Financial Info: Banned in Boston

Financial Info: Banned in Boston

January 06, 2011
Originally published in The Wall Street Journal

"Banned in Boston." Those words became a catch phrase in the mid-20th century, as the city was notorious for suppressing works by authors such as Ernest Hemingway, H.L. Mencken and Sinclair Lewis.

Back then, Massachusetts's obscenity laws were written to authorize the banning of books, plays and movies considered dangerous by powerful paternalistic groups such as the Watch and Ward Society. As late as the mid-1960s, the Massachusetts Supreme Judicial Court upheld a ban of the 18th-century English novel "Fanny Hill," only to be reversed by the U.S. Supreme Court in the landmark Memoirs v. Massachusetts (1966) case.

Today the Bay State is a liberal bastion, so you might think that "Banned in Boston" is an anachronism. But on Thursday the state's highest court will consider a case involving censorship of truthful speech. The target of state Attorney General Martha Coakley and this modern Watch and Ward Society: financial information disseminated to the general public by a hedge fund.

In 2007, Massachusetts Secretary of the Commonwealth William Galvin sanctioned the hedge fund Bulldog Investors for making an illegal public "offering" under the state's securities laws. Under state (and federal) law, alternative investment vehicles such as hedge funds can generally offer their securities only to "accredited investors" who meet certain financial conditions such as having $1 million or more in net worth.

Massachusetts doesn't contend that Bulldog signed up any investor who didn't meet the law's definition of "accredited investor." Rather, it charges that Bulldog's "offering"—in the form of a website with information about the fund's performance and philosophy—"fail[ed] to properly restrict access by prospective investors."

The Bay State is not contending that any information on Bulldog's website was false or misleading. Instead, in echoes of the state's puritanical censors of the past, officials are trying to suppress truthful information because it "arouses" the public. The website, they say, "even though not couched in terms of a direct offer," may still "condition the public mind or arouse public interest in the particular securities."

The legal team for Phillip Goldstein, the cofounder of Bulldog, will argue that Massachusetts' broad definition of "offering" violates the First Amendment. Among his lawyers is Laurence Tribe, the liberal Harvard Law professor who has just finished a stint as senior counselor for access to justice in the Obama Justice Department.

State Attorney General Coakley, for her part, has implied in a brief that the First Amendment doesn't apply to securities laws. "Widespread concerns . . . exist about extending the First Amendment to securities regulation," her brief states. It cites the controversial California Supreme Court ruling, in Kasky v. Nike (2002), that "differential treatment of speech about products based on the identity of the speaker is inherent in the commercial speech doctrine." This view subjects speech to a highly subjective test of how much it benefits a speaker financially—rather than whether it actually advocates a commercial transaction.

A friend-of-the court brief filed by a group of financial researchers (including this author) explains why Ms. Coakley is mistaken. The brief states that "making truthful information about lawful activity accessible to journalists, academics and others who wish to receive it for noncommercial reasons is noncommercial speech regardless of who is speaking."

The brief adds that even if the information on the website were deemed "commercial speech" entitled to less constitutional protection, "regulations that restrict public access to truthful information about a lawful product or service are unconstitutional."

The U.S. Supreme Court decided in Lorillard Tobacco Co. v. Reilly (2001) that a Massachusetts rule aimed at preventing tobacco ads from reaching children violated the First Amendment because it blocked too much speech to adults. And the state itself has a website advertising state lottery tickets, even though their purchase is restricted to adults.

In this case Massachusetts is treating a whole class of non-wealthy adults as children who can't be trusted with basic information about how hedge funds work. In the name of protecting investors, Ms. Coakley and Mr. Galvin are actually perpetuating problems—namely lack of transparency in the hedge-fund market and inequality of information among investors—so often decried by politicians.

For these reasons, the Massachusetts Supreme Judicial Court should think long and hard about whether it wants the "Banned in Boston" insignia appended to financial speech in the 21st century.