Can Third Parties Be Held Liable for Securities Fraud? Gearing Up for Stoneridge

The National Law Journal recently published Securities Case Has Law Firms on Edge, an assessment of the potentially far-reaching implications of Stoneridge Investment Partners v. Scientific-Atlanta, which will be argued before the Supreme Court of the United States on October 9.  The article notes that, in Stoneridge, the Court will decide: “Who, besides the chief actor in a securities fraud, can be sued in private securities litigation?”

As the piece explains, the case has practitioners on both sides of the securities-litigation bar rather nervous.  If third parties can be held liable in private securities litigation, the article notes, the case will have major implications for law firms, investment banks, consultants, and accounting firms participating in the disclosure and compliance process.  On the other hand, plaintiffs worry that Stoneridge will curb the reach of the securities laws; as Jay Brown notes in the article, “there is fear among shareholder and investor groups that as a matter of policy, the Supreme Court will rewrite . . . Rule 10b-5 to continue to make it difficult to use.”  (Jay has posted about Stoneridge on our Blog here.)

Given its potentially far-reaching ramifications, the case has generated significant interest, with more than a dozen parties filing friend-of-the-Court briefs.  The United States has argued that, although third parties such as investment bankers can be held liable for securities fraud in some cases, to prevail plaintiffs must show that they relied on misstatements by the third party; since third-party communications with issuers are rarely made public, showing such reliance will often be difficult.  The Government’s position contradicts the views of a majority of the present members of the Securities and Exchange Commission and those of many lawmakers.

The academy has also weighed in–on both sides of the case.  Stephen Bainbridge, Robert Clark, John Coates, Allen Ferrell, and Larry Ribstein, along with several former SEC Commissioners, have filed a brief urging the Court that third-party liability in this case is inappropriate.  Several observers have argued that permitting third party liability in a case such as this would impose substantial costs on any entity doing business with issuers in the future.  On the other hand, the article explains, Jill Fisch of Fordham Law School has filed a brief urging that third-party liability will be limited by the requirement that a defendant actually engage in deceptive conduct.

As Jay Brown explained here, legal analysts are having difficulty anticipating the views of Justice Samuel Alito and Chief Justice John Roberts on the case.  Until recently it appeared that both the Chief Justice and Justice Breyer would be recused from the case; but a recent order indicates that the Chief Justice will participate.  In light of the other Justices’ votes in a previous case, Central Bank v. First Interstate Bank, it appears that the Chief Justice and Justice Alito will be decisive to the outcome in Stoneridge.  The arguments on October 9 might thus provide some insight as to what we can expect the Court to tell us about third-party liability this Term.

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One Comment

  1. Bill
    Posted Tuesday, September 25, 2007 at 5:22 pm | Permalink

    It’s worth remembering that a ruling for the defendants in Stoneridge would leave current law unchanged, while a ruling for the plaintiffs would radically alter current law.

    The Court and every federal circuit court but one have made secondary
    liability (the plaintiffs call it “scheme” liability) off limits for private suits.

    However, neither the Court
    nor Congress have set prosecution of accomplices off bounds in securities
    cases – they have simply left that task solely to the SEC and the Justice Department.

    This balances the need for justice in such cases with the need to protect the economy from being hamstrung and hog-tied by an avalanche of lawsuits.

    The blog “10b-5 Daily” had an interesting post last week headlined “NERA Releases Study on “Recent Trends In Shareholder Class Action Litigation”

    The gist of it is that the NERA Economic Consulting study, included the following info:

    The number of such filings has increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.

    The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.

    Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco’s announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.

    Here’s the link:

    Now, imagine if the Stoneridge case was decided for the plaintiffs. The number of such lawsuits would skyrocket, putting a “scheme liability” tax on the economy.