Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
Speaker 2: The Supreme Court's conservatives appear poised to give the president
Speaker 2: control over dozens of independent federal agencies. At oral arguments
Speaker 2: on Monday, they suggested they will allow President Trump to
Speaker 2: fire Rebecca Kelly Slaughter from the Federal Trade Commission, despite
Speaker 2: a law that says commissioners can only be fired for
Speaker 2: specific reasons. The liberal justices, like Sonya so to Mayor
Speaker 2: and Elena Kagan, expressed alarm at giving the president such
Speaker 2: unchecked authority over agencies that overlook crucial areas like nuclear energy,
Speaker 2: consumer products safety, and labor relations.
Speaker 3: You're asking us to destroy the structure of government and
Speaker 3: to take away from Congress its ability to protect its
Speaker 3: idea that the government is better structured with some agencies
Speaker 3: that are independent.
Speaker 4: So the result of what you want is that the
Speaker 4: president is going to have massive, unchecked, uncontrolled power not
Speaker 4: only to do traditional execution but to make law.
Speaker 2: But the conservative justice is, like Brett Kavanaugh and Neil Gorsuch, say,
Speaker 2: the real concern is Congress's creation of agencies that exercise
Speaker 2: executive power but can't be held accountable.
Speaker 5: Independent agencies are not accountable to the people. They're not elected,
Speaker 5: as Congress and the President are and are exercising massive
Speaker 5: power over individual liberty and billion dollar industries, whether it's
Speaker 5: the FCC or the FTC or whatever it might be.
Speaker 6: Tomorrow, we could have the Labor Commission, the Education Commission,
Speaker 6: the Environmental Commission, and rather than Departments of Interior and
Speaker 6: so forth.
Speaker 2: In allowing the president to fire the heads of independent agencies,
Speaker 2: the court would be overturning a ninety year old president
Speaker 2: called Humphreys executor that protects their independence. My guest is
Speaker 2: constitutional law expert William Traynor, a professor at Georgetown Law
Speaker 2: Bill tell us about the issues in Rebecca Slaughter's case
Speaker 2: against Trump for firing her.
Speaker 7: The issue before the screen Court is that Congress puts
Speaker 7: the limits on when the president and fire the heads
Speaker 7: of independent agencies. So an independent agency is like the
Speaker 7: Federal Trade Commission or the Federal Reserve. So really, since
Speaker 7: the start of the Constitution, Congress has imposed limits on
Speaker 7: when the president can fired these people. The question in
Speaker 7: the case is whether that's unconstitutional, Whether the president can
Speaker 7: fire the head of an independent agency for any reason,
Speaker 7: even if Congress has said they can only fire them,
Speaker 7: you know, if they're engaged in bad behavior. So this
Speaker 7: is a very big deal. So much of a government
Speaker 7: structure that protects people in different ways or regulates the
Speaker 7: economy is done through independent agencies. Congress has wanted to
Speaker 7: insulate them from total executive control, and the Supreme Court
Speaker 7: is deciding right now whether, in fact, the president has
Speaker 7: the kind of control that comes with being able to
Speaker 7: fire the leaders of the agencies.
Speaker 2: In these oral arguments, you often hear the Supreme Court
Speaker 2: justices say, well, that's a job for Congress. You know,
Speaker 2: that's not something that we should be interfering in. So
Speaker 2: why are they interfering here where Congress has set up
Speaker 2: these agencies and the rules.
Speaker 7: That's a great question. There had been so many times
Speaker 7: in which the Court is saying, this is a political matter,
Speaker 7: we shouldn't be deciding. But at the same time, the
Speaker 7: conservative justices of the Court are very dedicated to what's
Speaker 7: called the unitary executive theory, which means that the president
Speaker 7: is in total charge of the executive branch. So what
Speaker 7: they're saying here is Congress doesn't get to be involved.
Speaker 7: The president is in total charge of the executive branch,
Speaker 7: including what have historically been things like the independent agencies.
Speaker 7: That is kind of one of the core commitments that
Speaker 7: has really been at the basis of what Keef Justice
Speaker 7: Roberts has thought really going back to when he was
Speaker 7: a young attorney, and that's the same thing for most
Speaker 7: of the members of the whole conservative wing.
Speaker 2: What kind of concerns did the conservative justices express during
Speaker 2: the oral arguments about this ninety year old President Humphrey's executor.
Speaker 7: There are two things that we're seeing the conservative wing
Speaker 7: of the Court struggle with. One is they want the
Speaker 7: Federal Reserve to continue to be independent. They don't want
Speaker 7: the president to be able to fire somebody on the
Speaker 7: Federal Reserve. And they don't want that because you know,
Speaker 7: that would be terrible for the economy. If the Federal
Speaker 7: Reserve is setting interest rates just in order to help
Speaker 7: the president rather than to help the economy, that would
Speaker 7: be a disaster, be a disaster for the market, the
Speaker 7: disaster for the economy as a whole. So the conservative
Speaker 7: wing of the Court i think wants to overturn Humphrey's executor,
Speaker 7: but they're trying to come up with some rationale in
Speaker 7: which they can say the president can fire somebody on
Speaker 7: the FTC, but he can't fire somebody on the Federal Reserve.
