Staffers inside the Securities and Exchange Commission have a nickname for the massive Dodd-Frank financial overhaul law, which imposes hundreds of new federal rules on business: They call it the “Eugene Scalia Full Employment Act.” Funny, right?
Maybe the joke works better if you know who Eugene Scalia is. Over the past six years, the son of Supreme Court Justice Antonin Scalia has argued four major cases in the U.S. Court of Appeals in Washington, which hears challenges to federal policies, on behalf of corporate interests trying to knock down financial regulations. He’s won each time. In 2005 and 2006 he brought cases for the U.S. Chamber of Commerce to dismiss two rules requiring mutual fund companies—at the time plagued by trading scandals—to place outside overseers on their boards. In 2010 he won a case brought by a group of insurance companies that argued the SEC shouldn’t have power to regulate fixed index annuities, an insurance investment linked to the fortunes of the stock market.
Scalia’s approach is as unflashy as it is effective: He uses the government’s own rules against it. A 1946 law requires agencies to take into account public comments about the impact their regulations would have, to avoid enacting policies in an “arbitrary and capricious” manner. In case after case, Scalia has convinced the court in Washington that the SEC failed to do that. He also invokes a 1996 law that calls for the agency to consider the economic consequences of its rules to promote efficiency and competition. In one case the SEC produced a 60-page economic analysis to combat Scalia’s argument that its rules went too far. That didn’t impress the court, which said the commission had “inconsistently and opportunistically framed the costs and benefits.” Scalia “has proven himself again and again in this area,” says David Hirschmann of the Chamber of Commerce, which hired him to argue three cases against SEC regulations on behalf of its members, among them large corporations and Wall Street firms.
His services don’t come cheap. Hirschmann says challenging a federal regulation can cost the Chamber between $500,000 and $1 million. As Scalia sees it, that’s a bargain. “Usually the cost of litigating one of these cases is infinitely less than the costs that are going to be imposed by the rule,” he says.
Now Scalia is using these same tactics to attack Dodd-Frank. In July he won a case in which he argued to kill a rule, opposed by the Chamber, that would have made it easier for shareholders to nominate candidates for corporate boards. In December he filed a case on behalf of two lobbying groups representing big Wall Street banks, which are challenging rules that would give the Commodity Futures Trading Commission more power to limit speculation in the derivatives markets. “American business isn’t looking to sue the government,” says Scalia, 48, who was the Labor Dept.’s top lawyer in the last Bush Administration and is now a partner at Gibson, Dunn & Crutcher. “It is bringing cases when it feels the action has become so onerous and unjustifiable that litigation is warranted.”
Scalia has found a sympathetic audience in the federal appellate court in Washington. The court tilts conservative and is often skeptical of government regulation. “This is an activist court saying, in effect, we don’t like the substantive work the commission is doing here,” says Harvey J. Goldschmid, a former Democratic SEC commissioner who teaches at Columbia Law School. Goldschmid and other Dodd-Frank supporters say the lawsuits are an attempt by big-pocketed corporations to undo in the courts what they couldn’t stop in Congress. “The financial industry tried to water down Dodd-Frank before it was enacted, [and] has been trying to chip away at it since it became law,” Senator Carl Levin (D-Mich.) said when Scalia filed the CFTC case. Yet the government hasn’t appealed any of the cases it lost to the Supreme Court, an indication the SEC believes it would not prevail.
Spokespeople for the SEC and CFTC declined to comment about Scalia. Privately, two officials concede the success of the legal challenges is changing the way they do business. They are adding more economists and now calculate the consequences of their rules more thoroughly, in part to make them hold up better in court. That won’t be enough to make Scalia and his Chamber patrons stand down, or slow the scores of industry-backed lawsuits Dodd-Frank is expected to provoke in the months ahead. “I guarantee that there will be a lot more,” says Paul S. Atkins, a former Republican SEC commissioner who now runs a consulting firm in Washington. “This is a growth industry.”