Indeed, despite the factual similarity, Judges Posner and Flaum
apparently thought In re Cement's holding so inapposite to the issue
before them it was not discussed or even cited in the opinion or
dissent. See Union Carbide, 782 F.2d at 710-17 (Posner, J.); id. at
717-18 (Flaum, J., dissenting). This was no accident; Judges Posner and
Flaum did not overlook a leading circuit court opinion on the issue of
recusal that was cited in the lower court's opinion. See In re Industrial
Gas Antitrust Litig. 1985 WL 2869, at *1-*2 (discussing In re Cement, a
case of "almost identical circumstances," but holding that in her
situation "disqualification could be cured by divestment of the stock").
Rather, Judges Posner and Flaum seemingly shared the understanding that
the holding of In re Cement (that a court must recuse itself if it has
presided with a conflicting financial interest for a number of years) had
no bearing on the issue of whether a judge could preside over a case if
she terminated her disqualifying interest before making any substantive
The legislative history does not indicate that anyone in Congress
believed that the two cases were similar either — Union Carbide was
simply not perceived to be a problem. Thus, if any conclusion can be
drawn about Congress's intent in 1988, it must be that it approved of
Union Carbide — otherwise Congress could have overturned it just as
it overturned In re Cement. Either way, Union Carbide, as well as its
underlying rationale, is still good law.
The only support for the argument that a court may not promptly remove
a conflict at the beginning of a case is found in Tramonte and its quite
sparse progeny. Because Tramonte's understanding conflicts with Congress's
intent in 1974 and 1988, subsequent case law, and the well-respected
opinions of the Committee on Codes of Conduct, the argument based upon it
(that disqualifying conflicts are incurable) must be rejected.
Courts may always take measures at the outset of a proceeding to remove
potential conflicts. The fact that those conflicts exist when the court is
assigned the case does not taint the proceedings. Likewise, if the
conflict arises in the middle of the litigation, courts do not need to
recuse themselves as long as they act promptly to rectify the situation.
But if a court presides over a case while maintaining a conflict of
interest, it must disqualify itself — not because it could not
preside in the future without having a conflict, but because it cannot
retroactively repair the damage. Subsection (f) provides one exception to
this rule: If the conflict involves a financial interest in a party, then
a court may divest itself of the interest retroactively in order to
remain on the case.
In this case, the Court has promptly removed any potential conflicts.
From the very beginning, it has sold any financial interest in a party
and waived any class membership in the actions. With this in mind, the
Court now turns to the relevant
sections of 455 and the Moving
VI. MOVING DEFENDANTS' ARGUMENTS
The Moving Defendants argue that recusal is required under four
provisions of the statute:
• 455(b)(4), because the Judge is known to have
`a financial interest in the subject matter in
controversy' and is known to have a `financial
interest . . . in a party to the proceeding,
or any other interest that could be
substantially affected by the outcome of the
proceeding' . . .;
• 455(b)(5), because the Judge is `a party to
the proceeding' and is known to have `an
interest that could be substantially affected
by the outcome of the proceeding' . . .;
• 455(b)(1), because the Judge has `personal
knowledge of disputed evidentiary facts'
arising out of her investment experience and
losses . . .; and
• 455(a), because the Judge's `impartiality
might reasonably be questioned' in light of
her own losses on some of the securities at
issue. . . .
Moving Mem. at 3. I will consider each argument, and the relevant
subsection of 28 U.S.C. § 455, in turn.
Three separate interests are contemplated under subsection (b)(4): (1)
"financial interest in the subject matter in controversy," (2) financial
interest "in a party to the proceeding," or (3) "any other interest that
could be substantially affected by the outcome of the proceeding."
28 U.S.C. § 455(b)(4). A "`financial interest' means ownership of a
legal or equitable interest, however small," 28 U.S.C. § 455(d)(4)
(emphasis added), with certain statutory exceptions.*fn31
In this case, the stock previously held by this Court was a financial
interest in an issuer defendant and an issuer identified in one
complaint. See Kidder, Peabody & Co. v. Maxus Energy Corp., 925 F.2d 556,
561 (2d Cir. 1991); Key Pharm., Inc. v. Mylan Labs. Inc.,
24 F. Supp.2d 480, 482 n.2 (W.D. Pa. 1998). I will also assume,
arguendo, that this Court's status as a putative class member qualified
as a "legal or equitable interest, however small," 28 U.S.C.
455(d)(4)(i), in "the subject matter in controversy."*fn32 See
Tramonte, 136 F.3d at 1030; Gordon, 141 F. Supp. at 1043.
I have removed both of these conflicts. Given this Court's previous
analysis, see supra Part V, this Court may not disqualify itself on the
grounds that it once owned stock in three defendants or was a
Thus, the only remaining question under subsection (b)(4) is whether
this Court currently holds "any other interest that could be
substantially affected." 28 U.S.C. § 455(b)(4) (emphasis added).