Speaker 7: And they're going to be looking at the Federal Reserve
Speaker 7: later in the term. That's a big concern for them.
Speaker 7: So I think that animates all of the conservative justices
Speaker 7: of the Court. I think also, you know, what I'm
Speaker 7: hearing with the Chief Justices, what he's trying to do
Speaker 7: is to come up with some way in which there's
Speaker 7: some agencies where Congress can in fact limit the president's
Speaker 7: ability to fire people. And he's thinking about, you know,
Speaker 7: are the ones that are essentially kind of judicial in
Speaker 7: their function, and you know, that may be an area
Speaker 7: in which Congress can establish requirements or when the prison
Speaker 7: can terminate somebody, but that's not the Federal Trade Commission.
Speaker 7: Federal Trade Commission is not making the judicial decisions, you know,
Speaker 7: it's very much deciding executive type rules. So I think
Speaker 7: we're seeing two things on the conservative wing of the Court.
Speaker 7: One is they're trying to come up with some way
Speaker 7: in which they can say the President can fire somebody
Speaker 7: the FDC, but not at the FED. And I think
Speaker 7: the Chief is trying to come up with some way
Speaker 7: in which there's some type of agencies in which the
Speaker 7: president can be limited by Congress, but those would be
Speaker 7: ones that are really deciding kind of fuzzi judicial matters,
Speaker 7: not the FDC.
Speaker 2: The liberals painted a dire picture of what would happen
Speaker 2: if Trump wins here. Just as Soto Mayor said to
Speaker 2: the Solicitor General, you're asking us to destroy the structure
Speaker 2: of government. Do you think it's that serious.
Speaker 7: I think that's absolutely right. You know, we have had
Speaker 7: independent agencies which largely exists to protect peace with limited power,
Speaker 7: you know, and they've been in place really for one
Speaker 7: hundred years. And the idea is that these should be
Speaker 7: basically bipartisan or apolitical. They should not just be tools
Speaker 7: of the president. So what the court is considering right
Speaker 7: now is whether that whole kind of structure gets got it.
Speaker 7: So the stakes on this are huge.
Speaker 2: Well, President Trump wasn't specifically mentioned by name, two of
Speaker 2: the liberal justices, Elina Kagan and Katanji Brown Jackson, did
Speaker 2: make broad references to his firing of experts and dismantling
Speaker 2: of the Department of Education.
Speaker 4: That the more realistic danger here is that we'll have
Speaker 4: an education department, as authorized by Congress by law that
Speaker 4: won't have any employees in it.
Speaker 8: Having a president come in and fire all the scientists
Speaker 8: and the doctors and the economists and the PhDs and
Speaker 8: replacing them with loyalists and people who don't know anything
Speaker 8: is actually not in the best interest of the citizens
Speaker 8: of the United States.
Speaker 7: You know, what we're seeing right now is that in
Speaker 7: the Trump administration, you know, the independent agencies and all
Speaker 7: of the government washtoogs, there's an attempt to politicize them
Speaker 7: in a way that you know, we've never seen before.
Speaker 7: So the stakes are very different, and they're much higher.
Speaker 7: If Humphrey's executor has been overturned in President bush forty
Speaker 7: threes administration, the stakes would have been very different because
Speaker 7: President Bush was not focused on making independent agencies kind
Speaker 7: of the tool for his politics. But that's what we're
Speaker 7: seeing with President Trump, and that's why the stakes are
Speaker 7: so high. They've always been big, but in this administration,
Speaker 7: where there's such an attempt to kind of move away
Speaker 7: from scientific expertise and neutral decision making to control every
Speaker 7: part of the executive branch, the stakes are huge. And
Speaker 7: that's really part of what those three liberal justices we're questioning.
Speaker 7: You know, the other thing that they really are focusing
Speaker 7: in an honor. First of all, it's very very hard
Speaker 7: to come up with some line where you can say,
Speaker 7: Congress can limit the president's ability to fire the heads
Speaker 7: of the sec they can't fire at will the heads
Speaker 7: of the set. And I can't think of any kind
Speaker 7: of coherent way to distinguish those two cases. And that's
Speaker 7: one of the things that the liberals were pressing on.
Speaker 7: You know, I think they're also pressing on the history.
Speaker 7: If you look at the constitutions, the text of the
Speaker 7: constitutions doesn't say that the president gets to fire people
Speaker 7: in the executive rection. It doesn't deal with removal at all.
Speaker 7: So there's not a text that really helps the conservative
Speaker 7: way of the Court and Congress really, starting in the
Speaker 7: Washington administration, limited the president's ability to fire people running
Speaker 7: agencies kind of what was analogous to modern agencies at
Speaker 7: the time. So I think what the liberals on the
Speaker 7: Court are focusing on are the text, the original understanding,
Speaker 7: as well as the huge consequences of essentially giving the
Speaker 7: president the power to politicize all of the dependent agencies.
