October 5, 2007
The Stoneridge Case
Since everyone, and I mean everyone (including an ex-Chancellor of the Exchequer writing an op-ed in the Wall Street Journal), has weighed in on the merits of the Stoneridge Investments v Scientific-Atlanta case (to be argued in the Supreme Court on October 9th), these comments may be pointlessly futile. Never stops other bloggers, so here is my two cents. The case is the most important private securities litigation case in two decades. At stake is the number of potential defendants in such cases. The case pits the SEC against the Department of Justice and the Treasury Department. The SEC voted 3-2 to support the plaintiffs (Chairman Cox voted with the two Democratic seat holders against the two Republican seat holders). Sec. Paulson of the Dept. of Treasury came out in favor of the defendants and the Dept. of Justice brief supports his position.
In the case a cable company, Charter Communications, cooked its books, inflating revenues. The scheme involved contracts with two suppliers of set-top boxes, who may or may not have known of the alleged fraudulent disclosures by Charter. The plaintiffs sued Charter and the two suppliers, arguing "scheme liability." The business community recognized immediately that at stake is not only supplier liability but liability of professional advisers (lawyers, accountants, underwriters and financial consultants) and of lenders. These groups do not want to be caught in private suits. In short, Goldman Sachs and the corporate law firms of New York do not want to be sued (have I mentioned that the present Sec. of the Treasury is an ex-Goldman Sachs CEO?). They have riled up foreign companies as well with arguments that foreign corporations, supplying United States companies, will be sued in United States courts. This caught the attention of the ex-Chancellor of the Exchequer in England who made a veiled threat that English companies would not longer do business with United States companies if the case went against the defendants.
Most agree that we have too much private securities class action litigation in the United States. Over the past fifteen years the Supreme Court and Congress have be chipping away at the cause of action. That is the problem -- the chipping away-- there has been no systematic definition of the cause of action. The Court has required scienter, actual trading by the plaintiff, and limited secondary liability. Congress has enhanced pleading requirements (recently affirmed by the Court) and recast the priority of named plaintiffs. I agree that "scheme liability" may be too broad, but only if it does not require that the secondarily liable parties have intent to aid the fraud. In short I like the old aiding and abetting (and conspiracy) standards for secondary liability and believer the Court made a mistake in the old Central Bank of Denver case (the Court disabled private litigants from making an aiding and abetting claim). Those who intentionally aid someone else make a fraudulent disclosure should be liable under a centuries old notion of secondary liability for aiding and abetting or conspiracy. At present only the SEC can sue under an aiding and abetting allegation (this is want some academics favor, power in the SEC, a public agency, and less power in the hands of private litigants). This case is about protecting Goldman Sachs, Price Waterhouse and Cleary, from private suits not about English suppliers. I do not see why they should be protected from damage claims if they intentionally aided and abetted a fraud, espectially if the primary wrongdoer is involvent.
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I agree with your view on this Prof. Oesterle. I think that advisers and lenders in these situations should be exposed to liability; however, I think that the standard of 'intent to aid' is too high of a bar to set. Since the secondarily liable parties are in the role of experts (and have intimate knowledge of the primary company's business), shouldn't the appropriate standard be 'recklessness' in aiding a false disclosure?
As a follow-up question, what reaction do you expect from the international business community if the Court decides in favor of secondary liability?
Posted by: Scott Walker | Oct 5, 2007 9:01:23 AM
I too agree that there is too much litigation against companies committing fraud. If a company wants to commit fraud on the public, then they should be permitted to do so without annoying civil lawsuits. If there is a serious enough problem, then I'm comfortable that the SEC will take the necessary enforcement action, since after all, the SEC is a non-political organization dedicated to honesty, integrity, and the rights of investors.
If banks, investments banks, lawyers, and accountants that are working with companies committing frauds, I believe that they should be entitled to earn as much profit as they can, as long as they are only creating, developing, orchestrating, or implementing the fraud, but are not giving out any false information directly to the public. Some say that my approach and that of the U.S. Supreme Court will only learn to bigger Enrons, WorldComs, and other such cases. While that may be true, I say let the disasters happen and then figure out ways to deal with them after they have wrought their damages. America is a resourceful country, and we will come together in the inevitable financial disasters that await us in the wake of the U.S. Supreme Court decision.
Posted by: Ralph Adamo | Nov 4, 2007 1:30:00 PM