The Code of Conduct for United States Judges prohibits judges from allowing personal relationships, including social connections with parties or attorneys involved in a case, to influence the judges’ conduct. However, the disclosure of such social conflicts, as well as the decision to recuse from a particular case, rests with the judge. In a recent paper, we provide systematic evidence that judges’ social connections to defendants at firms subject to securities litigation result in significantly more defendant-friendly litigation outcomes. Our findings raise questions about the impartiality of the judicial system and suggest the need for greater transparency.

Our research examines social connections between judges and executives of defendant firms in class-action lawsuits alleging misleading disclosure or fraudulent financial reporting in violation of the Securities and Exchange Act of 1934 Rule 10b-5. Judges’ social connections are, of course, not directly observable, especially for a large sample of cases. Instead, we rely on connections that judges and executives likely forge when they attend the same educational institutions, with most of the connections formed in college or law school. An advantage of this approach is that it relies upon social connections formed long before the lawsuit’s filing.

Random assignment of federal cases to judges mitigates the concern that lawsuits with connections between judges and executives differ systematically from other lawsuits in terms of the severity of alleged wrongdoing. Indeed, cases with and without connections are not significantly different on average based on various measures of case severity and types of allegations. Importantly, judges with educational connections to the defendant firm’s executives do not recuse themselves any more often than those without such connections, suggesting that judges do not adhere to the prescribed Code of Conduct.

We find that outcomes of Rule 10b-5 lawsuits filed between 1996 and 2017 are significantly more favorable for the defendants when judges and defendant executives share educational ties. These ties lead to (1) more likely dismissal, (2) faster resolution, and (3) substantially lower lawsuit payouts. In particular, cases involving socially connected judges and executives are 24 percent more likely to be dismissed, are resolved approximately 21 percent faster, and are associated with lawsuit payouts that are 49 percent lower. The large magnitude of the documented effects likely reflects substantial judicial discretion and ruling disparity. Our findings hold after accounting for case severity, firm characteristics, and judge-specific factors. They persist even when we compare the outcomes of cases in which the same judge presided over a case involving executives the judge went to school with and another case with no school ties between the judge and the defendants.

Our results on defendant-friendly class action outcomes are elevated when the executive who is socially connected to the ruling judge is a named defendant, consistent with the judge being more aware of the connection at the sued firm.  Further analysis indicates that the influence of social connections between judges and firm executives varies based on case visibility and the strength of the social ties. Connections have a more pronounced effect in less visible cases, suggesting that judges consider the potential costs of more defendant-friendly outcomes when the lawsuit is covered by the media or the defendant firm is well-recognized. Further, the documented effects are stronger when the connection is likely more direct because it was developed at smaller colleges or law schools. Interestingly, connections have no significant influence on lawsuit outcomes when judges attended the same schools as executives did but at different times, suggesting that it is not affinity for the common alma mater, but rather direct acquaintance that generates more favorable treatment.

Recent scrutiny from both the media and academia has highlighted potential conflicts of interest among federal judges, particularly concerning their financial interests (Wall Street Journal, September 2021; Harit, Parupati, Pinto and Sadka 2022). In response, the U.S. Congress passed the Courthouse Ethics and Transparency Act to enhance the transparency and timeliness of judges’ financial disclosures. Our research underscores that biased legal outcomes can stem not only from judges’ financial holdings but also from their social connections with defendants. While judges are required to disclose their financial interests regularly, there is currently no explicit requirement to disclose social connections. Consequently, the influence of social ties on judicial decisions is even less transparent than that of financial interests. Biases originating from social connections arise due to the specific individuals involved in the lawsuit and their relationships with judges, which is distinct from the effect of judges’ financial holdings in those firms (Harit et al. 2022), and their political affiliations (Huang, Hui and Li 2019). By highlighting conflicts of interest that arise from personal connections between judges and litigants, we offer insights relevant to ongoing debates on judicial ethics and transparency.

REFERENCES

HARIT, T.; S. PARUPATI; J. PINTO; AND G. SADKA. “Judge Financial Holdings and Case Outcomes: Evidence from Judge Financial Disclosures”. Working paper, 2022. Available at https://ssrn.com/abstract=4265987.

HUANG, A.; K. W. HUI; AND R. Z. LI. “Federal Judge Ideology: A New Measure of Ex Ante Litigation Risk.” Journal of Accounting Research 57 (2019): 431-89.

WALL STREET JOURNAL. How the Journal Found Judges’ Violations of Law on Conflicts. Sep 2021. https://www.wsj.com/articles/how-the-journal-found-judges-violations-of-law-on-conflicts-11632833775. 

This post comes to us from professors Sterling Huang at New York University-Shanghai, Sugata Roychowdhury at Northwestern University, Ewa Sletten at The Ohio State University, and Yanping Xu at Sun Yat-sen University. It is based on their paper, “Just Friends? Managers’ Connections to Judges,” forthcoming in Journal of Accounting Research and available here.