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Chasing the Devil Around the Stump: Securities Regulation, the SEC and the Courts

Limits of Federal Regulation

The Norm of Common Law: Strong v. Repide and Standard Oil v. United States

“Stone grows on one. Many of my insights are not his. But he is brave and honorable. He thinks straight. He fights for his principles, and I think he knows, in the way I hope to have known, the necessary limitations we must place on ourselves as a court.”

1925 – 1932 Excerpts of letters from Associate Justice Oliver Wendell Holmes to Professor Harold Laski

In the late 1890s and early 1900s, the Supreme Court decided a mere handful of cases affecting the securities markets. This was due in large part to the lack of a strong national regulatory presence in market regulation. When it faced such cases, the Court often used common law rules to make its decisions.

The development of common law rules -- rules made by courts that espoused general principles which would then be applied to other cases with similar facts -- were first developed by state courts. The federal court system did not have an independent source of common law rules. When a case arose where the law of several states might apply, federal courts would apply the state statutory law of the relevant jurisdiction.⁹

In 1909, the Supreme Court, in Strong v. Repide, gave impetus to the trend of using the common law of fraud to permit recovery by plaintiffs. Strong v. Repide was an insider trading case arising from the sale of stock in the Philippine Sugar Estates Development Company to one of the directors of the company. The defendant, while negotiating the purchase of the plaintiff's stock, was simultaneously negotiating the sale of the corporate land assets to the Philippine government.¹⁰

The defendant took extraordinary efforts to conceal the information about the negotiations, and was able to purchase the stock from the stockholder for about one-tenth of its actual value. In a decision written by Justice Peckham, the Supreme Court refused to follow either the then-accepted majority or minority rule, adopting instead a third approach. It held that, under the special facts of the case, "the law would indeed be impotent if the sale could not be set aside or the defendant case in damages for his fraud."¹¹ This new rule meant that, although directors generally had no duty to disclose material facts when trading with shareholders, a duty might arise where there were special circumstances, such as concealment of the defendant-seller's identity (the corporate officer had used an agent go-between to avoid detection of his actions by the seller) and a failure to disclose significant facts that materially affected the price of the stock.

Although in Strong v. Repide, the Supreme Court developed and applied common law fraud principles to protect an innocent purchaser, in many other areas of financial regulation, deference to the accepted boundaries of state economic regulation meant that those cases often remained beyond the purview of national regulation. In 1911, antitrust law became an exception to that practice when the Supreme Court revisited the meaning of the federal Sherman Antitrust Act in Standard Oil Company v. United States.

For years, progressives had been attempting to stop the powerful misconduct of the company which had left a trail of ruined competitors in its wake. Standard Oil had grown its national monopoly by acquiring stock control of numerous refining companies, extracting preferential rail rates from shippers, and aggregating so vast a capital as to exclude others from the oil drilling, refining and retail markets. At issue was whether Standard Oil had violated the Sherman Act and should be dissolved. Justice White, writing for the majority, returned to common law principles in holding that, while Congress did not specify in the antitrust act a standard to judge which restraints under the Sherman Act were illegal, the statute “indubitably contemplating and requiring a standard” must have intended to employ the common law “standard of reason.”¹² In these cases, the Supreme Court used the common law as a legitimate and principled tool for adjudicating economic disputes while protecting individual liberty of contract.

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Footnotes:

(9) See Swift v Tyson, 41 US 1 (1842), overruled in Erie Railroad v. Tompkins, 304 US 64 (1938). Where the national interest was so strong, the doctrine of federal preemption might apply as an exception to federal application of state common law rule. See Richard A. Epstein and Michael S. Greve, Federal Preemption: States’ Powers (National Interests, AIE Press: Washington, DC, 2007).

(10) Strong v. Repide, 213 US 419 (1909); Fair To All People: The SEC and the Regulation of Insider Trading – Pre-Securities Act Common Law Enforcement: “Special Facts or Special Circumstances.”.

(11) Strong v. Repide, 430.

