Supreme Court Hears Landmark Investor Suit

Markel's argument in greater detail:

The important question presented on this appeal [before the Supreme Court] is what parties, under what circumstances, may be liable for a manipulative scheme under Section 10(b) of the Securities Exchange Act of 1934.

The heart of the issue raised by these cases is whether investors should be permitted to sue not only the company that issued the securities and the corporate officials or others who made misstatements to investors about the company’s condition, but also third parties such as financial institutions, accounting firms, lawyers, vendors, customers or business counterparties who did business in some form with the company but made no false public statements about it.

As a policy matter, the implications of permitting such suits would be far-reaching.

If allowed, they would impose significant additional costs on businesses of all kinds. Financial institutions in particular would be forced to engage in extraordinary due diligence on their customers, even when they do not provide underwriting or other services that relate directly to the securities markets.

The problem would extend to others as well. Some scheme liability cases involve parties such as vendors and advertisers. In even routine transactions between businesses, to avoid potential liability, each party would have to evaluate the other party’s financial condition and accounting practices to try to be sure that the other party is not using the transaction to distort its publicly stated financial condition.

The costs of such expansive liability would of course be passed on to society both in terms of higher fees and in detracting from the competitiveness of the United States (already burdened as the world’s most litigious society). Also to be considered is the adverse effect of the uncertainty caused by such an ambiguous potential liability. The incremental cost of such expanded liability of course is only a small part of the enormous cost of litigation.