Justice Lewis F. Powell, Jr., and the Counterrevolution in the Federal Securities Laws
Pritchard, A. C., Duke Law Journal
The confirmation of Lewis F. Powell, Jr., to the Supreme Court coincided with a dramatic shift in the Court's approach to securities law. This Article documents Powell's influence in changing the Court's direction in securities law. Powell's influence was the product of his extensive experience with the securities laws as a corporate lawyer, which gave him much greater familiarity with that body of law than his fellow Justices had. That experience also made him skeptical of civil liability, particularly class and derivative actions. Powell's skepticism led him to interpret the securities law in a consistently narrow fashion to reduce liability exposure and increase predictability. Powell also rebuffed the Securities and Exchange Commission's efforts to expand its reach, most notably in insider trading and takeover regulation. Powell's experience and interest brought a halt to the continuing expansion of the federal securities law.
TABLE OF CONTENTS Introduction I. Experience and Outlook II. Powell's Influence III. Curtailing Lawsuits A. The Construction of Rule 10b-5 B. Representative Actions C. Definition of Sale D. Private Rights of Action IV. Predictability A. Short Swing Profits under Section 16(b) B. Materiality C. Definition of Security V. The Takeover Wars A. Virginia's Anti-Takeover Statute B. The Williams Act C. Preemption VI. The SEC A. The SEC in the Supreme Court B. Insider Trading Conclusion
The 1960s witnessed a rapid expansion of the federal securities laws, primarily through broad interpretations of Rule 10b-5 of the Securities Exchange Act (1) by the courts and the Securities and Exchange Commission (SEC). Rule 10b-5--ostensibly a simple antifraud provision--threatened to become an overarching "federal corporation law." (2) In 1961, the SEC pioneered prohibitions against insider trading in its Cady, Roberts decision. (3) In 1964, the Supreme Court recognized the existence of a private cause of action for proxy violations in J.I. Case Co. v. Borak. (4) That recognition tacitly validated private suits under Rule 10b-5 as well, setting loose a plethora of decisions in which lower federal courts imposed a variety of duties on corporate officers and directors. In 1969, Louis Loss observed that "the great Rule 10b-5 ... seems to be taking over the universe gradually." (5) The lower courts could feel confident that their expansive interpretations would be upheld, given the Supreme Court's consistently broad reading of those laws from the time of their enactment. (6) This trend reached its apogee during the Court's October 1971 term, with two of the most expansive decisions. (7) The federal securities laws seemed poised to take over the law governing corporations entirely.
This trend dominated corporate securities law when Lewis F. Powell, Jr., was sworn in as an Associate Justice of the Supreme Court on January 7, 1972. Powell's swearing in coincided with an immediate sea change in the path of the federal securities laws. (8) Although the Burger Court has been described as "the counterrevolution that wasn't" in constitutional law, (9) that description does not fit securities law. By the time Powell retired from the Court on June 26, 1987, federal securities law had been confined. The threat to state corporate law had been beaten back, if only for a time. (10)
It would be an exaggeration to give Justice Powell sole credit for this retrenchment--other Justices wrote important opinions curtailing the growth of liability under the federal securities law." (11) And the threat of a federal incorporation was beaten back with the election of Ronald Reagan, which augured a renewed commitment to the governing role of the states. Nonetheless, it would be difficult to identify anyone who did more to limit the reach of the federal securities law than Powell. …