Tuesday, January 15, 2008
The U.S. Supreme Court decided Stoneridge Investment Partners v. Scientific-Atlanta today, holding (5-3) that the plaintiff in a private securities fraud class action could not sue third parties who allegedly engaged in deceptive acts to further the corporation's securities fraud, because the plaintiff could not establish that it relied on the deceptive conduct. Since it is a foregone conclusion that plaintiffs will lose in private securities fraud class actions, the only interesting question is how will the Court determine that they lost. The majority opinion by Justice Kennedy (author of Central Bank) is exactly the kind of result-oriented opinion we have come to expect.
First, the Court rejects the actual holding of the Eighth Circuit opinion that there is no Rule 10b-5 liability without a misstatement or an omission where there is a duty to speak. Affirming the decision on this ground would have done serious damage to SEC enforcement actions.
Second, the Court does not rely on "plain meaning," its favorite tool of statutory construction in other private securities fraud cases, presumably because here the plain meaning actually supports the plaintiff's case -- it had good grounds to assert that the defendants engaged in a "deceptive act or contrivance" under Section 10(b). Instead it focuses on the plaintiff's lack of reliance on the misconduct (because they did not know about it) and what it sees as the "remoteness" of the alleged misconduct from securities markets (never mind that plaintiff specifically alleged that the point of the scheme was to inflate the corporation's revenues so it could meet analysts' projections). The Court thus announces that "reliance by the plaintiff upon the defendant's deceptive acts is an essential element" of the Rule 10b-5 cause of action.
Third, the Court believes that finding for the plaintiff here would revive "aiding and abetting" liability contrary to Congressional action. "Were we to adopt this construction of section 10(b), it would revive in substance the implied cause of action against all aiders and abetters except those who committed no deceptive act in the process of facilitating the fraud; and we would undermine Congress' determination that this class of defendants should be pursued by the SEC and not by private litigants."
Fourth, the Court supports its result through its view of policy. (1) Securities fraud liability should not attach to "commercial transactions" that are "the realm of ordinary business operations" and left to state law remedies; (2) Imposing liability would increase the costs of being a public company and encourage corporations to flee to foreign shores; and (3) Criminal and SEC enforcement provide adequate deterrence as well as compensation for investors.
Justice Stevens, in a dissent that Justices Souter and Ginsburg joined, criticizes the majority for its "overly broad reading" of Central Bank and its view that "reliance requires a kind of super-causation." He also makes an heroic argument that "every wrong shall have a remedy" and protests against the majority's "continuing campaign to render the private cause of action under section 10(b) toothless."
Justice Breyer did not participate in the decision.