Speaker 2: I wonder what happens when there is a democratic president.
Speaker 2: Do the conservatives then try to limit the ruling they're
Speaker 2: expected to make.
Speaker 5: Here.
Speaker 7: You know, one of the reasons why I think that
Speaker 7: the Court should not overturn Humphrey's Executor is to the
Speaker 7: extent that you have any kind of political terms, you're
Speaker 7: giving a democratic president the power to do exactly what
Speaker 7: President Trump is doing, to politicize every independent agency in
Speaker 7: the way that that president wants, you know. And then
Speaker 7: how does a conservative court say, well, you know, Humphrey
Speaker 7: Executors is back. Once you establish a rule, you know,
Speaker 7: it applies to everybody. And that's something that they really
Speaker 7: have to think true because of the long term consequences,
Speaker 7: because I don't think they would feel comfortable, you know,
Speaker 7: with limiting a democratic president after they allow President Trump
Speaker 7: to fire people whenever he wants.
Speaker 2: So then you think this is the end of Humphrey's executs.
Speaker 7: Yeah, I think they will completely overrule Humphrey's Executor. I
Speaker 7: think the one question for me is whether the Chief
Speaker 7: comes up with some limiting principle in which if there
Speaker 7: are you know, quasi judicial independent agencies, then Congress can
Speaker 7: put limitations on the president's ability to fire. But you know,
Speaker 7: the basic point is I think they're going to overturn
Speaker 7: Humphrey's executive So I think what the Court will try
Speaker 7: to do is to say the president can't fire Jerome Power,
Speaker 7: can't fire at least a cook. But you know, I
Speaker 7: don't think that that is a coherent approach, you know,
Speaker 7: because I think it would be based on history, but
Speaker 7: the history doesn't support it.
Speaker 2: Well. We often see some strained interpretations of history from
Speaker 2: this court. Thanks so much, Bill. That's Georgetown law professor
Speaker 2: William Trainor coming up next. The Court grapples with caps
Speaker 2: on campaign spending. I'm June Grosso and you're listening to Bloomberg.
Speaker 2: The Supreme Court is considering a Republican led effort to
Speaker 2: erase yet another campaign finance regulation, this time the federal
Speaker 2: caps that limit how much political parties can spend in
Speaker 2: coordination with candidates. It's the latest in a line of
Speaker 2: cases where the conservative majority has upended congressionally enacted limits
Speaker 2: on raising and spending money to influence elections, and two
Speaker 2: hours of arguments on Tuesday showed the entrenched divisions between
Speaker 2: the liberal and conservative justices over campaign finance restrictions. Liberal
Speaker 2: Justice Sonya Sotomayor said that every time the Court interferes
Speaker 2: weakening campaign finance rules, it makes matters worse. While conservative
Speaker 2: Justice Brett Kavanaugh said that spending limits have hurt political
Speaker 2: parties in an era of unlimited spending by other organizations.
Speaker 3: You're telling us that Citizens United and McCutcheon ended up
Speaker 3: yes in ample find the voice of corporations, but diminishing
Speaker 3: another voice, that of the party. Now you want to
Speaker 3: now tinker some more and try to raise the voice
Speaker 3: of one party. Our tinkering causes more harm than it
Speaker 3: does good.
Speaker 5: That's the real source of the disadvantage. Right, you can
Speaker 5: give huge money to the outside group, but you can't
Speaker 5: give huge money of the party. So the parties are
Speaker 5: very much weakened compared to the outside groups.
Speaker 2: Chief Justice John Roberts, a potentially pivotal vote, said he
Speaker 2: didn't see much difference between contribution limits, which the Court
Speaker 2: has long upheld, and the caps on coordinated expenditures.
Speaker 6: It seems to me that that's kind of a fiction that, oh,
Speaker 6: you know, they're just coordinating expenditures, they're not making direct contributions.
Speaker 3: I don't know in substance what the difference is.
Speaker 2: Doing away with the caps would overturn a quarter century
Speaker 2: old precedent. In the same week, the court appears ready
Speaker 2: to overturn an ninety year old president and allow President
Speaker 2: Trump to fire the heads of independent agencies. Joining me
Speaker 2: is an expert on campaign finance reform, Richard Brofald, a
Speaker 2: professor at Columbia Law School. Rich Well, you start by
Speaker 2: explaining the federal caps on spending by political parties in
Speaker 2: coordination with candidates.
Speaker 1: So the Federal Russian Campaign Act, going back to the
Speaker 1: nineteen seventies when it was enacted in the aftermath of Artegate,
Speaker 1: places limits on donations to candidates, and it also places
Speaker 1: limits on donations to parties. It does something else, It
Speaker 1: places limits on how much parties can give to candidates,
Speaker 1: on the theory that donors, once they max out on
Speaker 1: how much the donor can give directly to a candidate,
Speaker 1: will then just give to a party to chanting the
Speaker 1: money to a candidate. So there's a limit on how
Speaker 1: much the parties can give to their candidates. And that
Speaker 1: comes up in two ways. One is a literal limit
Speaker 1: on contributions actually writing a check, but the parties are
Speaker 1: also allowed to engage in their own spending in support
Speaker 1: of candidates, and that's called coordinated expenditures. In other words,
Speaker 1: the party does the spending, they don't give the candidate
Speaker 1: a check, but they do spending to promote the candidate.
