Court Opinion

ID: 9469286
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:36:23.283024+00
Date Added: 2024-06-11T17:41:18.681153
License: Public Domain

POSNER, Circuit Judge,
concurring.
I join Chief Judge Cummings’ excellent opinion without reservations, and write separately only to express my doubts whether this case really belongs in the federal courts. I do not mean that we do not have jurisdiction; I mean that perhaps we should not have jurisdiction.
The dispute out of which this case arises is local. Wisconsin is the home of Messrs. Scag and Trecker and of their corporation, Wisconsin Marine, Inc. — the home, that is to say, of all the disputants except Ransomes, which while named as a defendant is not accused of any wrongdoing. And Wisconsin Marine is a closely held corporation. Its stock is not traded on any organized exchange — in fact is not freely traded at all. The basis of federal jurisdiction over the lawsuit is Scag’s use of the mails in his dealings with Ransomes, but the federal government has no substantive interest in local transactions just because the parties happen to send letters to each other. The theory of the suit is that Scag defrauded Trecker by failing to inform him of the deal with Ransomes (which showed that Trecker’s stock was worth more than Trecker knew), thereby inducing Trecker to redeem his stock for less than its true worth. This is common law fraud, a matter traditionally of state rather than federal law — but anyway Wisconsin has a statute similar to Rule 10b-5. Wis.Stat.Ann. § 189.18. Moreover, as in so many Rule 10b-5 cases, the legal issues on this appeal are issues of, or entwined with, state law: whether Trecker could under Wisconsin law have abandoned his redemption suit if he had known of the negotiations with Ransomes (as Chief Judge Cummings’ opinion explains, unless Trecker could have abandoned the suit Scag’s failure to inform him of the deal with Ransomes could not have been a material omission); and whether Wisconsin’s statute of limitations, which governs this Rule 10b-5 private action because there is no applicable federal statute of limitations, has run.
If I thought Congress really wanted the federal courts to decide lawsuits of this sort, involving primarily local law applied to local disputes between local residents, I would bow to its desire without protest, for there is no constitutional obstacle to federal jurisdiction. But I cannot believe that this consequence was intended when Congress enacted section 10(b) of the Securities Exchange Act of 1934. Section 10(b) makes it unlawful to use the mails “To use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). This grant of rulemaking authority was taken up in 1942 when the SEC issued Rule 10b-5, which defines the term “deceptive device” to include “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5. The Securities Exchange Act does not expressly create a private right of action for violations of rules promulgated under section 10(b), but the courts early on implied a right of action and the Supreme Court confirmed it in a footnote in Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9, 92 S.Ct. 165, 169 n.9, 30 *711L.Ed.2d 128 (1971). And so we arrive at federal jurisdiction in a case such as the present, a garden-variety squabble among shareholders in a closely held corporation, which could not even be maintained as a diversity action because of the lack of complete diversity among the parties.
Rule 10b-5 was defensible as a catch-all prohibition of deceptive devices when the enforcement of the rule was confined to the SEC. Like every other government agency, the SEC has a limited budget, which prevents it from bringing anything like all the cases that are within the potential reach of the statutes and rules that it enforces. But no budget constraint limits private damage actions; such an action will be brought so long as the expected damages exceed, however slightly, the expected cost of the litigation to the plaintiff. The SEC’s budget constraint, which probably would deter it from enforcing Rule 10b-5 in cases where state remedies are adequate, ceased to constrain Rule 10b-5 actions when the courts authorized private actions.
The resulting displacement of state substantive law and state court jurisdiction in an area remote from any federal concern that might arise from federal regulation of the securities markets could not have been foreseen by the framers of the Securities Exchange Act. Cf. Hundahl v. United Benefit Life Ins. Co., 465 F.Supp. 1349, 1362-63 (N.D.Tex.1979). But there is little if anything that the lower federal courts can do to arrest or retard the unintended federalization of corporation law by Rule 10b-5. In Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), the Supreme Court put some brakes on Rule 10b-5 actions by confining the concept of fraud, in the statute and the rule, to deception; unfairness is no longer enough. But as the present case, in common with many other cases decided after Green, such as Wright v. Heizer Corp., 560 F.2d 236 (7th Cir. 1977), illustrates, the fact that deception is shown, while enough to bring Rule 10b-5 into play, does not turn a spat between two shareholders of a closely held corporation into a “federal case” in any real sense. And although Green is not the only limiting interpretation of Rule 10b-5 that has been made — see Chiarella v. United States, 445 U.S. 222, 247, 100 S.Ct. 1108, 1124, 63 L.Ed.2d 348 (1980) (Blackmun, J., dissenting), for a list of others — it is hard to see how a rule that applies to “the purchase or sale of any security” could be judicially amended to read “the purchase or sale of any publicly traded security.”
True, under the approach the Supreme Court now uses to decide whether a federal statute creates an implied right of action, it is clear that Rule 10b-5 does not. See Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979). But Bankers Life has apparently been “grandfathered,” see id. at 577-78 n.19, 99 S.Ct. at 2489-2490 n.19; and although the grant of certiorari in Herman & MacLean v. Huddleston, - U.S. --, 102 S.Ct. 1766, 72 L.Ed.2d 173 (1982), suggests that the Court may be willing to reexamine the Bankers Life footnote, the Seventh Circuit cannot do so. So we have and cannot renounce jurisdiction in this case, even though our jurisdiction is the unintended result of administrative and judicial actions that have pushed the federal courts into an area that a proper conception of federalism would assign to state legislatures and judges.
I note that an alternative theory for Trecker to a Rule 10b-5 violation was abuse by Scag of his positions as majority shareholder, director, and officer, which created fiduciary obligations on his part toward the plaintiff that Scag, it may be argued, breached. I do not want to prejudge the plaintiff’s rights under Wisconsin law, cf. Barber v. Kilbourn, 16 Wis. 485 (1863); Haywood v. Lincoln Lumber Co., 64 Wis. 639, 26 N.W. 184 (1885); Thomsen v. Olson, 219 Wis. 145, 262 N.W. 601 (1935), but only to point out that he might actually get more complete relief in a suit under Wisconsin law than in this federal suit. True, he could have joined a state law claim with his federal claim under the doctrine of pendent jurisdiction; but since the exercise of pendent jurisdiction is discretionary, he could not have been sure that the federal *712court would retain a state law claim. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966).
When asked at the oral argument of this appeal why he had not brought this suit in state court, plaintiffs counsel stated that there were no cases under Wisconsin’s counterpart to Rule 10b-5 — all the case development had been federal. This just shows that the expansion of federal jurisdiction under Rule 10b-5, an expansion barely checked by decisions such as Green, has stultified the development of state law in an area where there is no reason to displace state by federal authority. This is not what Congress intended to happen when it enacted section 10(b) in 1934; I regret that we cannot enforce its actual intentions.