Earlier this week, I mentioned the former Public Utility Holding Company Act (aka PUHCA). Although it was repealed several years ago, the PUHCA remains important as the legal substrate upon which the famous, and still important, Chenery cases were decided.
Trading by Insiders, But No Insider Trading
The Chenery cases involved the SEC’s authority under the PUHCA to approve utility reorganizations. In the first case, S.E.C. v. Chenery, 318 U.S. 80 (1943), the management of a holding company registered under the PUHCA challenged the SEC’s approval of a plan of reorganization. Management challenged the SEC’s approval because it prohibited their shares of preferred stock from being treated equally with other preferred shares in the reorganization. Management had acquired these preferred shares while the SEC was considering successive reorganization plans. Remarkably, the SEC did not find that management had acted covertly or traded on inside knowledge, or that their position as reorganization managers enabled them to purchase the preferred stock at prices lower than they would otherwise have had to pay, or that their acquisition of the stock in any way prejudiced the interests of the corporation or its stockholders. The SEC concluded that “the ‘duty of fair dealing’ which the management owes to the stockholders is violated if those in control of the corporation purchase its stock, even at a fair price, openly and without fraud.” The Supreme Court, in an opinion by Felix Frankfurter, disagreed with the SEC’s application of the law. On appeal, the SEC argued that its decision could be upheld on other grounds. The Court, however, would have none of this and thus established the important principle that agency actions could only be upheld on grounds invoked by the agency. As Professor Kevin M. Stack has observed:
The Chenery principle makes the validity of agency action depend upon the validity of contemporaneous agency reason-giving.
The Constitutional Foundations of Chenery, 116 Yale L. J. 952, 956 (2007).
This principle has been followed in California. See, e.g., Pacific Gas & Electric v. P.U.C., 85 Cal. App. 4th 86, 96 (2000). This important principle of administrative law is, of course, the opposite of the common rule on appeals that an appellate court can uphold a trial court decision even though the trial court applied the wrong reasoning.
“And ’tis not done.”
After remand, the SEC reached the same conclusion. This time, however, things were different. The SEC didn’t base its action on its understanding of fiduciary law, but on “a thorough reexamination of the problem in light of the purposes and standards” of the PUHCA. This time, moreover, the opinion was written by Justice Frank W. Murphy and the court sustained the SEC’s decision, S.E.C. v. Chenery, 332 U.S. 194 (1947). In upholding the SEC, Chenery II established another principle of administrative law – when Congress authorizes an agency to proceed either by rulemaking or by adjudication, the choice of paths belongs to the agency. Chenery II has also been followed by California courts. See, e.g., Agricultural Labor Relations Bd. v. California Coastal Farms, Inc., 31 Cal. 3d 469, 478 (1982).
Chenery and the “run for the roses”
This weekend will be the 139th running of the Kentucky Derby. Christopher Tompkins Chenery, who is mentioned in Chenery I as “C. T. Chenery”, was the owner of Secretariat, the famous winner of the 1973 Kentucky Derby (and father of 653).