William O. Douglas’s involvement with the SEC began with his criticism of the Securities Act of 1933 while serving as a professor at Yale Law School. Prior to joining the Yale Law School faculty, Douglas was a law professor at Columbia Law School. With his move to Yale, Douglas joined an emerging group of realist legal scholars who challenged the full disclosure philosophy of the law. Legal realists, led by scholars such as Louis Brandeis and Oliver Wendell Holmes, asserted that the law demanded an objectivity that conformed to social reality. Focused on economic concerns and the creation and growth of corporations through the systematic management of finance, they asserted that the common law could not resolve the massive problems created by the Great Depression.
Douglas began his academic career surrounded by a strong group of Yale Law School professors, including Jerome Frank and Thurman Arnold, and Columbia Law School professor Adolph Berle, Jr. They argued that judges should admit that their choices were often political, exercising judicial power with an eye to social results. Their goal was to use the law to revitalize American capitalism and its institutions which had failed in the Great Depression by regulating private economic governance through governmental administrative agencies.
Douglas spent his first two years after graduating from Columbia Law School studying Wall Street. He practiced law with the high powered New York firm of Cravath, De Gersdorff, Swaine and Wood. But Douglas was more intrigued with theories of corporate governance and regulation than with Wall Street law practice. He became an enthusiast of Thorstein Veblen’s "Absentee Ownership," and Louis Brandeis’s classic, "Other People’s Money." In 1927, he left New York and returned home to Yakima, Washington to practice law with an old friend. Facing an oversupply of lawyers, Douglas lasted there but ten days, returning to Columbia Law School where he began teaching and writing on securities law, corporate governance, and bankruptcy issues. When Congress passed the Securities Act in 1933, Douglas criticized the Act in a Yale Law Review article as insufficient to address the problem. "I saw just enough of the horrors of Wall Street," he would tell Felix Frankfurter, "to know that adequate control of those [corrupt securities] practices must be uncompromising."
As a professor, Douglas criticized the New Dealers for not going far enough to regulate and revamp the economic system. He wrote that full disclosure of the 1933 Act provided inadequate investor protection because investors "either lack the training or intelligence to assimilate and find useful the balance sheets, contracts or other data in the registration statement, or are so concerned with a speculative profit as to consider them irrelevant." He called for a strong securities act integrated with a whole program of industrial regulation, with control lodged in the hands of an effective, efficient new agency. Disappointed with the authority granted to government by the Securities Act and concerned over the immense problems of the Depression, he warned his friend Jerome Frank that "Felix and his common law are not going to pull us out of this hole."(1)
The Securities Exchange Act of 1934 created the Securities and Exchange Commission as a separate federal agency that would regulate the stock exchanges and existing securities which Douglas contended most needed regulation. Douglas, who had authored several casebooks and numerous law review articles on corporate finance, bankruptcy and securities law, including a 1934 Harvard Law Review article entitled "Protective Committees in Railroad Reorganizations," jumped at the opportunity. Anxious to get involved in New Deal government service regulating business, Douglas sought a seat on the newly formed Securities and Exchange Commission. When President Franklin Roosevelt surprised everyone by appointing Joseph P. Kennedy as the first Chairman, Douglas tried, unsuccessfully at least for the moment, to obtain a position at the new Commission.
James M. Landis, who had been with the Securities Division of the Federal Trade Commission, became Kennedy’s closest advisor on the newly created Securities and Exchange Commission. In May 1934, he was placed in charge of managing Section 211 of the 1934 Act which authorized the SEC to make a detailed study of business bankruptcies, reorganizations and protective committees. Landis, seeking to expand the influence of the best legal minds from the realist school, urged Kennedy to appoint Douglas to head the investigation.(2) After his appointment, Douglas took what would become a series of temporary summer and holiday leaves of absence from his law teaching to organize the Protective Committee Investigation staff.
(2) Joel Seligman, The Transformation of Wall Street ( Boston: Northeastern University Press, 1995), 110.