Speaker 1: Parties are allowed to do that, but the law places
Speaker 1: a limit on how much money they can spend supporting candidates.
Speaker 1: And again for the same idea that if there is
Speaker 1: no limit on how much they could support candidates through spending.
Speaker 1: Once again, donors who once they max out on the
Speaker 1: direct donation to the candidate would then just give to
Speaker 1: the parties and the parties could then use that money
Speaker 1: to basically support their candidates. But parties are allowed to
Speaker 1: do this in a way that other organizations are not.
Speaker 1: Packs are not allowed to coordinate at all with candidates,
Speaker 1: so parties get this extra permission to support the candidates directly,
Speaker 1: but with a cap on it, and it varies from
Speaker 1: state to state based on the population of the state.
Speaker 9: And what's going on in this case is.
Speaker 1: The National Republican Senate Campaign Committee and JD. Vance, who
Speaker 1: this case began was a Senator and a congressman from
Speaker 1: Ohio has since retired, have all brought suit challenging this
Speaker 1: limit on the ability of parties to coordinate their spending
Speaker 1: with candidates.
Speaker 2: And there's a longstanding precedent here.
Speaker 9: Almost twenty five years ago.
Speaker 1: The Supreme Court upheld this limit in a case called
Speaker 1: Colorado Republican Sided in two thousand and one, and the
Speaker 1: Court said yes, because of the danger of conduits a
Speaker 1: party serving as conduits for donor support, these limits make
Speaker 1: sense and are constitutional. Well, the Supreme Court is being
Speaker 1: asked basically now, is to overturn that decision.
Speaker 2: One of the concerns of the liberal justices was that
Speaker 2: lifting the limits on party spending would lead to quid
Speaker 2: pro quo bribery, so wealthy donors could bypass the individual
Speaker 2: contribution limits by donating through parties instead.
Speaker 1: I mean, that is the major concern of the liberal
Speaker 1: justices and of a call the campaign finance reform community
Speaker 1: as a whole, is that this will put another hole
Speaker 1: in the campaign finance laws and make it easier for
Speaker 1: wealthy donors to channel money to candidates. There's still limits
Speaker 1: on their ability to give directly, but this would enable
Speaker 1: them to give through the parties and so that money
Speaker 1: would still get to candidate.
Speaker 9: So yeah, that is the core concern.
Speaker 1: A second concern is, depending on how the Court writes
Speaker 1: this decision, it could be the green light for further
Speaker 1: challenges to other aspects of the campaign finance laws, depending
Speaker 1: on exactly how.
Speaker 9: They write this.
Speaker 1: So it's both upfront making it easier to channel money
Speaker 1: from donors to candidates, and also yet one more case
Speaker 1: eroding Congress's ability to place limits on campaign money.
Speaker 2: The Administration and the Republican's argument centers on free speech
Speaker 2: right as these campaign finance cases since Citizens United have done.
Speaker 1: The essential argument is that this is a limit on
Speaker 1: the ability of parties to speak, and that you don't
Speaker 1: need it. That the combination of disclosure laws, anti bribery laws,
Speaker 1: and limits on literally earmarking that's the term, that's use
Speaker 1: a donation that our donor gives to a party to
Speaker 1: be used for a candidate, that that's enough. That those
Speaker 1: three things banning bribes, requiring disclosure, and saying that when
Speaker 1: a donor gives a party a donation, they can't literally
Speaker 1: say this is going to candidate so and so, that
Speaker 1: that's enough, and that to go beyond that is to
Speaker 1: constrain the ability of parties as free speech actors, as
Speaker 1: First Amendment actors, to participate in political process.
Speaker 2: Just as Brett Kavanaugh said, you can give huge money
Speaker 2: to the outside group, but you can't give huge money
Speaker 2: to the party, and so the parties are very much
Speaker 2: weakened compared to the outside group.
Speaker 9: See talking about super PACs.
Speaker 1: And indeed, that is an argument that many people have
Speaker 1: raised who don't like this law, including people who might
Speaker 1: liberals or reformers. They say this law might have made
Speaker 1: some sense when it was first adopted, but given the
Speaker 1: proliferation of super PACs and other outside groups, we'd be
Speaker 1: better off if parties actually had a bigger voice, that
Speaker 1: parties can play a coordination function, that parties maybe can
Speaker 1: be a little less extreme than some outside groups, that
Speaker 1: parties have more of an interest in governance rather than
Speaker 1: being single issue and that actually if we could start
Speaker 1: roll over now that the outside groups have kind of
Speaker 1: unlimited voice, that anything that strengthens the parties is actually
Speaker 1: a good thing, and that you see many people who
Speaker 1: are not conservatives who are taking that position, who are
Speaker 1: not First Amendment absolutists, but think that in fact, the
Speaker 1: campaign financ system has gotten unbalanced and it would actually
Speaker 1: be good to strengthen the role of parties.
