NPR’s Nina Totenberg reported today, as did the Washington Post on Tuesday, that Judge Alito sat on a case in which Vanguard, the firm that runs mutual funds in which he has invested, was a party. Judge Alito wrote the opinion affirming dismissal of the plaintiff’s claim. After he wrote the opinion, the plaintiff complained that Judge Alito should not have heard the case because of his Vanguard investments. He disagreed, but recused himself (Update: 11/16/05: according to testimony of counel for the plaintiff, Professor Flym, the recusal was from the plaintiff's motion, not the original opinion, which had issues) and sent the case to the Third Circuit to decide what to do. A new Third Circuit panel re-issued the opinion, with a footnote explaining the situation. Both reports stress that when he was appointed, in 1990, Judge Alito told the Senate (in answers to a questionnaire) that he would not sit on cases involving Vanguard.
It is not clear why Judge Alito heard this case in the first instance. The Post account quotes a White House representative claiming that a computer glitch was to blame. On NPR, Steve Gillers doubts this explanation, on the ground that the parties’ identities would have been obvious from the briefs. Professor Gillers’s comment seems right to me. The caption includes the names Vanguard Group, Inc., Vanguard Fiduciary Trust Company, Vanguard/Morgan Growth Fund, Inc., Founders Funds, Inc., Investors Fiduciary Trust Company. No computer is needed to catch something so obvious. (Note to White House—doesn’t anyone there remember the lesson of Watergate? It’s the coverup that kills you.)
Did Judge Alito violate any rules by sitting on the case? Deborah Rhode opined on NPR that Alito’s sitting on the case was “a violation of judicial ethics 101.” Steve Lubet was more forgiving, describing it as a mistake justifying an “oops” response, but not an episode calling Alito’s ethics into question. Steve Gillers pretty much agreed, though as I mentioned he rightly questioned the White House’s computer cover story. Judge Alito does not control the White House, however, so its comments cannot fairly be held against him, and post-hoc stories in any event do not bear on the propriety of his conduct at the time.
I think Professors Lubet and Gillers are right, and that Professor Rhode is not. One can approach this question in a pragmatic, purposive manner, in which case it is clear that Judge Alito did nothing seriously wrong, and that this episode provides no basis to question his ethics, or in a strictly literal, formalist, manner, in which case a case might be made that he violated rules against conflicts by hearing the case the first time but then properly recused himself when a complaint was made. That case has not yet been established, however, though the reports cited above imply that it has.
The governing law is 28 U.S.C. §455(b)(4), which provides that a judge should disqualify himself when “he knows that he . . . has a financial interest in the subject matter in . . . a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding.”
“Financial interest” is a defined term. Section (d)(4) says that it means “ownership of a legal or equitable interest, however small” in a party. So, the question is whether having an interest in a Vanguard fund makes you an owner of Vanguard. The statute gives us some help in thinking about that question. Section (d)(4)(1) says that ownership in an investment fund that holds securities does not translate to an ownership interest in the securities themselves, unless the judge helps manage the fund. Section (d)(4)(3) says that owning a policy in a mutual insurance company or depositing money in a mutual savings association is a financial interest “only if the outcome of the proceeding could substantially affect the value of the interest.”
Let’s start with a pragmatic, purposive approach. At first glance, it is not clear that Judge Alito owns Vanguard in an sense relevant to the rule. The purpose of the rule is to guard against the risk that a judge will rule based on his or her economic interest rather than the law. A judge who owns stock in Microsoft might be able to make money just by ruling for Microsoft; in a big case (say, not so hypothetically, an antitrust case) the ruling itself might raise the stock price and make the judge money.
As a general matter, that risk is not as severe, if it is present at all, in the mutual fund context. The value of Alito’s interest presumably depends on the performance of the firms whose securities are held by whatever fund he invests in. Even if we assume that Vanguard is a unitary, monolithic entity (which the reports imply but which it seems not to be), then Vanguard as a whole may do well and the fund do poorly, and vice versa. In that case, ruling for or against “Vanguard” would not be a way to make money for the judge. That is why section (d)(4)(1) is in the statute—it recognizes the economic (though not legal) connection between an interest in a fund and the performance of firms whose securities a fund holds.
