Federal Judge’s Rulings Favored Companies in Which He Owned Stock
by Jennifer Gollan and Shane Shifflett, California Watch
A federal judge has issued three key rulings over a four-year period that favored companies in which he owned stock, a California Watch analysis has found.
Measures are in place to prevent judges from violating federal conflict-of-interest laws. But Judge Manuel Real, a 46-year veteran of the bench appointed by President Lyndon B. Johnson, appears to have skirted those safeguards, records and interviews show.
Judges are supposed to disclose everything from their investments to their attendance at expenses-paid seminars. When a financial conflict arises, no matter how small, they are required to step aside, by federal law and the Code of Conduct for United States Judges.
“This is what we call a ‘bright line’ rule, meaning that it gives clear and unambiguous guidance to judges and the public,” said Steven Lubet, a Northwestern University law professor who specializes in judicial ethics.
But in at least three cases before the federal District Court for the Central District of California in Los Angeles, Real did not recuse himself:
- In 2008, he awarded Microsoft Corp. $746,027 in damages and fees in a copyright infringement case against a computer sales and repair company. At the time, Real held Microsoft stock worth between $15,001 and $50,000, according to his financial disclosures.
- In another 2008 case involving a contract dispute between Atlanta Cancer Care and biotech giant Amgen, Real dismissed the suit against Amgen. Real held between $15,001 and $50,000 of Amgen stock, too, which he transferred to someone else shortly after the case was appealed.
- The following year, Real dismissed a lawsuit against Verizon. After the plaintiff in the case appealed the decision to the 9th U.S. Circuit Court of Appeals, Real bought Verizon stock worth $15,001 to $50,000. The appeals court upheld Real’s dismissal, but returned the case to Real for further deliberation. The parties reached an agreement in February 2011, and Real dismissed the case.
In all three cases, the company’s stock rose at least a dollar per share during the two months following Real’s ruling or dismissal.
“When there is money involved, it is human nature to protect your own interests,” said John Schneider, a plaintiff in the Verizon case and a retired electrical contractor. “I would say he looked out for his financial interests before he looked out for mine. Judges should be above reproach.”
Real, previously reprimanded for poor conduct on the bench, did not respond to repeated interview requests made via email or messages left with his courtroom clerk.
There is no indication that Real had a financial incentive in making his decisions, and many factors affect stock prices. But legal experts consulted by California Watch indicated that Real’s rulings were, at a minimum, good news for the companies. California Watch asked law professor Laurie Levenson, who holds the David W. Burcham Chair in Ethical Advocacy at Loyola Law School in Los Angeles, to review the cases.
A judge who repeatedly fails to withdraw from cases can face sanctions ranging from a private reprimand to suspension from hearing cases. Beyond that, a judge can be referred to Congress for an impeachment hearing.
“If a judge is willfully disregarding the disqualification rules, there is precedent for saying he should be disciplined,” said Charles Geyh, an expert in judicial ethics who teaches law at Indiana University. “In addition, where judges are not diligent in keeping track of their financial conflicts, where there is a pattern of incompetence, they could also be sanctioned.”
But Geyh acknowledged that such sanctions are rare, typically occurring only in extreme situations. One recent case involved a federal district judge from New Orleans, impeached and removed from office by the U.S. Senate in 2010 for failing to disqualify himself from cases in which he accepted cash and favors from lawyers and a bail bonds company.
Potential ethics violations fall to the Judicial Council of the 9th Circuit to investigate. Chief Judge Alex Kozinksi, chairman of the council, did not return calls seeking comment.
Federal judges are required to report not only their financial holdings, but also those of their spouses to the federal court system. Since September 2006, they are supposed to use special conflict-checking software, which cross-references their stock holdings against their courtroom dockets, automatically flagging potential problems.
But technology is no panacea. Courts generally afford judges autonomy in who does the checks and how often. Some judges run checks before every case, while others do so intermittently, according to Central District of California communications specialist Gary Horimoto. The district is the largest of the 94 federal judicial districts, serving a population of more than 18 million people in Los Angeles, Ventura, Santa Barbara, San Luis Obispo, Orange, Riverside and San Bernardino counties.
“It is up to each judge to actually run these reports,” said Molly Dwyer, clerk of court of the 9th U.S. Circuit Court of Appeals. “We are not policing the judges. … We are accepting them at their word.”
Public scrutiny of the financial disclosures is complicated by logistical hurdles. While anyone can request judges’ annual financial disclosures through the federal courts’ administrative office in Washington, the process of obtaining these documents and cross-checking them against court rulings is cumbersome and expensive. Judges file annual financial disclosures by May 15.
In the courtroom
Real, 88, was first appointed to the bench in 1966. He earns $174,000 a year and like other federal trial court judges enjoys what has effectively become life tenure, a benefit engineered by authors of the Constitution to protect the court’s independence. A graduate of the University of Southern California, Real earned a law degree from Loyola Law School before becoming assistant U.S. attorney for the Southern District of California and, in 1964, the district’s U.S. attorney.