(12) Standard Oil Company v United States, 221 US 1 (1911); see also Edward F. Mannino, Shaping America: The Supreme Court and American Society (The University of South Carolina Press: Columbia, 2009), 98-99.

Related Museum Resources

Papers

March 10, 1897: Letter from Senator Francis Warren to Judge Willis Van Devanter on possible openings in the McKinley administration
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
March 11, 1897: Letter from Senator Francis Warren to Judge Willis Van Devanter on meeting with President McKinley
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
September 11, 1897: Letter from Charles B. Billings to Chief Justice Melville W. Fuller on proposed appointment of Attorney General Joseph McKenna to U.S. Supreme Court
image pdf (Melville W. Fuller Papers, courtesy of Library of Congress)
December 8, 1903: Portion of letter from Associate Justice Henry Brown to Chief Justice Melville Fuller on his current health and its impact on Northern Securities case
transcript pdf (Melville W. Fuller Papers, courtesy Library of Congress)
December 14, 1903: Letter from Henry M. Hoyt, Office of the Solicitor General to Chief Justice Melville W. Fuller on Northern Securities case
image pdf (Melville W. Fuller Papers, courtesy of Library of Congress)
January 24, 1907: Letter from Elmer Jones to Senator George Sutherland introducing Senator Norris Brown
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
February 14, 1907: Letter from John McQuarrie, Church of Jesus Christ of Latter-Day Saints to Senator George Sutherland on Smoot case
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
January 1910: Additional memorandum in support of application to advance cause and set same for argument about March 1st in Standard Oil Company of New Jersey vs. The United States of America
transcript pdf (Courtesy of National Archives and Records Administration)
March 11, 1910: Letter from Mr. Keen, American Philosophical Society to Senator George Sutherland on U.S. treaty-making power
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
April 2, 1910: Letter from Senator Francis Warren to Judge Willis Van Devanter on meeting with President Taft on possible appointment to U.S. Supreme Court
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
April 6, 1910: Letter from Charles Potter to President Taft in support of Willis Van Devanter's appointment to U.S. Supreme Court
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
October 25, 1910: Letter from Judge Elmer Adams to Judge Walter Sanborn on Tompkins case
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
October 25, 1910: Letter from Judge Elmer Adams to Judge Willis Van Devanter on Tompkins case
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
November 16, 1910: Letter from Senator Page to Senator George Sutherland on leadership of the conservative wing of the Republican Party in the Senate
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
January 25, 1911: Letter from James McKenney, Clerk of the U.S. Supreme Court to E. Trenhaft, Esq. on arguments in Standard Oil Co. and in Tobacco Co. cases
transcript pdf (Courtesy of National Archives and Records Administration)
April 10, 1911: Letter from L.D. Ratliff to Associate Justice Willis Van Devanter on U.S. Supreme Court
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
May 29, 1911: Letter from Judge Elmer Adams to Associate Justice Willis Van Devanter on Eighth Circuit, U.S. Court of Appeals
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
June 1, 1911: Letter from Henry Maine to Representative George Legare on Arizona constitution
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
June 4, 1911: Thank-you letter from Judge Elmer Adams to Associate Justice Willis Van Devanter for suggestions on opinion
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
July 12, 1911: Letter from Ralph Duniway to Senator George Sutherland on "Oregon system"
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
July 13, 1911: Letter from Herbert Lacey to Associate Justice Willis Van Devanter on transfer of law books
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
July 24, 1911: Letter from Herbert Lacey to Associate Justice Willis Van Devanter on progress of transfer of law books
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
August 16, 1911: Letter from Herbert Lacey to Associate Justice Willis Van Devanter on conclusion of transfer of law books
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
November 1, 1911: Letter from Judge Elmer Adams to Associate Justice Willis Van Devanter on Southern Railway Company v. U.S.
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
February 9, 1912: Thank-you letter from D.L. Cease to Senator George Sutherland on support for railroads
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
March 5, 1912: Letter from George Smith to Senator George Sutherland on compensation of railroad employees
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
