Is Supreme Court Justice Nominee Sonia Sotomayor a Champion of Individual Investors?

President Obama ended the speculation and nominated Judge Sonia Sotomayor of the United States Court of Appeals for the Second Circuit for the Supreme Court position left vacant by soon-to-be departed Justice David Souter. 

In Judge Sotomayor, the President has nominated what some consider an “activist” judge.  For me, that label doesn’t make a whole lot of sense because a judge’s job is to interpret the law.  Disagreeing with the status quo doesn’t necessarily make a judge an “activist” in my opinion.  

But more importantly, in Judge Sotomayor, are investors getting a champion of their rights?

Without a doubt, the current make-up of the Supreme Court has become far too business friendly and far too anti-investor.  Two of the most impactful decisions of late include “StoneRidge” and “Tellabs,” a one-two punch in the gut to investors which I have posted about often.  The Court is in desperate need of a voice that does not represent the interests of Corporate America.

Because the Second Circuit Court of Appeals’ jurisdiction includes Wall Street, it hears a large number of cases involving investors, so Judge Sotomayor has amassed a track record on investors-rights issues that we can study. Based on some of Judge Sotomayor’s rulings thus far, investors may have a fighting chance.

For example, in Dabit v Merrill Lynch, a securities class action involving state law securities claims Sotomayor reversed an earlier court decision and allowed Dabit to re-plead because it was “conceivable that claims based on wrongfully-induced holding could be pleaded.” The effect of Judge Sotomayor’s ruling would have been to allow the class action to go forward despite Merrill Lynch’s argument that federal law preempted plaintiffs’ ability to sue for securities violations under state law. Unfortunately, her decision was later reversed by the Supreme Court in a unanimous 8-0 decision. 

She also joined a 2-1 decision conferring class-action status in Visa Check, 280 F.3d 124 (2001), a class action brought by merchants challenging the fees that Visa and Mastercard charged for using their debit and credit cards. Judge Sotomayor ruled that “a motion for class certification is not an occasion for examination of the merits of the case.” The power of the Visa Check decision was later undermined by an amendment to the Federal Rules of Civil Procedure, though, and the Second Circuit - including Judge Sotomayor - has ruled that trial judges should make a more searching examination of the merits of a case when deciding whether to certify a class.

 Like most appellate judges with a long track record, Judge Sotomayor’s record on investors’ issues is mixed.  In a 2006 decision, In re IPO, 471 F.3d 24, she voted to decertify a class action alleging that big banks had manipulated the prices of tech-sector initial public offerings and collected huge fees from investors in connection with the manipulation.  The opinion reversed a lower-court ruling, raised a hurdle in front of investor classes trying to recover for investment banks’ wrongful conduct and scuttled a $1 billion settlement that had been reached.

 While there’s always the potential for her nomination to be derailed, certain aspects of Judge Sotomayor’s record provide a glimmer of hope for investors who have been thoroughly ignored by the Supreme Court.