevens' dissent demonstrates the absurdity:
Because of its intrusive nature, discovery may also invade the privacy interests of the defendants and their executives. Like citizens suspected of having engaged in criminal activity, those defendants should not be required to produce their private effects unless there is probable cause to believe them guilty of misconduct. Admittedly, the probable-cause standard is not capable of precise measurement, but it is a concept that is familiar to judges. As a matter of normal English usage, its meaning is roughly the same as “strong inference.” Moreover, it is most unlikely that Congress intended us to adopt a standard that makes it more difficult to commence a civil case than a criminal case.
(Emphasis supplied.) Any litigator who has ever been involved in discovery has to scoff at the SCOTUS' concern for the privacy interest of well heeled executives. Litigation is by its very nature incredibly intrusive. If "privacy" is a concern, then write better discovery rules. (Indeed, if privacy is such a concern, ENFORCE the 4th Amendment against the State. But I digress.)
Most telling is the example Stevens uses to demonstrate his "probable cause" standard:
There are times when an inference can easily be deemed strong without any need to weigh competing inferences. For example, if a known drug dealer exits a building immediately after a confirmed drug transaction, carrying a suspicious looking package, a judge could draw a strong inference that the individual was involved in the aforementioned drug transaction without debating whether the suspect might have been leaving the building at that exact time for another unrelated reason.
Stevens appeared to be trying to make a telling point to his colleagues on how their view of "probable cause" is more expansive than their view of the possibility that white collar executives might have engaged in wrongdoing. But he ignores the more pertinent point it seems to me -- that the State has investigative resources and rights that a private litigant can not even imagine.
In short, the Court and the Congress have rejected the concept of "private attorneys general." Fine. Then what can we do to strengthen the regulatory state? Write more toothless laws? "Strengthen" regulation? Better fund government regulators?
Krugman writes "doing nothing isn’t an option." Fine. Do what then?
Speaking for me only
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