Activist investor Phil Goldstein of New Jersey-based Bulldog Investors, the man who successfully fought the Securities and Exchange Commission's attempt to force the registration of hedge funds, is set to argue in Massachusetts' highest court that restrictions on hedge fund advertising are a violation of the First Amendment right to free speech.
In a related case, brought by Goldstein, a lower court decided against him on September 30, a verdict he plans to appeal. In a letter sent on October 18 to friends and investors, Goldstein argued his case. The full text of that letter is reproduced here with permission. For more information on the cases, please read Phil Goldstein's First Amendment case heads to Massachusetts' highest court.
To those who have a continuing interest in this case:
As Thomas Paine said, “The harder the conflict, the more glorious the triumph.” Thus far, we have lost every round in what I have always believed is a vindictive enforcement action brought by Secretary Galvin against us for allegedly (1) not having a restricted website and (2) responding to an unsolicited request for information about our hedge funds. The facts surrounding this case, i.e., no allegation of fraud, Galvin’s failure to contact Mr. Hickey to determine what led him to access our website, Galvin’s rush to sue us without any meaningful investigation, his refusal to enter into settlement discussions even though no one was harmed, and his agreement in our separate civil rights action to stipulate that we did not say anything misleading or attempt to enter into an illegal transaction as a quid pro quo for us not deposing him or calling as a witness (presumably to avoid being subjected to potentially embarrassing questioning), suggest that his true motive from the beginning was to silence an ideological opponent.
Galvin’s modus operandus for his enforcement targets is to make it so painful for them that, even if they are innocent and may ultimately prevail in court, they will settle by accepting a cease and desist order and paying a fine, thereby implicitly admitting guilt, rather than go through a costly, lengthy and uncertain litigation. Moreover, it is a foregone conclusion that they will lose the first round because his administrative “hearing officer” (I have to put that title in quotes) will support him. In our case, the “hearing officer,” Laurie Flynn was asked by a publication of the Boston Bar: “Who has most influenced your legal career and why?" She responded in part, “Secretary Galvan, whose compassion, work ethic and dedication to public service motivate me to continue to provide the best public service possible.” Is this someone who can impartially decide a case that Galvin is prosecuting? My guess is that Galvan’s Securities Division has never lost a case – or even a motion -- in front of a hearing officer in his own agency. Why the bar tolerates these sham administrative hearings is beyond me. This is Massachusetts, not Zimbabwe.
However, Galvin made what a critical mistake. He should have known that the guys that took on the SEC (and won) might not roll over as quickly as his other victims. Since Galvin lives for favorable publicity in his quest for higher office, his silence about all of his legal “victories” thus far is telling. I think he knows that every ruling has been wrong and he is on thin ice if the case ever gets before a fair and competent adjudicator. He has lucked out so far. The non-agency decisions have all been issued by Justice Judith Fabricant of the Massachusetts Superior Court who was a prosecutor for most of her professional career. Her sympathies for Galvin are evident and have impaired her willingness to apply the appropriate legal principles to this case. If we cite a precedent that does not suit her goal of protecting Galvin, she distorts or ignores it. For example, in Rush v. Savchuk, the Supreme Court said this about personal jurisdiction:
The Minnesota court also attempted to attribute State Farm's contacts to Rush by considering the "defending parties" together and aggregating their forum contacts in determining whether it had jurisdiction. The result was the assertion of jurisdiction over Rush based solely on the activities of State Farm. Such a result is plainly unconstitutional. Naturally, the parties' relationships with each other may be significant in evaluating their ties to the forum. The requirements of International Shoe, however, must be met as to each defendant over whom a state court exercises jurisdiction.
