(Credit: Dan Brandenburg/iStockphoto.com)
Even prior to the presidential election, this had been an interesting and tumultuous year for securities litigators. The death of Justice Antonin Scalia in February 2016 left the U.S. Supreme Court with a 4-4 split and an uncertain future. In Delaware, there was a radical shift in merger litigation as the Chancery Court closed the door on nonmonetary disclosure-only settlements. The Securities and Exchange Commission brought a record number of enforcement proceedings and paid millions of dollars in whistleblower bounties, and the Department of Justice continued to target the individuals involved in corporate wrongdoing.
The election of Donald J. Trump, however, overwhelms all other trends and developments. Trump’s election was unanticipated by most experts, and it has created significant uncertainty. Almost daily, there are conflicting news reports concerning President-Elect Trump’s presumed intentions and legislative priorities. Few things are certain, but we can reasonably expect a number of changes that will impact Wall Street, securities litigation, and regulatory enforcement:
The Dodd-Frank Act. President-Elect Trump has vowed to dismantle the Dodd-Frank Act, which I described in 2010 as “the most sweeping financial legislation since the Great Depression.” Dodd-Frank was enacted in response to the 2008 financial crisis, and its regulatory requirements have proven onerous and controversial, particularly for the banking industry. Steven Mnuchin, the proposed nominee for Treasury secretary, has stated that his “number one priority” is to “strip back” Dodd-Frank.
The Trump administration’s efforts to alter or repeal the Act are likely to find support from Congressional Republicans. Texas Congressman Jeb Hensarling, who has been linked to the new administration, sought to repeal the Act earlier this year, stating that it “has failed.” Most Democrats would disagree with Congressman Hensarling’s assessment, and they are likely to fight to preserve key aspects of the law.
At this point, it is difficult to assess how much political capital the President–Elect is willing to expend in a battle over Dodd-Frank. At a minimum, we should expect rollbacks of restrictions on bank investment and lending activity, a slowdown in agency rule-making, and attempts to rein in or even eliminate the Consumer Financial Protection Bureau.
The Supreme Court. Over the last decade, the Supreme Court has devoted considerable attention to securities cases. The Roberts Court has altered the landscape of federal securities jurisprudence in numerous respects: narrowing the jurisdictional reach of the securities laws, limiting claims against secondary actors, redefining pleading and class certification standards, and addressing questions of materiality, causation, and the statute of limitations.
Justice Scalia authored many of the Court’s important business law decisions, including securities cases such as Morrison v. National Australia Bank, which limited the extraterritorial reach of the Securities Exchange Act. More importantly, Scalia wrote the majority opinion in a number of sharply-divided business cases decided by a narrow 5-4 or 5-3 vote, including Wal-Mart Stores v. Dukes, which curtailed employment class actions, and AT&T Mobility LLC. v. Concepcion and American Express Co. v. Italian Colors Restaurant, both of which strictly enforced business arbitration agreements.
In the aftermath of Justice Scalia’s death, there is considerable uncertainty about the future direction of the Court, including its approach to business litigation. Most experts had anticipated a Democratic victory in the presidential election, and the assumption had been that the Court would move to the left. Trump’s victory changes the calculus. Justice Scalia’s replacement is likely to share many of his conservative viewpoints, and the Republicans will regain their 5-4 majority. The dramatic shift will come after the next vacancy. Who knows when that might occur—Supreme Court justices are appointed for life, and there is a vacancy only when a justice retires or dies. But Ruth Bader Ginsburg is 83, Anthony Kennedy is 80, and Stephen Breyer is 78. Sooner or later, there will be a second vacancy, and the real fight will begin.
The Securities and Exchange Commission. On Nov. 14, 2016, Mary Jo White announced that she was stepping down as Chair of the SEC. White’s tenure will be remembered for her aggressive “broken windows” enforcement style, her efforts to require companies to admit wrongdoing in connection with SEC settlements, and the rise of the SEC whistleblower program. Chair White also presided over extensive Dodd-Frank rule-making, which may or may not survive her tenure. White’s departure is likely to bring significant changes to the SEC. Paul Atkins, a former Republican SEC commissioner and fierce Dodd-Frank critic, is reportedly leading Trump’s transition team assessing the SEC and other financial regulators. If Atkins is appointed to replace White, we can expect a rollback of Dodd-Frank rule-making, even if the act itself survives. Atkins is an outspoken critic of corporate financial penalties, which he believes further punish the shareholders who have been victimized by corporate fraud. Atkins has expressed a preference for holding individual corporate actors accountable for their actions. In that regard, Atkins’ prosecutorial preferences are consistent with those of the Obama Justice Department, which likewise has targeted individual wrongdoers engaged in corporate misconduct.
In 2005, Atkins argued that if “someone in the company cooked the books,” it is the individuals engaged in misconduct who should be held accountable. Ten year later, the Obama Justice Department announced new prosecution guidelines targeting individuals involved in corporate wrongdoing. Echoing Atkins’ earlier argument, Deputy Attorney General Sally Yates stated that “as a matter of basic fairness, we cannot allow the flesh-and-blood people responsible for misconduct to walk away, while leaving only the company’s employees and shareholders to pay the price.”
Perhaps there is common ground after all.