(The exemption in section (d)(4)(1) makes sense because a passive investor will not control what the fund owns, meaning a judge could not be sure the fund would hold the stock long enough to reap the rewards of a ruling, nor could a judge control other investments related to an issuer (puts, calls, etc.) that might blur the question of the fund's true position on the firm (i.e., what if a fund shorts a firm and the judge rules for it?). In addition, well-diversified funds would hold so many securities that to require disqualification whenever a judge held an interest in a fund that held an interest in a party would either force judges out of the most economically rational form of passive investment or would lead to the disqualification of a large fraction of judges available to hear any case involving a large business. We might have to live with that if funds presented a high risk of bias, but they don’t. In fact, the diversification within the fund, which would create waves of disqualification, also reduces the importance of events affecting only a single firm, which is another reason the exemption makes sense.)
Of course, sticking with the assumption of a unitary, monolithic Vanguard, to say that the value of Judge Alito’s interest depends on the value of the firms in which Vanguard invests is not to say that Vanguard’s presence in a case is totally irrelevant. Suppose a case threatened Vanguard’s very existence, and thus its ability to operate the funds. An Enron-like litigation debacle involving a fund management company might harm the value of a fund (I am not an expert in the regulation of funds--but let’s assume that is true). The risk that even an ordinary interest, such as a policy issued by a mutual insurance company, might be threatened if the stakes were high enough, thus presenting the risk of economically self-interested judging, seems to explain the rule in section (d)(4)(3).
None of the reports indicate that the case at issue placed Vanguard at any risk at all, much less
a substantial one. To the extent that one can draw an analogy from the mutual insurance example, one would conclude that disqualification is required only where the litigation presented a risk to the judge’s interest by threatening severe harm to the firm involved, which was not the case here. In fact, as I will discuss below, the plaintiff’s case seems to have been frivolous, and even if it had not been the expected cost (risk) to Vanguard was trivial.
What about a stricter, more formal approach? That would require us to be precise about who owned what. Both the NPR and Washington Post reports suggest that Judge Alito had an ownership interest in Vanguard because Vanguard literature describes its investors as owners. I wouldn’t base a legal conclusion regarding the conflicts statute on general descriptions, so bloggers might wish to follow up on this.
If we are to take such descriptions as evidence, however, then the most precise one I have found either does not support the NPR/Post claims or at least presents a much more complicated picture. According to a Philadelphia Enquirer report of the case:
"In its corporate literature, Vanguard says: `The shareholders and owners are essentially one and the same at Vanguard. Vanguard shareholders own the Vanguard funds, which are independent investment companies that jointly own the Vanguard Group. The Vanguard Group provides management, administrative and marketing services to the funds.'"
The NPR/Post reports (which do not cite their source on this point) seem to focus on the general “investors are owners” claim but not the claim that each fund is an independent firm. If this report is accurate, then Alito would be an owner only of the particular funds in which he invested, which would be individual companies. They each would have an ownership in the Vanguard group, but Judge Alito’s ownership interest in a fund, which in turn owned part of The Vanguard Group, would not necessarily give him an ownership interest in The Vanguard Group itself. In an ordinary corporate context one would not say that one owns stock in company B just because one owns stock in company A, which has invested (as a company) in B.
I am not an expert in mutual funds or their regulation, however, so perhaps a general corporate analogy is inapt here. Perhaps this jump from ownership in a fund to ownership in the general management company is justified. A footnote to the Judicial Conference’s “Checklist for Financial and Other Conflicts of Interest" warns that “shares in some mutual funds may convey an ownership interest in the mutual fund management company (in which case that company should be included on the conflicts list),” so the situation is at least common enough to be a reasonable possibility. Neither report has nailed this down, however, though both reports give the appearance that they have. (One news account has Judge Alito relying on a subsequent and contrary advisory opinion regarding mutual funds, but I have not found it.)