Galvin never alleged that Andy Dakos, Rajeev Das or I had any contacts whatsoever in (or directed to) Massachusetts. Nor could he have made such an allegation in good faith since none of us knew anything about the alleged illegal email exchange between Steve Samuels and Hickey until Galvin threatened to sue us. Fabricant just ignored this critical fact – and the Supreme Court’s “plainly unconstitutional” language -- and lumped all the defendants together as “Bulldog.” Fabricant is not dumb and this is not mere “error.” Apparently, she just could not figure out how to distort the Supreme Court’s clear language. In the course of this lawsuit, Secretary Galvin made a remarkable assertion: that he is entitled to fine a hedge fund manager for responding truthfully to an unsolicited email inquiry from a Massachusetts resident unless that resident first proves to the hedge fund manager that he is a wealthy investor. On September 30, 2009 Justice Judith Fabricant of the Massachusetts Superior Court agreed with Secretary Galvin by ruling that he can bar journalists, academic researchers, and anyone else that merely wants to gain insight into the investment strategy of a hedge fund manager from accessing the fund’s website.
With respect to our First Amendment claim, Justice Fabricant’s has continually failed to heed the admonition of the United States Supreme Court that judges should be “especially skeptical” of governmental attempts to censor truthful commercial speech. In finding a similar ban imposed by the FDA on truthful advertising of compounded prescription drugs to be unconstitutionalThompson v. Western States Medical Center, 535 U.S. 357 (S.Ct., 2002)Thompson v. Western States Medical Center, 535 U.S. 357 (S.Ct., 2002) Thompson v. Western States Medical Center, 535 U.S. 357 (S.Ct., 2002)Thompson v. Western States Medical Center, 535 U.S. 357 (S.Ct., 2002), the Supreme Court said: Thompson v. Western States Medical Center, 535 U.S. 357 (S.Ct., 2002)
There is, of course, an alternative to this highly paternalistic approach. That alternative is to assume that this information is not in itself harmful, that people will perceive their own best interests if only they are well enough informed, and that the best means to that end is to open the channels of communication rather than to close them. . . . It is precisely this kind of choice, between the dangers of suppressing information, and the dangers of its misuse if it is freely available, that the First Amendment makes for us. . . .
Bans against truthful, nonmisleading commercial speech . . . usually rest solely on the offensive assumption that the public will respond “irrationally” to the truth. . . . The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.
Contrary to this controlling Supreme Court precedent, Justice Fabricant uncritically accepted Secretary Galvin’s dubious claim of disastrous consequences if non-wealthy Americans are allowed access a hedge fund’s website – even though only sophisticated investors are actually allowed to invest in the fund.
All of these nuances have largely been lost on the press which tends to report only who won and who lost and tries to get a comment from the parties or others. There has been virtually no meaningful public analysis of the legal merits of any of the rulings in this case. Similarly, the press mostly pooh-poohed our chances in our lawsuit challenging the SEC’s hedge fund advisor registration rule. When we won, it got a lot of coverage but anyone who had read the briefs or attended the oral argument would not have been surprised.
Despite having lost every round over the past three years, I am cautiously optimistic that our losing streak may soon be over. On November 12, 2009 the Massachusetts Appellate Court will hear oral argument on our appeal of Fabricant’s affirmation of the Secretary’s enforcement action. There will be a panel of three judges who are much more likely to give us a fair shake than Fabricant. I have attached (in two emails since they are big) the appellate briefs and Fabricant’s decision denying that our First Amendment rights have been violated in our related civil rights action so you can judge for yourself what our odds are in the appellate court.
My lawyer and I think we will prevail on personal jurisdiction sometime after the November 12th oral argument and that the appellate court will not decide the First Amendment claim (since it would not have to do so). If so, that means Galvin’s entire enforcement action is invalid ab initio (from Day One) and the stain on our reputation will be instantly removed. If so, Galvin’s failure to establish personal jurisdiction over us is a violation of our constitutional right of due process and entitles us to seek a fee award from the state. That is not the kind of publicity Galvin wants. Also, we intend to continue to appeal Fabricant’s error-filled ruling denying our First Amendment claim in our parallel civil rights action (because the threat of a future enforcement action still exists). A win on that claim would also allow us to seek a fee award and of course, would have huge implications for the application of the First Amendment to securities laws in general.
Phillip Goldstein
Bulldog Investors