Speaker 9: And this could do that.
Speaker 2: There was also an argument about standing made by those
Speaker 2: defending the caps that JD. Vance, who's no longer a
Speaker 2: Senate candidate, doesn't have a stake in the case and
Speaker 2: thus there's no standing. And then there was a lot
Speaker 2: of discussion about, well, is he going to run for president?
Speaker 2: I don't think this standing argument is going anywhere, but
Speaker 2: it's interesting, so tell us about it.
Speaker 1: So Ramond Martinez was the man appointed by the court
Speaker 1: to defend the law when the government declined to do so,
Speaker 1: and he opened by saying, this case is a big deal.
Speaker 1: You know, anytime you're being asked to overturn a president
Speaker 1: that's twenty five years old, should be very hesitant, and
Speaker 1: you should make sure that this is a case that's
Speaker 1: jurisdictionally sound, and he basically said it's not. So this
Speaker 1: case was brought by some individuals JD. Vance and Congressman
Speaker 1: Cheveaux from Ohio, and also by the National.
Speaker 9: Republican Senate Committee.
Speaker 1: With respect to the two individuals, one of them is
Speaker 1: actually retired and no longer in politics, So that gets
Speaker 1: it down to Vance. And Vance has pretty clearly said
Speaker 1: I don't know if I'm running, or more than point,
Speaker 1: I don't currently have a plan to run, saying I
Speaker 1: might run, I might not run. So mister Martinez's argument was, well,
Speaker 1: this case isn't right. We don't know if he's running,
Speaker 1: so there's no candidate here to bring it, and therefore
Speaker 1: there's no plaintiff. He's not a good plaintiff because whether
Speaker 1: he's going to run a speculative. He doesn't clearly have
Speaker 1: a stake in this case. So there were some back
Speaker 1: and forth on that, but it does seem unlikely. Well,
Speaker 1: you never know what the Supreme Court, but almost all
Speaker 1: of the oral argument was really focused on the merits
Speaker 1: of the case.
Speaker 2: It doesn't seem as clear as in other cases. But
Speaker 2: can you tell where the justices are on this? Gorsuch
Speaker 2: didn't even ask a question.
Speaker 1: It's worth pointing out that in every single campaign finance
Speaker 1: case the Court has taken since Chief Justice Roberts became
Speaker 1: Chief Justice and Justice Alito joined the court, the attack
Speaker 1: on campaign finance law has won.
Speaker 9: That's about eight cases.
Speaker 1: And turn it around and there's not been a single
Speaker 1: case that the Supreme Court has taken since two thousand
Speaker 1: and five on campaign finance law where the law was
Speaker 1: the state. That's all I think I need to say
Speaker 1: about that.
Speaker 2: Yes, Rich, that about says it all. So in light
Speaker 2: of that, there were also questions about what's next. Justice
Speaker 2: Katanji Brown Jackson basically asked the Republican's lawyer, former Solicitor
Speaker 2: General Nol Francisco, if these caps on coordinated expenditures go down,
Speaker 2: what's next the caps on contribution limits?
Speaker 8: In McCutcheon, your clients filed a brief saying that the
Speaker 8: sky wouldn't fall if the court struck down aggregate limits
Speaker 8: because we still have coordinated expended truths. And now here
Speaker 8: we are today with your clients saying no more coordinate
Speaker 8: expenditure limits. And so I'm wondering if, and I think
Speaker 8: others have sort of raised that concern as well, we're
Speaker 8: going to be back here with the other kinds of
Speaker 8: limits you with you making the same kinds of arguments.
Speaker 10: Well, your honor, I think different limits are on stronger
Speaker 10: footing than others. I am not going to say that
Speaker 10: my clients are not going to come back and try
Speaker 10: to challenge other limitations.
Speaker 1: And indeed, it's the lawyer for people who are defending
Speaker 1: this law, which I should say is not the government.
Speaker 1: This is a federal statute. Well, the Trump administration will
Speaker 1: not defend it. In fact, they'e actually joined in the
Speaker 1: attack on it. So the statue was being defended by
Speaker 1: two lawyers. One was a lawyer pointed about the Court
Speaker 1: to speak for the statute, in addition the lawyer for
Speaker 1: the Democratic organizations, and they both argue that basically this
Speaker 1: is the bait and switch that's been going on in
Speaker 1: campaign finance law for a long time. Someone says, well,
Speaker 1: given changes in the law, this particular restriction does make
Speaker 1: any sense, so you should strike it down. And then
Speaker 1: they come along and say, well, now you've struck down
Speaker 1: this one, the next restriction doesn't make any sense either,
Speaker 1: so strike that down. And there seems to be kind
Speaker 1: of a salami tactic aspect to this. A number of
Speaker 1: the justices are very very skeptical, more than skeptical about
Speaker 1: the constitutionality of the contribution restrictions. They don't have to
Speaker 1: decide that in this case, but the Court has traditionally
Speaker 1: treated coordinated expenditures as the constitutional equivalent of contributions. If
Speaker 1: they're going to start protecting coordinated expenditures more saying that
Speaker 1: they're more protected from limitation, it's not a big leap
Speaker 1: to say that. That kind of thinking would also apply
Speaker 1: to the contribution restrictions.
