By Alison Frankel
(Reuters) - Congress overhauled disclosure rules for federal judges last April to bolster public confidence that judicial decisions haven’t been tainted by secret financial considerations.
But the new law does not undermine longstanding precedent that allows judges to invest in index funds without worrying about the funds’ ownership of shares in public companies, according to a ruling on Wednesday from U.S. District Judge Yvonne Gonzalez Rogers (NYSE:ROG) of Oakland, California.
In notably fiery language, Rogers denied a recusal motion by patent holder Cellspin Soft Inc, which argued that the judge had a financial stake in Alphabet (NASDAQ:GOOGL) Inc through her husband’s jobs -- formerly as a partner at McKinsey & Company Inc and then as a contract partner for venture capital firm Ajax Strategies -- and through her multimillion-dollar investment in two broad-based Vanguard index funds. Alphabet owns Fitbit (NYSE:FIT) Inc, one of the half-dozen defendants Cellspin accused of infringing its patents on the automated distribution of multimedia content.
The judge, who granted summary judgment to the defendants last June, after more than five years of litigation, explained at length why, in her view, Cellspin’s “speculation” about her husband’s financial connections to Alphabet and its subsidiary Google LLC was utterly specious. In a nutshell: He left McKinsey before Google acquired Fitbit and is not an equity partner at Ajax, where his sole role is to advise the boards of two portfolio companies in which Google has no stake.
“The accusations are frivolous and devoid of any evidentiary merit,” the judge wrote. “Plaintiff’s attack on the integrity of the judiciary … not only demonstrates a measure of desperation but is divorced from the law and the facts.”
It’s always fun to read indignant judicial opinions, but in the larger context of judicial ethics, the most important part of Rogers’ opinion is her discussion of the investments that she and her husband have in two Vanguard funds whose underlying stock portfolios are calibrated to reflect stock indexes. One of the Rogerses' investments is in a fund linked to the Standard & Poor’s 500 Index. The other is in an index fund for internationally traded stocks.
The federal statute governing judicial recusals includes a safe harbor provision that says judges need not step aside if they have a financial interest in a party through a “mutual or common investment fund,” as long as the judge does not have a role in managing the fund. In several reported decisions between 2011 and 2015, judges have held that index funds – including the very Vanguard S&P 500 fund in which Rogers and her husband invested – are, in essence, mutual funds and therefore included in the safe harbor.
Cellspin's lawyers at Garteiser Honea argued, however, that by investing in the Vanguard funds, Rogers had chosen to take a financial interest in the shares of the large public companies that dominate the underlying indexes, including Fitbit owner Google and other defendants.
“Owning index funds is just another way to hold/own Google and Apple (NASDAQ:AAPL) stocks,” Cellspin argued. “Investing in an index fund … provides a foreseeable investment in Google.”
Cellspin said that 2022 precedent from the Federal Circuit in Centripetal Networks, Inc. v. Cisco Systems (NASDAQ:CSCO), Inc. sets a more demanding standard for judges who own stock. (In that case, the appeals court ruled that a West Virginia judge was required to recuse based on his wife’s ownership of about $5,000 in Cisco stock, even though he and his wife moved the shares into a blind trust partway through the litigation.)
Cellspin's lawyers also said that by passing a new judicial disclosure law last year, Congress signaled how seriously it expects judges to think about their financial conflicts.
Fitbit’s counsel at Desmarais pointed out the potentially seismic consequences of Cellspin’s index fund theory in their brief opposing Rogers’ recusal. “Cellspin’s flawed interpretation of the law,” Fitbit said, “taken to its logical conclusion, would likely exclude Judge Gonzalez Rogers -- along with many, if not most, other federal judges -- from presiding in almost every case involving publicly traded corporations.”
Rogers was having none of it. The new law, she said, did not change the statutory provision offering a safe harbor for mutual fund investments. Nor, she said, did the Federal Circuit’s Centripetal decision, which involved direct ownership of stock in a litigant before the judge. Rogers said the Vanguard funds in which she has invested “are prototypical examples falling into the safe harbors for mutual or common investment funds.”
In an email statement Cellspin counsel Scott Fuller of Garteiser insisted that the recusal motion was “neither baseless nor illogical,” since the recusal standard requires judges to step aside even if there is an appearance of partiality, including bias from a financial conflict.
Fuller added that policy concerns about a potential parade of recusals if judges were required to step aside based on index fund holdings cannot dictate the outcome of specific recusal demands. “Judges are free to make whatever investments they see fit to make (including owning specific stocks or funds) but the impact of such investments will necessarily require recusal in some cases in order to maintain and protect the public trust in the court system,” he said.
I reached out to defense lawyers for Fitbit, Nike Inc (NYSE:NKE), Under Armour Inc (NYSE:UAA), Fossil Group Inc (NASDAQ:FOSL) and Garmin (NYSE:GRMN) International Inc. All opposed Rogers’ recusal. None got back to me.
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