If an ownership interest in a Vanguard fund entails an ownership interest in Vanguard the management company, then Judge Alito would be in violation of the financial conflict of interest rule, because the basic prohibition in section (d)(4) runs to ownership interests, “however small.” (See also this advisory report.) He also would be in violation if the plaintiff sued the precise funds he owned, though no one claims that yet.
It is also possible that ownership of a fund could be analogized to ownership in a company that controls a subsidiary involved in litigation, in which case recusal is recommended, but no one has made that argument. On the other hand, perhaps the analogy should be to a judge who owns stock in a firm that is a member of a trade association involved in litigation, in which recusal is not recommended. At a formal, literal level, therefore, the case against Judge Alito has not yet been made, though there is a chance it might be.
None of this is to say Judge Alito should have heard the case. Regardless of the legal status of his fund investments relative to Vanguard, he should not have. His initial instinct, reflected in his 1990 questionnaire answers, was to avoid arguments like this by avoiding even implausible hints of bias, or the faintest appearance of impropriety, which is the most this case would support. His decision to recuse himself and turn the case over to the Third Circuit as a whole when the matter was brought to his attention confirms this view.
Nor is any of this to say that the case reflects particularly badly on Judge Alito, however. Sitting on the case in the first instance was a mistake—an “oops,” as Professor Lubet rightly says--but people do make mistakes. At worst that is what happened here, and even that has not been shown yet. It may be that not even a technical violation occurred, and it is certain that this was not a significant conflict in the sense that it presented a remotely plausible claim of self-interested judging. That conclusion is supported by the preceding discussion and Judge Alito's considered choice to accede to the plaintiff’s motion to recuse himself after the fact. That decision was a wise one, which seems to me to belie the inferences some would draw from both the NPR and Washington Post reports.
Apart from this rather technical and inconclusive debate, it bothers me that these reports seem to want to take credit for having unearthed a scandal and that they paint an incomplete picture of the underlying claim. The NPR report make a pathos play, describing the plaintiff, who gets air time for her lament about Judge Alito, as a “Massachusetts widow” trying to get her husband’s retirement fund, which Vanguard had frozen.
Pathos notwithstanding, according to the district court opinion in this case,
a Massachusetts court found that the plaintiff’s late husband, D. Dev Monga, had moved money from his business to his Vanguard account in an effort to hide assets from his creditors. [[Update: 12/30/05. This language reflected an inference I drew from the opinion when I first wrote, based on my research at that time. I have since learned that this inference is unsound, and that the Massachusetts court did not make such an evidentiary finding.]] The Massachusetts court appointed a receiver for Monga’s business, and it was the receiver who obtained an order freezing the Vanguard account to preserve the assets for distribution to judgment creditors. Vanguard complied with the orders of the Massachusetts courts , issued to prevent Monga from defrauding his creditors by appropriating entity assets to his personal account. [[Update: 1/9-10/06: This sentence referred to the orders of the Massachusetts courts, and the apparent rationale of those courts for issuing the orders. It should be read in light of this correction.]] That is another reason this case presents no real risk of an economic conflict--Vanguard was not trying to keep the plaintiff's assets for itself. It paid those assets to Monga's creditors update: 1/9/06: the receiver, and the chance that Ms. Maharaj, his widow, would get money out of Vanguard was trivially low (meaning the suit's expected cost to Vanguard (apart from litigation costs) was essentially 0). (The district court opinion from which these facts may be inferred (they are reported in the Enquirer story linked above) is not published but can be found in Westlaw at 2001 WL 253648. For readers without access, I reprint excerpts of the opinion below.)
There is no reason to believe Ms. Maharaj had anything to do with this
wrongful conduct, and one can sympathize with her situation, but to depict her as a widow trying to pry her husband’s retirement from the greedy clutches of Vanguard is to misrepresent the facts. I have a hard time believing Ms. Totenberg did not know the facts of the underlying case, which makes me wonder why she filed the report she filed. Perhaps it was to increase the drama of the story. Whatever the reason, I hope this is not a harbinger of the reporting to come regarding this nomination, though I fear that it is.
