Professor Bainbridge...on law, politics, religion, culture & food

Blawgosphere Reaction to Stoneridge

Ashby Jones:

The case centered on the issue of “scheme liability,” i.e., whether third parties — investment bankers, lawyers, accountants and vendors — can be held liable under the federal securities laws for fraud committed by companies with which they do business.

The court ruled against investors who accused two suppliers — Scientific-Atlanta and Motorola — of colluding with Charter Communications to deceive Charter’s stockholders and manipulate the price of the cable-television company’s stock. To a large degree, the majority opinion turned on whether the investors had, in making their decisions, relied on Scientific-Atlanta or Motorola’s statements. The court said no: “We conclude the private right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.”

John Carney:

The Supreme Court ruled against scheme liability in the closely watched Stoneridge case. The result is a blow to self-styled shareholder advocates and their friends in the plaintiff’s bar but ultimately a win for actual shareholders who faced losses from a potential litigations explosion under the scheme liability theory.

Ted Frank:

Steve Shapiro, who argued the case for the winning side, says in a press statement, “The Supreme Court today handed down a major victory for the U.S. economy and investor welfare. The Court understood 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.”

Elizabeth Nowicki offers a long and thoughtful post which deserves to be read in full, but here’s one of several possible money quotes:

I am stunned that the Supreme Court treated this case as a “reliance” case.  Basically the Court said that the investors could not have relied on Scientific-Atlanta and Motorola b/c those parties had no “duty” to make disclosure to the investors.  Huh?  As I understand the reliance argument that could be made by the investors in this case, it is that the investors relied on the fact that the contracts with Scientific-Atlanta and Motorola were legitimate, business-justified, economically defensible contracts.  Which wasn’t true –they were wash contracts, designed to be wash contracts.  If an investor walked into court and could prove that she bought stock in Charter because she saw on Charter’s books the contracts with S-A and Motorola, and she relied on the economic value of those contracts (that they were positive contracts benefiting Charter), why *couldn’t* the investor establish reliance as it pertains to S-A and Motorola?  The fact that S-A and Motorola had no “duty” to the Charter investors is irrelevant.  “Duty” is not an element to a Section 10(b) violation.  Reliance is, and if an investor could prove that she “relied” on the true economic value of those contracts (e.g. that they weren’t sham “wash” contracts), why couldn’t she prove reliance?