Associate Justice, U.S. Supreme Court
(With permission of the Pierce Butler Family Papers, Minnesota Historical Society )
In 1917, the Supreme Court was asked to determine if states could regulate securities firms and practices, even when firms selling securities involved interstate activities. Three major cases -- Hall v. Geiger-Jones Company, Caldwell v. Sioux Falls Stock Yards Co., and Merrick v. Halsey -- involved different blue sky laws from Ohio, South Dakota and Michigan, with varying degrees of regulation. In decisions issued in 1917, Justice McKenna wrote for the Court majority upholding the constitutionality of each regulation, and dismissing interstate commerce clause and substantive due process objections to the state legislation.17
The majority described the legislative rationale for passage of the state blue sky laws, stating that “the name that is given to the law indicates the evil at which it is aimed, that is, to use the language of a cited case, ‘speculative schemes which have no more basis than so many feet of blue sky;’” or, as stated by counsel in another case, “to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations. Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government and that the appreciation of the consequences of it is not open for our review.” 18 In each case, the Court determined that state regulation of securities firms and practices within each state, even if there were some multi-state involvement in the marketing or management of securities sales personnel, was constitutional.
In permitting regulation of property rights, these major cases appear to be aberrations from Justice Field’s successful creation of the property-rights-centered, laissez-faire constitutionalism of the early twentieth century. In reality, the blue sky cases supported the Court’s rationale that, in the federal system, it was entirely appropriate that state legislature determinations of the evils of unrestricted securities marketing demanded local solutions. The blue sky cases confirmed that reasonable state securities regulations would pass constitutional due process muster, even if they affected interstate markets.
The national securities industry viewed warily the increasing likelihood of a patchwork of various state regulation schemes. Securities industry interest groups, especially the IBA, felt that multiple state regulations would make the national scope of their business operations impossibly complex. Large New York and Chicago investment firms would be forced to undertake substantial business restrictions in their operations to avoid diverse, onerous license requirements in ten or twenty states. The industry and IBA began consideration and promotion of model securities laws, and even more radically, a national system of securities regulation.19
(17) Hall v. Geiger-Jones Co., 61 US 480; Caldwell v Sioux Falls Stock Yards Co., 61 US 493; Merrick v. Halsey, 61 US 498 (1917).
(18) Hall v. Geiger-Jones Co., 490-494. While it was not until passage of the Securities Act of 1933, when Rule 10b-5 liability would begin to develop, the blue sky cases provided an important judicial acceptance of the principles inherent in that rule.
(19) Parrish,12.