Besides continuing to own stock in two companies that conducted their
IPOs during the relevant four-year period (and are not defendants in
these actions), the Court also holds financial interests in many other
publicly traded companies. The Defendants have failed to establish
— and the Court does not see — how the outcome of this
litigation will have any direct effect on any of the Court's remaining
The fact that two of the stocks currently owned by the Court were
issued to the public during the class period has no meaning. The
plaintiffs' self-imposed deadline expires in approximately one week
(December 6, 2001). At that time, every company not yet sued will be free
from even the fear of a lawsuit. A loss or a win for either side in this
case will have no discernable effect on my current portfolio. Like other
courts, I am "unwilling to adopt a rule requiring recusal in every case
in which a judge owns stock of a company in the same industry as one of
the parties to the case." In re Placid Oil Co., 802 F.2d at 786; see also
Union Planters Bank v. L & J Dev. Co., Inc., 115 F.3d 378, 382 (6th Cir.
1997); Gas Util. Co. of Alabama, Inc. v. Southern Natural Gas Co.,
996 F.2d 282, 283 (11th Cir. 1993); 13A Charles A. Wright et al., Federal
Practice and Procedure, 2001 Supplement, at § 3547.
On the other hand, if the Moving Defendants' argument is that the
outcome of this case could affect the public's perception of the
integrity of the stock markets, then any negative effect resulting from
these suits will fall equally on all shareholders of all publicly traded
companies. All judges have interests, either directly or indirectly, in
publicly traded companies. There has simply been no showing that this
litigation will have any direct effect that will "substantially affect"
this Court's holdings. See In re New Mexico Natural Gas, 620 F.2d at 796
("In view of the statutory requirement that interests must be
substantially affected before recusal is required, we believe Congress
did not intend to require disqualification in all cases in which the
judge might benefit as a member of the general public.").
Because the Moving Defendants have failed to show that the Court has
anything more than a "remote, contingent, or speculative" interest in
this litigation, disqualification may not be granted under section
455(b)(4). Hook v. McDade, 89 F.3d 350, 356 (7th Cir. 1996); In re Drexel
Burnham. Inc., 861 F.2d at 1313; In re Placid Oil Co., 802 F.2d at 787.
B. Subsection (b)(5)
The Moving Defendants argue that this Court was a "party to the
proceeding" under subsection (b)(5)(i) because it was once a putative
class member.*fn34 Those
courts to have considered whether potential
class members qualify as "part[ies] to the proceeding" under subsection
(b)(5) have repeatedly held that they do not. See, e.g., Tramonte, 136
F.3d at 1030 (holding that "members of a putative class are not `parties'
to a class action for these purposes [under section 455(b)(5)]"); New
Orleans Pub. Serv. v. United Gas Pipe Line Co., 719 F.2d 733, 735 (5th
Cir. 1983) (holding that judges are not disqualified if they are only
putative class members); LeRoy v. City of Houston, 592 F. Supp. 415, 419
(S.D. Tex. 1984) ("If nothing more, to hold a judge to be a `party' in
any situation where he was a member of a potential class would do
violence to the rules governing class actions. . . . The interests of a
potential member of a class are too `uncertain' to justify holding those
potential members to be parties under § 455."); see also Federal
Practice and Procedure § 3548 n.5 ("Members of a putative class are
not `parties' for purposes of 28 U.S.C. § 455(b)(5).")
The issue is moot, of course, because I have waived my status as a
potential class member. Because this Court was at no time a party to the
proceeding, it may not disqualify itself under subsection (5) on this
ground. See supra Part V.
I must also consider one other conflict under subsection (b)(5). The
Moving Defendants reviewed my adult son's financial statements (without
his permission or mine), and disclosed during a telephone conference that
he owned stock in one of the issuers. At the time, they argued that this
created a conflict although they no longer appear to argue that this
results in a disqualification under subsection (b)(5).*fn35 As a result
of their investigation and disclosure, however, I now know that my adult
son owned stock in a party and was once a putative class member.
Subsection (b)(v)(iii) states that a judge shall recuse herself when "a
person within the third degree of relationship" is "known by the judge to
have an interest that could be substantially affected by the outcome of
the proceeding." In this case, the interests that my son owned that could
have been affected by the case were (1) his stock and, perhaps, (2) his
legal interest as a putative class member. Because he promptly sold his
stock and waived his class membership rights, I may not disqualify myself
under subsection (b)(5).*fn36 See supra Part V.
