U.S. Supreme Court

CEI Takes Corrupt Tobacco Deal to Supreme Court

by Christine Hall on November 9, 2010

in Legal

On Monday, CEI took its constitutional challenge to the corrupt 1998 tobacco deal to the US Supreme Court, appealing the case from Fifth Circuit Court of Appeals.  I hope the court will take the case.  It goes way beyond tobacco.  The settlement amounted to a $200 billion tax foisted on smokers and a massive, Byzantine regulatory morass imposed on an entire industry — not by state governors or legislators but by state attorneys general.  It was a unilateral power-grab by a handful of state AGs who wanted to stick it to Big Tobacco and haul in a chunk of revenue for their states and trial lawyer cronies ($13 billion!) using baseless lawsuits against the (then) four major tobacco companies.

Inconveniently, Article I, Section 10 of the US Constitution flat out prohibits states from entering into multi-state compacts, without the consent of Congress. That’s important because the so-called “Compact Clause” was intended by the Founding Fathers to prevent states from taxing, regulating, and otherwise bullying across their own boundaries.  Looking at the language of the Article I, Section 10, you can see that the Founders were worried about states trying to take on such national powers (emphasis added):

State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

State shall, without the Consent of Congress, lay any duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

And, guess what?  Congress never approved the 1998 tobacco deal.  In fact, Sen. John McCain (R-Ariz.) introduced a resolution in 1997 to approve an earlier version of the tobacco deal, but that resolution failed in committee.  Isn’t it interesting that there was an effort to get congressional approval?  It must have occurred to someone that the Constitution might actually, oh, require it.

At the end of the day, even state AGs who opposed the state lawsuits, such as Alabama’s Bill Pryor, felt compelled to sign the 46-state settlement (while four other states reached individual settlements), because smokers in all states would be paying for the settlement in the form of higher cigarette prices.  What sense was there in allowing your own state’s smokers to pay for the settlement while getting none of that money back to the state, at least?

Looking again at Article I, Section 10, doesn’t this seem like exactly the sort of nefarious state bullying and multi-state tax schemes that would have concerned the Founding Fathers?  It’s hard to believe they would’ve written the Compact Clause for no reason.  Surely it is past time to pay attention to the protections they gave us.

For more information about the case, visit cei.org/msa.

CEI files amicus in Aussie bank case threatening national sovereignty

by John Berlau on March 29, 2010

in Economy, Environment, Global Warming, International, Legal, Mobility, Regulation, Trade

Headquartered in Melbourne, the second largest city of the land down under, National Australia Bank is firmly attached to its home country. The primary trading venue for stock in the bank is the Australian Securities Exchange in Sydney, Australia’s biggest city. It was from this exchange shares in the company were bought by three Australian investors who are now suing the firm for securities fraud.

So see if you can guess in which Australian locale this lawsuit is proceeding. Melbourne? Sydney? Perhaps in the Australian state or territories where one of the shareholders live?

Sorry, trick question! The lawsuit isn’t proceeding in Australia at all. It was brought in U.S. federal courts in New York and was heard today by the U.S. Supreme Court. The case is Morrison v. National Australia Bank.

If you didn’t think the “trick” in this riddle was very funny, you’re right in more ways than one. It’s hard to overstate the seriousness of the outcome of this case for the American economy. If the Court grants the Australian plaintiffs “subject matter jurisdiction” and allows the case to proceed in U.S. Court, it will make the U.S. a litigation magnet for foreign shareholder lawsuits from all over the world.

And this very same magnet that attracts the foreign plaintiffs and their lawyers will repel many foreign businesses who are considering making even the most minor type of investment in the U.S. Jobs would suffer, as foreign firms would think twice about forming a U.S. subsidiary that employs American workers, for fear of establishing what courts have called a “nexus” that could establish a tangential connection for litigation in U.S. courts.

That’s why the Competitive Enterprise Institute, filed an amicus, or friend-of-the-court, brief urging the justices to establish a bright-line rule to bar U.S. courts from hearing what are called “foreign cubed cases.” A “foreign cubed” shareholder case is one in which a foreign corporation is sued by foreign investor who brought their shares on a foreign exchange.

