Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, August 17, 2007

Reviewing the Amicus Briefs in Stoneridge

I have been reading some of the amicus briefs filed in Stoneridge Investment Partners v. Scientific-Atlantic, which will be argued before the U.S. Supreme Court this fall.  The complaint alleges that defendants, equipment vendors, knowingly participated in a scheme by Charter Communications to inflate its operating cash flow through sham transactions.  Plaintiff argues that defendants were primary violators, and not simply aiders and abetters, because they participated in a scheme under Rule 10b-5(b) -- rather than the typical case involving misstatements under subparagraphs (a) and (c) of the Rule.  The Eighth Circuit rejected plaintiff's argument.

The Government's brief in support of affirmance (where President Bush broke the "tie" between Treasury Secretary Paulson, who supported the defendants, and the SEC, who supported the plaintiff) carefully makes its argument to maintain the SEC's authority to bring aiding and abetting actions.  Thus, it begins by criticizing the 8th Circuit's conclusion that section 10(b) reaches only misstatements, omissions made when under a duty to disclose, or manipulative trading practices.  To the contrary, the Government argues, the plain meaning of the statute makes it clear that it reaches all conduct that is manipulative or deceptive, including non-verbal decptive conduct.  Thus, while the alleged conduct of the defendants may have constituted a violation, plaintiff could not recover because it could not establish reliance, since it does not even allege that it was aware of the transactions that defendants entered into with Charter.  In addition, plaintiff cannot show loss causation. Accordingly, allowing plaintiff to recover would be a sweeping expansion of the Rule 10b-5 implied remedy.

An interesting amicus brief was filed by a group of former SEC Commissioners and Officials and Law and Finance Professors, also in favor of affirmance.  In essence, the brief argues that plaintiff's "scheme liability" theory is simply a "semantic ploy" to recast secondary conduct as a primary violation and that the alleged conduct in this case is indistinguishable from that in Central Bank.  The brief also addresses policy considerations made by plaintiff and concludes that they do not warrant deviation from the statute.  To the contrary, they assert, considerations of legal and economic policy cast "considerable doubt" on the wisdom of allowing private suits like plaintiff's.  As would be expected in a brief signed by law professors, lots of law review articles are cited.

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