C. Subsection (b)(1)
Under subsection (b)(1), a judge shall recuse herself if she has
"personal knowledge of disputed evidentiary facts concerning the
proceeding." 28 U.S.C. § 455(b)(1) (emphasis added). The Moving
Defendants make much ado about my "experience as an investor in IPOs
generally and in several IPO securities identified in the complaints."
Moving Mem. at 25. In their view, this Court "has knowledge of facts that
would be characteristic of investors who bought in the same or similar
circumstances." Id. at 27.
This argument says nothing more than that this Court was, at one time,
one of millions of putative class members. Yet, it only stands to reason
that if "[a] judge who opts out of the class need not recuse from a class
action," Code of Conduct for United States Judges, Compendium §
3.1-6(e) (emphasis added), the personal knowledge the Court may have
gained while a potential class member cannot disqualify it. Nor do I have
knowledge of any disputed facts, as the statute requires. Surely everyone
agrees that at least some putative class members bought stock solely on
the advice of their brokers.
As one underwriter opposing the recusal motion has argued:
Judge Scheindlin has apparent personal knowledge that
certain stocks were taken public (perhaps even that
they were taken public by one or more of the
underwriter defendants), and that she lost money on
some of her stock purchases and gained on at least one
other. But none of these issues is a matter of
disputed fact. Instead, the disputed facts here are
whether the defendants illegally manipulated IPOs or
the post-IPO market, as plaintiffs allege, through
so-called "excess commissions" or "tied-in purchases"
of stock — allegations that Morgan Stanley joins
with the other defendants in vigorously disputing.
There is no indication that Judge Scheindlin has any
personal knowledge about any alleged efforts to
require "excess commissions" or "tied-in purchases" in
exchange for IPO allocations. Nor is there any
indication that Judge Scheindlin has any personal
knowledge about the defendants' IPO allocation process
in general, IPO allocations for particular stocks, or
after-market transactions of those who received IPO
allocations, much less any disputed issues of fact on
Morgan Stanley's Submission in Response to Motion for Recusal ("Morgan
Stanley Submission") at 4 (emphasis original).
The Moving Defendants' threshold for personal knowledge of disputed
facts is so low that any judge who ever received a phone call from a
broker recommending an IPO stock — even if that judge did not buy
it — would be disqualified. This argument, if adopted, would
require every judge, and perhaps their broker, to be questioned as to
whether they had ever discussed an IPO stock. Moreover, any judge who
read one of the many articles on this lawsuit would have far more
knowledge of the case than I received from my broker's phone calls. See,
e.g., Noelle Knox et al., "Officials suspect IPO manipulation," USA
Today, Aug. 21, 2001, at B1; Carol Vinzant, "Public Offering, Private
Deal," Wash. Post, July 17, 2001, at H1; Pulliam & Smith, "Trying to
Avoid the Flippers," Wall St. J., Dec. 6, 2000, at A1.*fn37
Examples of recusal decisions under subsection (b)(1) show that the
threshold is much higher than Moving Defendants contend. Compare United
States v. Boyd, 208 F.3d 638 (7th Cir. 2000), vacated on other grounds,
531 U.S. 1135 (2001) (holding that district judge was not required to
recuse himself from case on ground that he had personal knowledge of
disputed evidentiary facts even though he had been head of state police
during investigation of business connected to defendants' gang because
judge did not have full knowledge of details of investigation); Easley
v. University of Michigan Bd. of Regents, 906 F.2d 1143,
1147 (6th Cir.
1990) (holding that because judge had not acquired actual or constructive
knowledge of any material facts while serving on law school's Committee
of Visitors judge was not disqualified from discrimination lawsuit) with
Murray v. Scott, 253 F.3d 1308 (11th Cir. 2001) (holding that judge
should have recused himself based on fact that, while serving as
government attorney, he had appeared as counsel of record in action in
which corporation was party, possibly giving him knowledge of facts
disputed in instant action); United States v. Alabama, 828 F.2d 1532,
1544-45 (11th Cir. 1987) (holding that judge was disqualified from
presiding where he had "actively participated in the very events and
shaped the very facts that are at issue" by helping pass the
discrimination law as a state senator and serving as an attorney for
individual plaintiffs in a school desegregation case).
Because this Court has no knowledge of "disputed evidentiary facts"
28 U.S.C. § 455(b)(1) (emphasis added), it may not disqualify itself
under subsection (b)(1).
D. Section 455(a)
The Moving Defendants' final argument is that this Court's
"impartiality might reasonably be questioned." 28 U.S.C. § 455(a).
Specifically, they argue that a reasonable person might question the
impartiality of a judge who:
1. as an active investor in IPO stocks in the relevant
period, personally suffered financial injury . . .
in the securities that the complaints allege were
manipulated by the defendants;
2. personally dealt with one of the defendants
and relied on that defendant's recommendations
. . .;
3. expressed sadness and regret . . .;