Speaker 2: Finally, if by chance, the Court were to uphold the
Speaker 2: spending caps, would you be surprised, fall off your chair?
Speaker 2: Surprised or mmm, that's interesting.
Speaker 9: Surprised, Well, probably fall off my chair.
Speaker 1: I mean when the Court upheld this law in twentsand
Speaker 1: and one, it was a five to four vote them.
Speaker 1: And in terms of just the carmentary this Supreme Court,
Speaker 1: I'm not sure if Justice Barrett has written on a
Speaker 1: big campaign finance case, but all the other Conservatives have
Speaker 1: and they've been rather consistently skeptical campaign finance.
Speaker 2: The record you cid it does seem to indicate that
Speaker 2: this cap is the next to go. Always great to
Speaker 2: have you on, rich That's Professor Richard Braflt. Of Columbia
Speaker 2: Law School. Coming up next on the Bloomberg Law Show.
Speaker 2: Will investment funds be facing more lawsuits by activist investors?
Speaker 2: Remember you can always get the latest legal news by
Speaker 2: listening to our Bloomberg Law podcast wherever you get your
Speaker 2: favorite podcasts. I'm June Grasso when this is Bloomberg.
Speaker 5: I think this case is extremely close. I'll just put
Speaker 5: cards out there on that.
Speaker 2: And that deduction by Justice Brett Cavanaugh seemed correct because
Speaker 2: Wednesday's eighty minute oral argument at the Supreme Court didn't
Speaker 2: give a clear indication about the likely outcome. Wall Street
Speaker 2: is watching the case over whether to allow investors to
Speaker 2: broadly use an eighty five year old law to sue
Speaker 2: funds over their management decisions. A lower court had allowed
Speaker 2: activist investors led by SABA Capital Master Fund to sue
Speaker 2: eleven closed end funds, including some affiliated with FS Credit
Speaker 2: Opportunities and Blackrock. Justice Sonya Soto Mayor pointed to the
Speaker 2: legislative history of the Investment Company Act to show that
Speaker 2: Congress intended to allow private rights of action.
Speaker 3: I know that many of my colleagues don't believe in
Speaker 3: statutory history, but here we have both a House and
Speaker 3: a Senate reports, a company, the nineteen eighty amendments to
Speaker 3: the ICA, and in both the House and the Senate
Speaker 3: reports it says that quote, private rights of action for
Speaker 3: violations of the federal securities laws are a necessary adjunct
Speaker 3: to the secs and for enforcement efforts.
Speaker 2: But in recent decades, the Supreme Court has avoided finding
Speaker 2: private rights of action unless Congress expressly authorizes them in
Speaker 2: a statute. And Conservative Justice Neil Gorsich was critical of
Speaker 2: allowing so called implied rights of action.
Speaker 6: Pretty disastrous for our system of government, where the people
Speaker 6: are supposed to write the laws that govern them, not judges.
Speaker 2: The Trump administration is backing the mutual funds. Joining me
Speaker 2: is securities law expert James Park, a professor at UCLA
Speaker 2: Law School. Jim tell us about this legal fight.
Speaker 11: Start sort of from the beginning. You have a hedge
Speaker 11: fund SABA Capital, and one of its strategies is it
Speaker 11: buys stock in mutual funds, mutual funds that are closed
Speaker 11: and did which means that they have stock trading in
Speaker 11: secondary markets. And the ideavia on the strategy is you
Speaker 11: buy a substantial stake and you influence the governance of
Speaker 11: the fund. You might think that it has poor governance,
Speaker 11: and then that should increase the price of the stock.
Speaker 11: That's what activist stock investors typically do, and then you
Speaker 11: hopefully sell at a profit. And so they did this
Speaker 11: for a number of mutual funds, and the funds basically
Speaker 11: tried to take away their right to vote. There was
Speaker 11: a state law in the state where they were formed
Speaker 11: which said that you know, if you pass a resolution,
Speaker 11: you can take away a shareholder's right to vote unless
Speaker 11: a majority of the other shareholders basically give it back.
Speaker 11: And this is, you know, almost a takeover defense sort
Speaker 11: of thing. It reduces their influence on the company's governance.
