Academic

Last week?s oral argument at the Supreme Court in Janus v. FDT offered few doctrinal surprises but one unsettling institutional revelation.  Doctrinally, the case represents an opportunity to expand or contract the availability of class action lawsuits for securities fraud.  Perhaps not surprisingly, certain justices (Ginsburg, Breyer, Sotomayor, Kagan) appeared sympathetic to the plaintiff?s claims and such suits generally, while others (Roberts, Scalia, Alito) seemed prepared to support the defendants and a constriction of such litigation.  More surprising, however, was the justices? admitted lack of comprehension and competence regarding investment funds, whose operations lie at the heart of the dispute.

Justice Breyer at one point said to an advocate, ?No, you have to explain it to me more.  I?m not being difficult.  I understand this less well than you think I do, and I want to know.?  Justice Sotomayor, inquiring about the structure of funds, asked ?what does it mean?? for them to be formed as entities distinct from advisers.  Then, at the very end of the discussion, after an hour of argument, Justice Alito and Justice Ginsburg asked about recovery for shareholders in the fund itself, which appeared to take the oral advocate by surprise because the case concerns recovery only for shareholders in the fund?s adviser.

?So what?? one might wonder.  The Court grapples with scores of different subjects each term, and we can hardly expect them to be fluent with them all.  Yes, but this one matters.  A lot.

The size, scope, and influence of investment funds are unavoidable and growing issues affecting all of corporate law.  Though the justices may be proficient with the direct relationship between firms and their shareholders, that simple dyad is increasingly being exploded by the interposition of financial intermediaries.  Today, hedge funds, mutual funds, private equity funds, and similarly managed investment vehicles dominate the global economic battleground, through their possession of both huge amounts of money and powerful systemic risk.

In her article entitled Rethinking Securities Intermediary Regulation, Jill Fisch points out that institutional (primarily fund) investors now own ?an unprecedented 76.4% of the largest 1000 corporations.?  U.S. mutual funds alone hold more than $11.5 trillion in assets under management.  And by many accounts, the U.S. economy teetered towards greatest jeopardy during the 2008 financial crisis with the breaking of the buck in money market funds.

After rushing in to take this case (over the objection of the Solicitor General), the justices may soon be looking for a way to make it go away.  Indeed, well into the oral argument, Justice Kagan finally asked, ?Is there a way to confine our holding just to the mutual fund situation??  That?s just what the Court did the last time it took a fund case.  In Jones v. Harris last Term, the justices resolved a highly contentious dispute with potentially broad fiduciary duty implications (pitting Easterbrook and Posner against each other in the Seventh Circuit) by handing down a notably unanimous, short, and tepid ruling. 

When it comes to investment funds, the justices seem to snatch up beautiful gewgaws improvidently, discover how complicated they are, and then find themselves searching for ways to put them back on the shelf without disturbing anything.