The bank has maintained it did not commit fraud, and fraud charges have never been brought by securities regulators in the Australia or the U.S., which had jurisdiction due to the fact that the bank was listed at the time on the New York Stock Exchange. But even if fraud did occur, both conservative and liberal justices seemed perplexed as to what this case was doing in U.S. courts any more than one involving something like an Aussie bank robbery or any other purely domestic Australian.

“Australian plaintiffs, Australian defendants, shares purchased in Australia. It has Australia written all over it,” liberal Justice Ruth Bader Ginsburg said in her exchange with the Australian plaintiff’s attorneys. “Isn’t the most appropriate choice the law of Australia rather than the law of United States?

Ginsburg’s questions seemed to be in line with points raised by CEI. CEI’s brief, written by CEI general counsel Sam Kazman and international law specialist Ernesto J. Sanchez, argues that “these types of lawsuits, in which plaintiffs circumvent the legal systems of countries where their disputes arise to take advantage of what they see as the U.S. legal systems ‘s more favorable aspects, amount to nothing more than global forum shopping.”

Although the appeals court had ruled against the Aussie plaintiffs, CEI urged a more “bright line” rule to remove uncertainty in these types of cases. “The Court should reiterate its own precedents presuming that U.S. laws do not apply beyond U.S. territorial boundaries unless Congress has clearly expressed its intent for such extraterritorial reach.”

CEI pointed out the potential for other countries to violate U.S. sovereignty if U.S. courts were to presume that other countries offered inadequate protection. The brief pointed to the stretching of the Alien Tort Claims Act of the eighteenth century to be utilized in lawsuits over such modern issues as global warming.

CEI’s amicus brief in support of the defendants joins those of the governments of the United Kingdom, France, and Australia, all of whom maintain they should be allowed to police their own securities’ markets with their own laws. Justice Stephen Breyer, another member of the Court’s liberal bloc, seemed to agree. According to Reuters, “Breyer questioned whether a win for the plaintiffs would interfere with efforts of foreign countries, such as Australia, to regulate their securities markets.”

Peekaboo! PCAOB More Powerful and Less Accountable than Government Claims

by Jonathan Moore on December 4, 2009 · 7 comments

in Legal

On December 7, the U.S. Supreme Court will hear Free Enterprise Fund v. Public Company Accounting Oversight Board. The case, brought by CEI and Jones Day attorneys on behalf of the Free Enterprise Fund, challenges the constitutionality of the way Public Company Accounting Oversight Board (also known as PCAOB, or not so affectionately as Peekaboo) members are appointed. The PCAOB, which was established by the Sarbanes-Oxley Act of 2002, is an independent governmental agency (according to Sarbanes-Oxley it is a private institution, but even supporters of the Board’s structure admit that it is a governmental body) whose members are selected by the SEC commissioners collectively. The lawyers arguing the case argue that this selection process violates the appointments clause of the Constitution.

The Constitution, in Article 2 sec. 2, establishes that the President “Shall have Power, by and with the Advice and Consent of the Senate to… nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

According to the Constitution, the President is responsible for appointing what has later been defined as “principal officers.” Further, if the officers are deemed to be “inferior officers,” Congress may give appointment power to the President, a judge, or the head of a department. Lawyers for the Free Enterprise Fund charge that regardless of whether the PCAOB members are principal or inferior, the Constitution has been violated. The President does not appoint the board members, and as such, if they are principal officers, the Constitution has been violated. If the board members, however, are inferior officers, they have not been appointed by a head of a department, rather, they have been appointed by the SEC commissioners.

Lawyers defending the constitutionality of the PCAOB have charged that the board members are inferior officers, and that the SEC commissioners collectively are the head of the SEC. Further, they claim that the SEC has complete control over the PCAOB through several powers, including the power to review all PCAOB rules, and approving the PCAOB’s budget. As such, they argue, this direct supervisory authority makes the PCAOB clear inferior officers, and since the President has control over the SEC commissioners, who have control over the PCAOB, the President has “fully effective control” over the PCAOB.

