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News July 16, 2018 Issue

Expect Kavanaugh to Stay in Line with Supreme Court Securities Rulings

Should federal appeals court Judge Brett Kavanaugh be confirmed as a Supreme Court justice, as many commentators think likely, don’t expect him to rock the boat when it comes to rulings involving the nation’s securities laws. The high court has a long history of deciding securities law cases fairly narrowly, and Kavanaugh is unlikely to push the court one way or the other, legal and securities experts say.

"He has a reputation of being a conservative when it comes to the power of regulators," said Willkie Farr partner and former Division of Investment Management director Barry Barbash. "That reputation suggests that he would have voted with the majority on most of the recent cases involving rulemaking and other actions of the SEC." Some of those cases have included Lucia v. SEC involving the agency’s appointment of administrative law judges (ACA Insight, 6/25/18); Kokesh v. SEC, regarding the application of a statute of limitations on SEC disgorgement orders (ACA Insight, 6/12/17); Digital Realty Trust v. Somers, regarding whistleblower anti-retaliation (ACA Insight, 3/5/18); and Salman v. United States, regarding insider trading (ACA Insight, 12/12/16).

"I don’t think Kavanaugh will have much of an impact on securities and financial law cases," said Stern Tannenbaum partner Aegis Frumento. "The Supreme Court has not been ideologically split there. Consider that Justice Elena Kagan wrote Lucia, Justice Sonia Sotomayor wrote Kokesh, and Justice Ruth Bader Ginsberg wrote Digital Realty, while Justice Samuel Alito wrote Salmon. All but Lucia were unanimous decisions, and Lucia was a 7-2 split, so not close at all. Basically the liberal and conservative wings have come together (with some variations) on most of the securities cases in the past few years, and Justice Anthony Kennedy has always been with the majority. I doubt a Justice Kavanaugh would have voted any differently."

Georgetown University School of Law professor Daniel Langevoort expressed the view that "a Justice Kavanaugh would favor narrow interpretations of the law governing advisers, or others subject to the securities laws." An example of this from Kavanaugh’s own judicial history, he said, involved Lorenzo v. SEC. That case, which the Supreme Court has agreed to review, deals with the questions of whether an investment banker violated Rule 10b-5 under the Securities Exchange Act when he included a false and misleading message written by his boss in an e-mail he sent to potential investors. "The United States Court of Appeals for the District of Columbia Circuit ruled that it did, but Judge Kavanaugh dissented, wanting to read the law as to scheme liability narrowly to apply only where the fraud was ‘owned’ by the defendant, not simply transmitted," Langevoort said.

"Kavanaugh’s been on the side of limiting the role of the SEC," said University of North Carolina School of Law professor Thomas Lee Hazen, who described the judge as "a moderate conservative, a little bit more moderate than Justice Neil Gorsuch. Kavanaugh would not be terribly expansive in terms of expanding SEC authority."

Columbia Law School professor John Coffee said that "one of Kavanaugh’s most notable characteristics is his skepticism of administrative agencies, including the SEC. That agency has recently been losing in the high court (as in Lucia and Kokesh), and this will not change with Kavanaugh’s addition to the court He is not a game changer in this respect, but he adds to the majority bloc that distrusts agencies."

Kavanaugh’s chances

Kavanaugh’s appointment to the high court by President Donald Trump July 9 must be approved by a majority of the Senate before he can be sworn in. While the 100-seat Senate is currently in Republican hands and Kavanaugh’s appointment is expected to pass, the Republicans only have 51 members. Democrats have 47 seats, and independents have two, with those two caucusing with the Democrats.

While a "no" vote from one Republican, would leave the chamber with an even number of senators from each party, that tie would be broken by Vice President Mike Pence, a Republican. That means that Democrats would need to wean two Republicans into the "no" column to defeat Kavanaugh’s appointment. This is not impossible, as there are two centrist Republican senators, Susan Collins (R-ME) and Lisa Murkowski (R-AK), who news reports indicate might be winnable.

However, on the other side, there are several Democratic senators hailing from "red" states who Republicans are trying to woo in favor of the Kavanaugh nomination. These senators include Heidi Heitkampt (D-ND), Joe Manchin (D-WV), Joe Donnelly (D-IN),
Jon Tester (D-MT), and Claire McCaskill (D-MO).

Given the perceived stakes involved if Kavanaugh’s nomination is approved and he locks in a conservative majority on the Supreme Court, as well as some Democrats’ memory of the Senate’s failure to consider former President Barack Obama’s nomination of Judge Merrick Garland to the high court, the fight over the nomination is expected to be significant.

The high court and securities law

"The Supreme Court over the past 30 years or so has tended to interpret the federal securities laws fairly narrowly," said Barbash. One reason for this might be that most justices, while having extensive legal backgrounds, do not have similar experience in finance or in the markets, and are reluctant to issue broad rulings that may have unintended consequences.

"My sense of the Supreme Court on securities law cases," said Frumento, "is that they tend to be decidedly consistent" with the following rules:

  1. Read the statutes as they are written with minimal judicial interpretation, and so limit the SEC’s actions to more strictly conform to constitutional and statutory requirements;
  2. Limit the scope of private rights of action, and
  3. Interpret the statutes so as to provide bright line tests of compliance and minimize ambiguity.

"Even the ‘liberal’ justices seem to agree with these basic rules of decision, despite that they are all ‘conservative’ principles," he said. "So don’t look to Kavanaugh to tip any balances in this area of the law."

Being "conservative," Hazen said, "can sometimes simply mean a reluctance to overturn existing court precedents."