Justices seem receptive of private suits against investment companies

Yesterday’s argument in FS Credit Opportunities Corp. v Saba Capital Master Fund showed a bench surprisingly receptive of private parties having the ability to sue investment companies under the Investment Company Act of 1940. Although the justices have been skeptical of implied rights of action in recent decades, most of them seemed to think that the statute went far enough to authorize the limited relief sought in the case before them, namely the right to invalidate a contract inconsistent with the statute.

The problems for the investment company opposing the suit started early in Shay Dvoretzky’s argument on its behalf, as Justice Sonia Sotomayor emphasized statutory history that seemed to her telling. Recognizing that “many of my colleagues don’t believe in statutory history,” she quoted from reports emphasizing that “private rights of action … are a necessary adjunct to the SEC’s enforcement efforts due to the SEC’s small staff.”

Also seeming to favor relief, Justice Elena Kagan looked to the 1979 decision in Transamerica Mortgage Advisors v. Lewis – which recognized a similar cause of action in a companion statute to the Investment Company Act. Kagan commented to the government’s lawyer Max Schulman: “you would really have us … look at these two companion pieces of legislation passed at the same time and say that the exact same language has one result in one statute and the other result in another statute just because there happens to be in one of the statutes private rights of action for damages that are essentially unrelated. … That seems like a pretty extreme position, honestly.”

Chief Justice John Roberts and Justice Brett Kavanaugh also seemed open to recognizing the relief the investors seek. The chief justice, for example, seemed to follow Kagan in viewing this as a case about whether the justices should “go back and reinterpret a statute you’ve already interpreted.” And Kavanaugh repeatedly pointed to an earlier brief in which the SEC had told the justices that the statute explicitly called for the relief that the investors are seeking here.

It was not all smooth sailing for the investors. Justice Neil Gorsuch was vehement in his view that judicial recognition of causes of action that are not explicitly written into statutes is “pretty disastrous for our system of government, where the people are supposed to write the laws that govern them, not judges.”

This argument was much more favorable to the investors than I would have expected. Having said that, it is far from clear that a majority of the justices ultimately will rule in favor of relief here, as several of them said little of substance in the argument. It is fair to say, though, that there will be votes on both sides of the issue so I would not expect a decision any time in the next few months.