One of Real’s more notable decisions was a 1970 order to use mandatory busing to desegregate Pasadena schools.
Among judicial ethicists as well as attorneys who have argued cases before him, Real is known as an iconoclast.
On a recent day, Real rarely looked up from his desk as a string of lawyers directed their arguments at the top of his head. Dwarfed by his burgundy leather chair, Real commanded the cavernous courtroom with the occasional gruff directive.
Then a mustachioed man in an orange jumpsuit and handcuffs appeared. He was there to plead guilty to being caught in the country after being deported.
Real leaned forward and peppered the inmate with questions. Then, when a prosecutor from the Justice Department urged Real to make sure the man understood the facts of the crime before accepting his plea – as required by federal rules – Real lashed out.
“I just went through all that with him,” Real responded. “What do you think that was all about? We went through the elements of the offense.”
The attorney said nothing more.
Real is famous for a courtroom spat with Hustler magazine publisher Larry Flynt in 1984. Flynt had refused to reveal the source of a video of a sting operation that he had given to a television network. He appeared before Real and after repeated outbursts, Real ordered Flynt gagged and handcuffed to his wheelchair.
Years later, the 9th U.S. Circuit Court of Appeals issued an opinion in which it criticized Real for his accounting of $33.8 million in disputed assets of the Philippines dictator Ferdinand Marcos. The assets had been held in a Merrill Lynch account while the courts decided how to divide funds among various claimants, including Filipinos who claimed to have suffered human rights abuses.
Real, the court documents indicated, declined to provide more than a brief accounting “filled with cryptic notations” of the transactions involving the assets or who authorized them.
Real faced a potential impeachment inquiry by Congress in 2006 over misconduct allegations, congressional documents show. He was accused of showing favoritism in a bankruptcy case toward a woman whose probation he supervised.
In the end, Congress did not pursue the impeachment. But shortly after the congressional hearing, the Judicial Council of the 9th Circuit publicly reprimanded Real for showing favoritism in the bankruptcy case and making misleading statements to investigators.
The Committee on Judicial Conduct and Disability of the Judicial Conference of the United States asked the 9th Circuit to review a complaint in which Real was accused of failing to provide the required reasons for his rulings. In April 2010, the conference reaffirmed the conclusion of the Judicial Council of the 9th Circuit, which had reviewed 38 of Real’s cases, that there was no misconduct – but warned Real that his decisions would be closely scrutinized.
Arthur D. Hellman, a law professor at the University of Pittsburgh and leading authority on the federal courts, said few federal judges have received as much scrutiny from the 9th Circuit as Real.
“I doubt that there is any federal judge that has been taken off as many cases as Judge Real,” Hellman said.
Federal trial court judges do not have to detail their reasons for withdrawing from cases, so it is difficult to pinpoint how many avoid financial conflicts of interest. The Central District doesn’t track how often judges withdraw from cases, said Horimoto, the district communications specialist.
However, Real has been taken off at least 20 cases over the past 25 years by the 9th Circuit, which has criticized him for making decisions that ignore precedent, court records show, and creating “an atmosphere in which an objectively fair trial could not be conducted.”
‘A controversial judge’
It is unclear how Real’s multiple conflicts of interest could have escaped notice. His annual financial disclosures list the companies involved in the three cases, a connection the conflict-checking software is designed to catch. At least two of the cases were resolved before Real was required to file his annual disclosures, however, leaving the attorneys involved no means for evaluating his financial interests on their own.
In one of Real’s cases, Microsoft claimed that All-Valley Computer in Cathedral City and its owner, Glenn Somervell, distributed software that infringed on Microsoft’s copyrights and trademarks. All-Valley failed to respond to Microsoft’s complaint by the deadline, and Microsoft’s lawyers urged Real to issue a judgment against All-Valley. Real awarded Microsoft about $746,000 in damages and fees.
Two weeks later, Real added a permanent injunction against All-Valley that prohibited it from distributing software protected by Microsoft trademarks or selling counterfeit Microsoft products.
Somervell, who closed All-Valley before the suit to care for his dying mother, said Real’s decisions damaged his career prospects.
“I probably can’t get a job for the rest of my life; it doesn’t look too good on my résumé,” Somervell said. “If (Real’s) involved with Microsoft, he is going to take their side. It’s totally unfair.”
In the Amgen case, Atlanta Cancer Care – which runs medical practices in and around Atlanta – alleged that the biotechnology company wrongfully recouped $184,625 in rebates owed to the oncology practice for medications it purchased for patients. Real was unmoved. Siding with Amgen’s lawyers, he dismissed the suit. But the 9th Circuit disagreed, reversing Real’s decision and sending the case back to him in late 2009 for further consideration. The parties reached a negotiated settlement in the case at the end of that year.
Leland Wahl, one of the lead attorneys representing Atlanta Cancer Care in the lawsuit, said Real did not disclose his financial interest in Amgen during the case.
