By ruling in the StoneRidge v. Scientific-Atlanta case that third parties complicit in corporate wrongdoing are not liable without themselves directly misleading investors, the Supreme Court has continued a “campaign to render the private cause of action under [the fraud law] toothless,” Justice John Paul Stevens said in his dissent in the case.
But Steve Shapiro, the Mayer Brown attorney who represented defendants Motorola and Scientific-Atlanta in the case, hailed the Court for understanding “that the trial lawyers’ theory of ‘scheme liability’ was simply a scheme to rake in billions of dollars for themselves at the expense of the investors they purported to represent.” The two companies — suppliers to cable-television Charter Communications Inc. — were alleged to have colluded with Charter to deceive its shareholders and manipulate its stock.
The bitter 5-3 court split in favor of corporate defendants extended the long winning streak for companies seeking to make life harder for class-action litigants, according to press accounts. It’s now five straight anti-plaintiff decisions since 2004 in such cases. Joining Justice Stevens in dissent were Justices Ruth Bader Ginsburg and David Souter, with Justice Stephen Breyer not participating because he owns stock in Cisco Systems, now Scientific-Atlanta’s parent company. Ruling for the majority with Justice Anthony Kennedy, who wrote the opinion, were Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia, and Clarence Thomas.
Bloomberg News quoted Georgetown University securities-law professor Donald Langevoort, who had labeled the case as “securities law’s Roe v. Wade” as saying that the ruling was “a complete and thorough victory for the defendants.”
What the case means for companies is that only those who issue statements or take other direct action to defraud investors — either by omitting key facts, manipulating trading, or other deceptive conduct — may be sued.
It is for this reason that commentators suggested that efforts to recoup billions of dollars lost in Enron Corp. and HealthSouth Corp. frauds, among others, may now be set back sharply. Those frauds often involved complex webs of relationships among companies and, especially, banks.
Bloomberg noted that the decision reinforced a 1994 Supreme Court ruling that federal securities law bars suits for “aiding and abetting” the wrongdoing of others. Congress changed the law the next year to permit such suits by the Securities and Exchange Commission, but the decision excluded private shareholder suits.
While investors believed that there was still room to sue abetters — if they were found to have taken part in deceptive schemes — the Bush administration backed the corporate side, and Justice Kennedy’s reasoning followed the administration’s view. He ruled that allowing the lawsuits in question “may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.” It was Charter, not the suppliers, that “misled its auditor and filed fraudulent financial statements,” he wrote.
Bloomberg quoted a lawyer for HealthSouth and Enron investors, Patrick Coughlin, as saying that those two are different because banks were more deeply involved in those frauds than they were in the Charter case, although he added that the ruling was “a pretty anti-investor decision.”
According to Stevens’s dissent, as summarized in a report on the www.Scotusblog.com Web site, Charter could not have inflated its revenues to cover up its cash flow shortfall “absent the knowingly fraudulent actions of Scientific-Atlanta and Motorola,” and investors relied on the “deceptive device” of the suppliers actions. Congress had passed its law in 1994 “with the understanding that federal courts respected the principle that every wrong should have a remedy,” he wrote. “Today’s decision simply cuts back further on Congress’ intended remedy.”