Speaker 11: And so what SABA Capital is arguing is that that
Speaker 11: violates a law, a federal law called the Investment Company Act,
Speaker 11: which is passed in nineteen forty, which is meant to
Speaker 11: regulate mutual funds. The Investment Company Act basically says that
Speaker 11: shareholders are supposed to have votes proportionate to the number
Speaker 11: of shares that they own. And so what SABA the
Speaker 11: Capital was arguing is that we have a private right
Speaker 11: of action to sue and the remedy should be recision,
Speaker 11: which means basically, we get our money back. And so
Speaker 11: there's a question as to whether the Investment Company Act
Speaker 11: authorizes a lawsuit like this, because the language does not
Speaker 11: come out and say in a very straightforward way that
Speaker 11: you have the right to sue for violations of the
Speaker 11: Investment Company Act. And so the only way you can
Speaker 11: say they have a right to sue is to say
Speaker 11: there's something called an implied remedy here, sort of an
Speaker 11: implicit right to sue that the Court can basically say
Speaker 11: is evident from the law.
Speaker 2: The Second Circuit Court of Appeals, which handles a lot
Speaker 2: of these kind of financial cases and is well respected,
Speaker 2: do it allow a private right of action?
Speaker 9: They did.
Speaker 11: They basically did in a different case. And Judge Laval,
Speaker 11: who is a very prominent, respected Second Circuit judge, said
Speaker 11: that the statute has language that can be read to
Speaker 11: indicate that Congress intended for private parties to be able
Speaker 11: to bring suit for recision when there is a violation
Speaker 11: of the Investment Company Act, and he mainly based his
Speaker 11: argument on the text. The text of the law says,
Speaker 11: you know, if you hihilated the Investment Company Act, then
Speaker 11: the various agreement that you entered into with the mutual
Speaker 11: fund is unenforceable. It talks about, you know, in certain circumstances,
Speaker 11: recision should not be denied by a party if the
Speaker 11: benefit of recision outweighs some of the downsides. So there
Speaker 11: is language that indicates that Congress might have envisioned these
Speaker 11: private lawsuits happening, but it's not set in a straightforward way,
Speaker 11: and I think that's what made the question ambiguous. And
Speaker 11: in fact, the Third Circuit and a number of other
Speaker 11: circuits have held the opposite and said that there is
Speaker 11: not an implied right to sue under the Investment Company Act,
Speaker 11: and Meeting Court generally has not favored these implicit rights,
Speaker 11: which are not straightforward in the text of the statute.
Speaker 2: And what were the concerns of the justices about allowing
Speaker 2: a private right of action?
Speaker 11: There were, you know, a number of concerns, and they
Speaker 11: mostly focused on the statutory interpretation argument as opposed to
Speaker 11: broader policy concerns. And you know, I think that they
Speaker 11: were concerned that the language was not completely straightforward and
Speaker 11: that there were some really difficult issues of interpreting what
Speaker 11: the statute meant. Justice Kavanaugh went so far as to
Speaker 11: say this was a very close case, that there were
Speaker 11: good arguments on both sides. Some of the more liberal
Speaker 11: justices pointed to the legislative history, and the legislative history
Speaker 11: actually indicates that Congress thought that there would be an
Speaker 11: implied right of action, And there were some reports senate
Speaker 11: in house reports which said that the envisioned investors could sue.
Speaker 11: But a lot of the more conservative justices, as you
Speaker 11: may know, they don't really like to look at legislative history.
Speaker 11: They like to look at the text of the statute,
Speaker 11: and so a lot of the oral argument was puzzling
Speaker 11: through how we read this language. That's basically what the
Speaker 11: argument was mainly about.
Speaker 2: I thought it was interesting that Justice Sodomayor prefaced her
Speaker 2: remarks about the statutory history by saying, I know many
Speaker 2: of my colleagues don't believe in statutory history. She also
Speaker 2: referred to these private lawsuits as being in conjunction with
Speaker 2: the SEC's enforcement efforts. But if you have private investors
Speaker 2: bringing their own lawsuits, does that interfere with the SEC's
Speaker 2: enforcement plans.
Speaker 11: Definitely. The mutual fund industry has taken the position that
Speaker 11: the statute is meant to be enforced by the SEC
Speaker 11: rather than private plaintiffs, and that the SEC can come
Speaker 11: in if there's a violation of the Investment Company Act
Speaker 11: and bring various enforcement actions. And you know, I think
Speaker 11: the response to that is the SEC has limited resources.
Speaker 11: There are a lot of these mutual funds out there,
Speaker 11: a lot of potential violations, and having private attorney generals
Speaker 11: who are able to bring these suits maybe a more
Speaker 11: effective way of enforcing these provisions. That was not really
Speaker 11: discussed much in the oral argument. I think that argument
Speaker 11: has fallen a bit out of favor with the more
Speaker 11: conservative justices, but definitely the mutual fund industry believes that
Speaker 11: it's really the sec that should be bringing enforcement actions
Speaker 11: in this space.
Speaker 2: What about suing in state court rather than federal court.
Speaker 2: Here's what Justice Kavanaugh said, So.
Speaker 5: It's a federal court state court issue. As I see it,
Speaker 5: like this is going to happen. It's just going to
Speaker 5: happen in federal court or state court.