Yesterday, however, at an American Enterprise Institute event titled “Public Company Accounting Oversight Board: A Preview”, former SEC Commissioner (2002-2008) Paul Atkins provided an alternative story of the SEC’s control over the PCAOB, as well as refuting the claim that the SEC commissioners are collectively the head of the SEC.

Atkins noted several areas in which the PCAOB managed to evade SEC controls and operate very independently of the SEC. First, he stated that the PCAOB’s budget was not nearly as under control by the SEC as has been claimed. Atkins stated that the “staff at Peekaboo were not telling the truth” to the SEC about the PCAOB’s budget. His experience at the SEC led him to the conclusion that the SEC “didn’t really have the authority it supposedly did” over the PCAOB’s budget.

At one point, the SEC asked the PCAOB for a business plan regarding their operations. The PCAOB chairman informed the SEC that Sarbanes-Oxley “was his business plan” and for five years the PCAOB evaded the SEC’s demand for a business plan.

After the PCAOB produced their “Audit Standard 2”, “all five” SEC commissioners were in favor of “radical” changes to it, and yet it took the SEC years to even make “some” changes to the auditing standards due in part to PCAOB recalcitrance.

He stated that the PCAOB used “informal rulemaking” to adopt “staff-driven” rules which evaded the need to obtain SEC approval for all rules. As an example, he says that the PCAOB’s rule making regarding stock options was “not subject to any rule at all” despite functioning as a rule.

Atkins directly refuted the claim that the SEC has plenary power over the PCAOB, stating bluntly that the SEC’s “power is not plenary” regarding the PCAOB. He even said that a good analogy for SEC oversight of the PCAOB was that of “pushing on a string”.

Atkins also implied that considering the SEC commissioners as a collective head for the SEC was ignoring the realities of the day-to-day operation of the SEC. He stated that the chairman has considerably more power than the other commissioners. He noted that the 1950 Reorganization Plan 10 gave “authority over the budget” and “HR decisions” to the SEC’s chairman. He did say that consensus among the commissioners is generally important, but said that “in reality, he can still appoint whoever he wants” to critical appointment posts. And yet, this does not apply to the PCAOB, who are appointed collectively by the SEC. Further, Atkins even questioned whether or not the President had direct power over the SEC, a lynchpin of the defenders of the SEC’s argument. He stated that the SEC’s history “illustrates how difficult it is for the President to assert authority” over the SEC, much less the PCAOB.

Atkins’ telling of the SEC and PCAOB’s relationship calls much of the PCAOB’s legal defense into question. If the SEC lacks reliable control over the PCAOB, how can the President have “fully effective control” over the PCAOB? If, one wonders, the SEC chairman is treated as the appointer for other positions within the SEC, which implies that he is the head of the department, why is it that he does not have the power to appoint the PCAOB members? And why is the SEC chairman sufficiently powerful to act as the head in all other appointment cases, but when it comes to the PCAOB he must act as an equal to his fellow commissioners? And further, if the President lacks even control over the SEC, how can he truly have control over the PCAOB members, who are an additional step further down the chain of command?

These are some questions the justices should be asking on December 7.

LibertyWeek 33: Drinking Our Way to Economic Health

by Richard Morrison on March 10, 2009

in CEI Projects, Podcast

Welcome to Episode 33 of the LibertyWeek podcast, with your hosts Richard Morrison and Cord Blomquist and technical producer (and this week’s special guest) Ryan Young. After bidding our friend Thor Halvorssen a very happy birthday, we get a fresh recap from Ryan Young on the events of the Free State Project’s recent Liberty Forum in Nashua, New Hampshire (photos). Google’s CEO spurns Twitter (transcript via TechCrunch) in Technology News, John McCain and Richard Shelby say that the government should end the bailouts and let poorly-managed banks go bankrupt, and brewers pin their hopes on robust St. Patrick’s Day sales in this week’s edition of Beer News. Next, we go abroad for Scandal Watch where the Chinese government is cracking down on sub-optimal milk quality and finally back home to America for Olympic News, where the head of the U.S. Olympic Committee is calling it quits.

The honor of Tweet of the Week™ goes to dan_hayes of Reason.tv!