Monday, December 14, 2009

Felix Frankfurter, Eustace Seligman, and the Securities Act of 1933

As it happened, I was rummaging around in Felix Frankfurter’s correspondence on the Securities Act of 1933 a few days before the House of Representatives passed its comprehensive bill reforming the nation’s financial sector. I already knew from the thoroughly researched studies of Michael Parrish, Joel Seligman, Joseph Lash, and Robert Thompson and Adam Pritchard that Frankfurter believed the corporate bar had advised investment bankers to postpone new issues to build up pressure to amend the statute. This “capital strike” confirmed the Harvard law professor’s longstanding belief in the selfishness of New York’s legal titans, for whom “big money was the big thing.” The “charge against the Act is what we used to call, in our days at Harvard, ‘hogwash,’” he declared to George A. Brownell of Davis, Polk & Wardwell. “There isn’t a particle of doubt that lawyers of responsibility and high standing have infused clients with fears and, worse than that--I know what I am talking about--actually discouraged clients, at times, from doing any financing for the present, so that the campaign against the Act, when Congress next meets, should show that the Act had prevented financing.”

Even so, I was surprised when I looked up some of Parrish’s footnotes and read Frankfurter’s correspondence with corporate lawyers during and after the passage of the act. The sharpest exchange was with Eustace Seligman of Sullivan & Cromwell. On April 11, 1933, Seligman wrote to Frankfurter that he was pleased to learn that the professor would be helping to prepare a substitute for the unworkable bill drafted by Huston Thompson, a former FTC chairman who, according to Louis Brandeis, had “every quality that makes for a great lawyer , except one . . . brains.” Hard on Seligman’s praise, however, was a slight: Frankfurter, the Wall Streeter opined, should have someone “who is familiar with the practical operation of securities selling” review his bill to ensure that it was workable “in practical operation and not hamper legitimate business.” Frankfurter let this condescension pass unremarked in his acknowledgment of Seligman's letter.

A fortnight later, after Sam Rayburn had introduced the bill drafted by Frankfurter’s proteges Benjamin Cohen, Thomas Corcoran, and James Landis without first showing it to a Wall Streeter, Seligman sorrowfully announced to Frankfurter his regret that the young drafters had produced such a punitive measure. “When I was at law school I shared the view that Wall Street bankers were wicked people and that if they sold me a security that went down in value, they should be personally liable,” Seligman wrote. After many years working on securities issues, he had come to very different conclusions. The sale of no commodity was “attended by greater care and precautions than that of securities,” he now maintained. “Bankers of standing and of financial responsibility have in every case that I have had any connection with gone to the extreme caution to insure that the circular was correct and complete.” Seligman closed by again urging Frankfurter to get “the viewpoint of a practicing” Wall Street lawyer, because it “would add something even to the viewpoint of a Harvard professor.”

This time Frankfurter hit back. He accused Seligman of “insouciance” in assuming that none of the drafters had practical experience of securities issues. (As a junior at Cotton & Franklin, Corcoran had handled many bond issues for Dillon, Reed; Cohen had many, somewhat shadowy adventures of his own on Wall Street in the Twenties.) To Seligman’s encomium for his banker-clients, Frankfurter sarcastically replied, “What a pity that you have not been connected with all security issues, for then there would be no need for any corrective legislation on the subject.”

After acknowledging that “my reply will probably irritate you as much as your letter did me,” Seligman returned fire. He enclosed an associate’s analysis of the house bill detailing mistakes that “any intelligent draftsman” should have avoided. He scoffed at the notion that, “if the House bill had been law for the past ten years, the great losses incurred by investors in recent years would have been appreciably reduced.” Frankfurter’s implication “that many bankers’ circulars issued in recent years have been fraudulent” lacked “the slightest factual basis.”

This brought another riposte from Frankfurter, and another sorrowful reply from Seligman. “I am a sadder but a wiser man,” the Sullivan & Cromwell lawyer wrote on May 15. “I had hoped notwithstanding what I had heard from mutual acquaintances to the contrary, that it might be possible to conduct an objective discussion with you on a matter where we did not entirely agree. I realize that this is not the case and that you prefer personalities and invective to reasoned arguments.”

In the summer of 1933, Seligman wrote to Frankfurter again, despite “the very unfair tone of your letters to me this spring,” to complain that his banker-clients faced “severe liabilities” for want of definite opinions from counsel on the many ambiguities of the securities law (enacted on May 27). He warned that the Wall Streeters would seek amendments at the next session of Congress. “I hope that you will be willing to cooperate in this process,” he closed, “as I really feel that the responsibility upon you for having fathered the existing Act is such that it must keep you awake at night very frequently.”

Frankfurter rejoined that he was sleeping well, that the statute’s ambiguities could and should be resolved against the issuers, dealers and underwriters of securities, and that Seligman’s difficulties with the act went not to its drafting but its underlying principles and assumptions. He observed that the Sullivan & Cromwell lawyer evidently believed that “practical knowledge of large affairs” could be found only in “two or three law offices.”

The exchange left Frankfurter so angry that when his revered mentor Henry Stimson wrote to say that the ambiguity of the 1933 act was “one of the key logs in the jam which must be loosened” before business would move normally, he replied with considerable heat. “Leading financial law firms” were attempting “chloroform” the act, Frankfurter complained. The lawyers who, “to their fat profit, ‘passed’” on “the baldest abuses of fiduciary responsibility” now hoped that the public and Congress would forget about their role. Stimson’s partner, a critic of the statute, was “so hardened a laissez-fairist that when it comes to matters of governmental regulation he suffers from astigmatism.” And “those who seek to open the door to amendment of the Act may be getting something from the next Congress that they’re not bargaining for.”

Stimson waited for passions to cool, then responded that Frankfurter’s letter “gave me the impression that for the first time in my years of experience with you there had entered into your mind an element of personal feeling which swung you from the balance of fairness which I have always grown to expect.” The two would patch things up, but not before the quarrel over securities regulation had moved back to Washington. Corcoran, Cohen and Landis battled Seligman and other members of the Wall Street bar as Frankfurter sent encouragement from across the Atlantic and Roosevelt stood on the sideline, awaiting a victor. Ultimately, the corporate bar found in the disclosure regime inaugurated by the 1933 act a new and lucrative practice as well as a needed check on frenzied finance. As the Financial Regulatory Reform Bill moves to Senate, will we see Seligman’s haughtiness or the eventual wisdom of Depression-era Wall Streeters from today’s corporate bar?

1 comment:

Shag from Brookline said...

A very compelling - and timely - post.

This brings to mind the role of attorneys in the development of Delaware's corporate law statutes where apparently critics like Frankfurter were not heard from or were ineffective in providing protections to shareholders.