University of San Diego
School of Law
2001 WL 253648
This action was commenced by D. Dev Monga ("Monga") on November 25, 1995. It is the third action filed arising from the same dispute between Monga and a receiver appointed by the Massachusetts Superior Court, John C. Ottenberg ("Ottenberg"), concerning the collection by Ottenberg of Monga's assets for distribution to judgment creditors and his now defunct corporation. See Massachusetts Superior Court Civil Action No. 89-2951. Among the assets in dispute are certain roll over Individual Retirement Accounts with Founders Funds, Inc., of which Vanguard and IFTC are the respective custodians. The action in the above captioned case, a second action also filed in the Eastern District of Pennsylvania (Civil Action No. 95-6637) and the Massachusetts Superior Court action all arose from the same factual background and raised essentially the same issues.
The Eastern District of Pennsylvania Action No. 95-6637 was dismissed on April 18, 1996 by the Honorable James T. Giles. In March of 1996, Monga was diagnosed with cancer. As a result of Monga's illness, all proceedings in the instant action were stayed and this case was placed in the Suspense Docket on June 13, 1996. See Order entered June 13, 1996. Monga died on August 23, 1996. Since then, his widow and the executrix of his estate, Shantee Maharaj ("Maharaj"), has pursued the Massachusetts litigation.
On August 1, 2000 the Massachusetts Superior Court entered its Judgment on the Receivership, distributing the receivership estate among Monga's creditors and discharging Ottenberg as Receiver. See Judgment on Receivership, entered August 1, 2000. During a recent hearing before the Massachusetts Superior Court, Ms. Maharaj stated her understanding that the "complaint [in the Pennsylvania action] was ... voluntarily dismissed in 1998 ..." and that "litigation in other jurisdictions [had been] barred [by the Massachusetts Superior Court]...." See Transcript of excerpt from hearing held on June 22, 2000, at pp. 1-19, 1-21. In addition, Ms. Maharaj has been "permanently enjoined" by the Massachusetts Superior Court "from instituting or prosecuting against Vanguard, IFTC, or any of them, any proceeding in any state or United States court or administrative tribunal regarding the Monga IRA Accounts." See Memorandum of Decision and Orders on Pending Motions, October 8, 1998, at 19. Also, in that same Order of the Massachusetts Superior Court, Ms. Maharaj was "permanently enjoined from instituting or prosecuting against Founders Funds, Inc., any proceeding in any state or United States court or administrative tribunal regarding the Monga IRA Accounts." See id, at 20. Accepting all facts and all reasonable inferences in Plaintiff's Complaint as true, the Court holds that Plaintiff is not entitled to relief. An appropriate Order follows.
AND NOW, this day of February, 2001, upon consideration of Motion of Vanguard and IFTC to Dismiss This Action with Prejudice (Docket No. 70), Motion of Founders Funds to Dismiss with Prejudice (Docket No. 72), Plaintiff's Corrected Memorandum in Opposition to Vanguard's, IFTC's and Founders Motions to Dismiss (Docket No. 87), Reply Brief of Vanguard and IFTC in Support of Their Motion to Dismiss this Action with Prejudice (Docket No. 88), Reply of Founders Funds, Inc. in Support of its Motion to Dismiss this Action with Prejudice (Docket No. 89) and Plaintiff's Opposition to New Material Inappropriately Submitted by Vanguard and IFTC in their Reply Brief, and Plaintiff's Response to Misstatements of Fact and Law (Docket No. 90) IT IS HEREBY ORDERED that said Motions are GRANTED and this action is dismissed with prejudice.
UPDATE: 12/30/05: Ms. Shantee Maharaj has responded to this post. Her response is here: Download dec_16_univ_san_diego_response_letter1.doc