“He is a controversial judge,” Wahl said. “If he does something unusual, many people would not be surprised, including me.”
And in the Verizon case, the communications company stood to lose millions. That’s because Schneider, the retired electrical contractor, brought a class-action suit on behalf of Verizon customers challenging the company’s practice of billing each of them up to $149 for canceling their Internet service before the end of their contract.
Schneider’s attorneys argued that the early termination fee was designed to lock in customers and had little bearing on the actual costs of cancellation. Verizon’s attorneys countered that the complaint lacked merit. Real dismissed the suit. On appeal, the 9th Circuit reversed part of Real’s decision and sent the rest back to him. Verizon later settled the case with Schneider, but no money was awarded to its other customers.
Checking for conflicts
Around the nation, attorneys and legal scholars point to judges and judicial districts that are doing things right – examples that differ from some of California’s practices.
One federal judge who pursues conflict checking with vigor is Chief Judge David R. Herndon of the Southern District of Illinois. He believes it is essential, he said, to retain the public’s trust.
A nominee of President Bill Clinton on the bench for 14 years, Herndon does not rely on conflict-checking software alone. He posts a list of his stock holdings online, updating it monthly, in the hope that litigants and lawyers will catch any conflicts he fails to see.
“Software is not infallible; humans are not infallible,” Herndon said.
Herndon and a staff member cross-check his case assignments against his financial holdings daily, he said. In addition, he said, he has instructed his broker not to invest in large companies involved in frequent litigation.
From October 2011 through September, five federal judges in the Southern District of Illinois recused themselves on 14 occasions, Herndon said.
In the Northern District of Iowa, the clerk’s office – rather than judges or their chamber staff – screens for conflicts before assigning cases. The Iowa district also posts judges’ stock holdings and other information on its website, including law firms or businesses affiliated with their family members.
“It helps lawyers sort out whether judges have conflicts,” said Robert Phelps, the district’s clerk of court. “In creating the list and publishing it, it also puts that consideration into the minds of judges.”
In California, Dwyer, the 9th Circuit court clerk, said privacy and security considerations keep California’s disclosures offline. Among the information included in the filings are details such as addresses of rental properties judges own or the name of their spouse’s employer.
“I don’t think judges want their holdings known by everyone and their mother,” Dwyer said.
Geyh, the Indiana law professor, scoffed at those objections, pointing out that the financial disclosure is technically a public record, so the lack of online posting merely makes it harder to get.
“It is the price you pay for being a government employee,” he said.
Obtaining financial filings
Without such Web access, obtaining judges’ financial filings is complicated. A written request must be sent to federal officials in Washington, and judges are warned about who is scrutinizing their disclosures. In some cases, under federal law, judges may black out key information, if it includes “revealing personal and sensitive information (that) could endanger” the judge or a family member.
For example, in mid-2008, Real transferred 19 stocks – most of which were worth between $15,001 and $100,000 each, one worth up to $500,000 – to a recipient whose name has been blacked out. The companies ranged from Adobe Systems to UnitedHealth Group.
Another Southern California federal court judge, Percy Anderson, issued more than two dozen rulings in a 2007 trademark infringement case involving Verizon, including a preliminary injunction and some other rulings in favor of the company.
Eight months into the continuing Los Angeles case, Anderson withdrew, saying “that he should not preside over this case because it was reasonably brought to his attention that he has a financial interest in one of the parties,” court records show.
Verizon was the only publicly traded company involved in the case. Lawyers said Anderson recused himself because he owned Verizon stock. But there is no way to know for sure because Anderson was allowed to black out his financial disclosures before they were released to the public.
Anderson did not respond to messages left with his courtroom clerk.
Once financial documents are obtained, they must be checked against hundreds of cases each judge oversees, making it difficult to determine whether Real is an anomaly or a symbol of a wider problem.
A California Watch analysis of Northern California district judges, for instance, found that they issued at least 20 rulings involving companies in which they owned stock between 2006 and 2010, according to court records and financial disclosures.
For the most part, however, those rulings did not appear to be favorable or significant enough to sway the cases in favor of the judge’s stock, according to legal experts who reviewed the cases for California Watch.
In one instance, Judge Marilyn Patel presided over a case involving ReliaStar Life Insurance Co., a subsidiary of ING Groep N.V., beginning in April 2009. Five months into the case, Patel bought $50,000 to $100,000 worth of stock in ING Groep. She sold it at the end of that year for a profit of $5,001 to $15,000, two months before she signed a court order dismissing the case at the request of the parties. In a letter to California Watch, Patel defended her role, saying she did not issue any rulings in the case while she held the ING stock.
“It appears that the system in place for performing conflicts checks did not reveal ING Groep since it was not a party to the action,” wrote Patel, who retired from the bench in September.
It is not clear whether Patel reviewed one of the first court filings in the case, which disclosed ING’s affiliation with ReliaStar.
She added: “I do not manage our family portfolio and am not involved in the buying or selling of stocks in it.”Related