Stoneridge Investments Argument

A study of the hearing transcript in the Supreme Court arguments on the Stoneridge Investments case on October 6th offers some interesting tidbits.  1) None of the eight Justices hearing the case (Justice Breyer recused himself) is willing to touch the core holding of the Central Bank of Denver case (that there is no private right of action under Rule 10b-5 for aiding and abetting).  All Justices seemingly assented to the argument that Congress had accepted the opinion in the PSLRA of 1995 (Section 20(e))and Sarbanes Oxley of 2002 (Section 303).  Justice Kennedy, the swing vote in Stoneridge wrote the majority opinion in Central Bank of Denver (he is not going to overrule his own opinion).  2) Those three (and perhaps four) Justices who appear desirous of finding liability for third parties must distinguish the Central Bank of Denver case and were searching for a rationale to do so.  3) The Justices were thoroughly conflicted and confused by the plaintiffs' lawyers attempt to distinguish the Central Bank of Denver case on the grounds that in that case there was no allegation of a "deceptive act" by the third party defendants.  The plaintiffs' counsel argued that in the Stoneridge case the plaintiffs had alleged that the third party defendants committed a deceptive act by lying to Arthur Anderson, the primary violator's (Charter Communications) auditor.  One of the Justices did not think the deceptive act was plead, another did not understand the difference between deceiving investors and deceiving Arthur Anderson, a third wondered whether the difference based on deceptive acts and just assisting another to deceive would ever exist in real life, and yet a fourth wondered whether in theory there was such a difference.  It was a mess. The plaintiffs' have asked the court to split hairs to avoid overruling the old 1994 opinion using a distinction that is easy to misunderstand and hard to apply if properly understood.  A case decided on such grounds would invite substantial disagreement in application in the lower courts.  4) Some of the Justices attempted to pursue a third tack.  One asked whether there was a "middle ground" between primary violations and aiding and abetting, another asked whether tort law had any other doctrines that could apply, a third (with help from another) wondered whether there was an "overlap" in categories (one act could be both aiding and abetting and a primary violation. They each received no help from plaintiffs' counsel.  The irony of the plaintiffs' counsel argument is that if everyone is in on the scam, there is no liability for assisting the primary violator's misleading statement; if, on the other hand, there is one innocent insider who assists, then all those who lied to the innocent party can be held liable.  The distinction is nonsense and designed to create a huge opening (logic aside) in the otherwise tightly wrapped Central Bank of Denver case. 4) The defendants' lawyer insisted that primary violators had to make misleading statements to investors and this the defendants did not do.  The government (the solicitor general) understood the problem (there cannot be multiple defendants???) with such an argument and, although supporting the defendants, impliedly disagreed with defendants' counsel. The government argued an absence of reliance doomed the complaint even if the plaintiffs' had plead a deceptive act by the defendants.  One Justice noted that the reliance argument had not been briefed below and seeming was not part of the circuit court opinion.  The circuit court had held, more obviously, that there was no deceptive act alleged.   5) Justice Kennedy, the swing vote (transforming a 4-4 into a 5-3 for the defendants) was pro-defendant and searching for a way to hold for the defendants and leave to a later day the liability of professionals (lawyers) who assisted primary violators who deceived their investors.  This was, in my view, the central moment in the argument.  He asked the defendants' counsel how he could find for his clients and still hold the outside lawyers who assisted in preparing the errant disclosure document liable.  Defense counsel evaded the question with a stream of alternative hypothetical.  All-in-all it was quite an exercise in mental gymnastics. 

The Court made a mistake in 1994 (investors in an insolvent primary violator (a random event) now have no legal recourse in a private suit) and the Court will not fix it.  The mistake puts pressure on the definition of "primary" violator and the Court could, in an effort to cut back on the damage, open up the definition but in so doing it will create severe application confusion.  Some of the Justices are willing to suffer the cost to open the test but a majority of the Court hearing the case is likely not.  Those who will not open up the test nor overruled Central Bank of Denver are willing to create an arbitrary result for investors based on their view that private securities litigation is out- of- control.  But this is an artificial and arbitrary limit.