November 13, 1913: Letter from Sherman Whipple to Senator George Sutherland on the courts
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
April 25, 1914: Letter from Judge Elmer Adams to Associate Justice Willis Van Devanter on Insurance Company v. Lewis
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
January 7, 1916: Letter from Samuel Gompers, American Federation of Labor to Senator George Sutherland on proposed eight-hour workday
image pdf (William H. Moody Papers, courtesy of Library of Congress)
March 9, 1916: Letter from Alfred Cruikshank to Senator George Sutherland on submarine warfare
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
June 30, 1916: Letter from Samuel Gompers, American Federation of Labor with legislative record of Senator George Sutherland on measures of interest to labor
image pdf (William H. Moody Papers, courtesy of Library of Congress)
November 11, 1916: Letter from Republican National Committee to Senator George Sutherland on his election defeat
image pdf (William H. Moody Papers, courtesy of Library of Congress)
September 6, 1917: Letter from Southern Pacific Railway to Senator George Sutherland on Interstate Commerce Commission
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
July 3, 1918: Letter from American Metal Company Ltd. to Federal Trade Commission on profit-sharing
transcript pdf (Louis D. Brandeis Papers, Brandeis School of Law, University of Louisville)
July 19, 1918: Letter from C.M. Loeb, American Metal Company, Ltd. to Henry Bruere on effect of Federal Trade Commission report
transcript pdf (Louis D. Brandeis Papers, Brandeis School of Law, University of Louisville)
March 15, 1920: Letter from Senator George Sutherland to William Guthrie on 18th Amendment
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
June 26, 1920: Letter from Senator George Sutherland to Senator Warren Harding on upcoming election
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
November 10, 1920: Letter from Senator George Sutherland to President-Elect Warren Harding
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
December 10, 1920: Letter from Judson Welliver to Senator George Sutherland on possible appointment to U.S. Supreme Court
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
May 12, 1922: Letter from Chief Justice William Howard Taft to Associate Justice Willis Van Devanter on Chicago Board of Trade and Reading cases
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
August 31, 1922: Letter from Chief Justice William Howard Taft to Associate Justice Willis Van Devanter on pending retirement of Associate Justice John Clarke
transcript pdf (Willis Van Devanter Papers, courtesy Library of Congress)
September 4, 1922: Congratulation letter from Henry Kirk White to Senator George Sutherland on appointment to U.S. Supreme Court
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
September 10, 1922: Congratulation letter from Chief Justice William Howard Taft to Senator George Sutherland on appointment to U.S. Supreme Court
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
April 10, 1923: Letter from Henry W. Anderson to Associate Justice George Sutherland on minimum wage case
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
May 5, 1923: Letter from Sailors' Union of the Pacific to Associate Justice George Sutherland on the women's minimum wage decision
image pdf (William H. Moody Papers, courtesy of Library of Congress)
1925 - 1932: Excerpts from letters from Justice Oliver Wendell Holmes to Professor Harold Laski on U.S. Supreme Court
transcript pdf (Earl Warren Papers, courtesy Library of Congress)
December 11, 1925: Letter from Henry Bates, University of Michigan Law School to Associate Justice George Sutherland on bureau of research for courts
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
December 17, 1925: Reply letter from Associate Justice George Sutherland to Henry Bates
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
January 13, 1926: Letter from Chief Justice William Howard Taft to Associate Justice George Sutherland on Maryland mandamus case
transcript pdf (William H. Moody Papers, courtesy Library of Congress)
July 17, 1926: Letter from Chief Justice William Howard Taft to Associate Justice George Sutherland while in Canada
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July 25, 1928: Letter from Chief Justice William Howard Taft to Associate Justice George Sutherland on upcoming election
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December 28, 1928: Letter from Associate Justice George Sutherland to Associate Justice Harlan Stone on Friedlander case
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June 27, 1963: Courses taken by Pierce Butler, 1884-1888, from Office of Registrar, Carleton College
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Galleries

Fair To All People: The SEC and the Regulation of Insider Trading: "Special Facts or Special Circumstances"