Speaker 11: There is also a lot of discussion about that possibility
Speaker 11: that maybe what the statute means is that the contract
Speaker 11: is unenforceable if there's a violation of the Investment Company Act,
Speaker 11: and so then there would be litigation in state court
Speaker 11: about the enforceability of the contract, And so that was
Speaker 11: seen as a possibility. Have there ever been suits like that.
Speaker 11: I don't know, and I think there would be a
Speaker 11: little bit complicated, you know, especially the types of theories
Speaker 11: that you might want to bring. Federal courts may have
Speaker 11: a bit of an advantage over state courts in hearing
Speaker 11: these types of issues, and so it would be a
Speaker 11: bit awkward to say that these claims would mainly be
Speaker 11: brought in state court as opposed to Federal Court if
Speaker 11: you want to have this be an effective remedy in
Speaker 11: my view.
Speaker 2: Jim, can you give us a sort of simplistic explanation
Speaker 2: of the position of each side here on the merits
Speaker 2: of the case.
Speaker 11: On one side, the investors might argue, we need some remedy,
Speaker 11: we need a clear remedy when there are violations, and
Speaker 11: you know, recision is a pretty powerful remedy under the
Speaker 11: Investment Company Act, which was meant to regulate mutual funds.
Speaker 11: On the other hand, I think what the mutual fund
Speaker 11: in as worried about is that you're going to get
Speaker 11: a flood of lawsuits and that that might actually be
Speaker 11: bad for most investors in the mutual fund because only
Speaker 11: a few investors might be interested, insuing, I'm only a
Speaker 11: few investors may be pursuing an activist strategy with the fund,
Speaker 11: and so the other investors may not be all that interested,
Speaker 11: and it's costly to defend these lawsuits, and those costs
Speaker 11: come out of the pockets of the other mutual fund shareholders.
Speaker 2: It was hard to read the argument, although it did
Speaker 2: seem like the liberal justices and perhaps the Chief Justice
Speaker 2: and Justice Kavanaugh, might favor allowing the private lawsuits. But
Speaker 2: what was your take?
Speaker 11: It's close. I mean, my guess is I actually think
Speaker 11: that they will find that there is a right of
Speaker 11: action based upon the text of the statute. I think
Speaker 11: there is enough in the text of the statute to
Speaker 11: persuade at least some of the conservative justices. Is that
Speaker 11: Congress intended for there to be a private right of
Speaker 11: action for recision, I think the more liberal justices will
Speaker 11: be persuaded by both the text, the legislative history, and
Speaker 11: policy considerations. So I think they'll need to get a
Speaker 11: couple of the Republican justices to decide with them, which
Speaker 11: I think is very possible. It's not a sure thing,
Speaker 11: but just my sense of the argument. If I felt
Speaker 11: like Saba Capital might have had a bit of a
Speaker 11: better argument in terms of the text on the statutory
Speaker 11: interpretation issue.
Speaker 2: And do you think that it's the correct decision to
Speaker 2: allow the private investors to.
Speaker 11: Sue As a policy matter, I think the risk that
Speaker 11: it's going to lead to a flood of lawsuits may
Speaker 11: be low. We'll have to see though. And my colleague
Speaker 11: at UCLA for non Restreppo, actually has a study that
Speaker 11: he just completed that looked at what happened after the
Speaker 11: second Circuit allowed these lawsuits, and he didn't find a
Speaker 11: flood of cases, and he didn't find a big impact
Speaker 11: on the mutual fund industry. These are preliminary results, he
Speaker 11: tells me, and so he may, you know, find something
Speaker 11: different as he delves into the data. My sense is that,
Speaker 11: you know, SABA Capital is a little bit of an
Speaker 11: outlier in terms of pursuing a strategy like this. Most
Speaker 11: activist funds are targeting public corporations rather than mutual funds. Now,
Speaker 11: it might be that if you know you have more
Speaker 11: rights and more leverage, that more funds may get into
Speaker 11: this space. But it is a strategy that does require
Speaker 11: you to make a pretty substantial investment in the mutual
Speaker 11: funds so that you have significant votes. And it's a
Speaker 11: little bit different than some of the shareholder lawsuits we
Speaker 11: see with public companies, which have been criticized because you know,
Speaker 11: you have plainers who own only a few shares who
Speaker 11: have a right to bring a private action represented by
Speaker 11: an attorney in a class action, and so that might
Speaker 11: be the reason we see a lot of litigation in
Speaker 11: the public company space. I don't know if that will
Speaker 11: necessarily be true with respect to mutual funds. And you know,
Speaker 11: the other thing to keep in mind is the imply
Speaker 11: right of action is also just for recision, which means
Speaker 11: the remedy as you get your money back, as opposed
Speaker 11: to damages. That may also have some impact on the
Speaker 11: incentives of plaintiffs to bring a lot of lawsuits for
Speaker 11: violations of the Investment company Acts.
Speaker 2: What's an investor lawsuit without damages? Thanks so much, Jim.
Speaker 2: That's Professor James Park of UCLA Law School. And that's
Speaker 2: it for this edition of The Bloomberg Law Show. Remember
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