Ignoring Justice Antonin Scalia's complaint (quoting Judge Harold Leventhal) that the use of legislative history to interpret a statute is like "entering a crowded cocktail party and looking over the heads of the guests for one's friends," the judges in the Business Roundtable case looked through the "crowded" administrative SEC record to find evidence friendly to Wall Street's cause, while dismissing as "unpersuasive" the economic evidence produced by the SEC to justify the rule. Thus, the judges' reasoning in Business Roundtable trumped that of the SEC, the most expert agency on corporate governance issues.
The judge-made law in Business Roundtable harks back to the Supreme Court's 1905 decision in Lochner v. New York and its progeny, wherein the Court's conservative justices substituted their own laissez-faire economic ideology for that of Progressive-era state legislatures and later for that of the early New Deal Congress. It was only the "switch in time that saved nine" — namely, Justice Owen Roberts' defection from the conservative bloc to the Court liberals — that ended judicial second-guessing of legislative actions and possibly saved the Court from Roosevelt's "court-packing" plan designed to add six New Deal justices.
Encouraged by the ruling in Business Roundtable, Wall Street trade associations have since filed two more major challenges to Dodd-Frank that rely heavily on the argument that financial regulators should be required to conduct these rigged cost-benefit analyses. The crucial question is: How will the Roberts Court respond to future challenges to Dodd-Frank on those grounds?
The Roberts Court's record on the review of financial regulations is mixed. When considering private parties' access to the courts to challenge securities laws, liberal justices have sometimes made it more difficult for these actions to be brought, as in Tellabs, Inc. v. Makor Issues & Rights, Ltd. (2007), whereas conservative justices have at times shown open-mindedness, as in Erica P. John Fund, Inc. v. Halliburton Co. (2011).
Two recent cases dealing with the substance of private rights of action under the securities laws are, however, problematic. In Janus Capital Group Inc. v. First Derivative Traders (2011), Justice Clarence Thomas, writing for himself and the four other conservative justices, defined the word "make" in an SEC rule to mean that an investment company could not be sued for the false statements in a subsidiary's mutual fund prospectus, even if it helped prepare the document, because the parent company did not "make" them; instead, the subsidiary did when it filed the prospectus with the SEC. To reach this conclusion, Justice Thomas relied heavily on his choice of competing dictionary definitions of "make." In dissent, Justice Stephen Breyer noted: "Neither common English nor this Court's earlier cases limit the scope of [the word] to those with 'ultimate authority' over a statement's content." Thus the Roberts Court twisted the word "make" to allow an "untrue statement of material fact" to go unsanctioned, just as the D.C. Circuit Court, in its Business Roundtable decision, twisted the hortatory language of Congress to require regulators to perform a pro-Wall Street cost-benefit analysis.
In Morrison v. National Australian Bank, Ltd. (2010), Justice Scalia, writing for himself and his four conservative colleagues, threw out a private citizen's suit against the Australian bank on the grounds that it was outside the reach of U.S. securities laws, even though the alleged fraud was committed by the bank's wholly owned U.S. subsidiary, a Florida-based mortgage company. Justice Scalia held that the Australian plaintiff couldn't bring suit in a U.S. court because the stocks claimed to be fraudulent had been purchased on the Australian stock exchange, and the governing statute did not "clearly express" Congress' "affirmative intention" to apply the law extraterritorially.
Wall Street has repeatedly read Morrison as broadly suggesting that if the underlying financial transactions are executed by a wholly owned subsidiary of a foreign company, the financial transactions cannot be regulated under Dodd-Frank. Accordingly, Wall Street banks and their U.S. corporate customers have threatened to execute as many of their over-the-counter derivatives transactions as possible through foreign subsidiaries in order to evade Dodd-Frank. Of course, U.S. taxpayers will in the end be asked to bail out the U.S. parent companies, just as they rescued AIG, whose undercapitalized bets were executed by a single British subsidiary in London. Never mind that Congress, in passing Dodd-Frank, responded to Morrison by clearly stating its "affirmative intention" to apply important parts of the Dodd-Frank extraterritorially.