A New Recipe for Cooking the Books
Back in September, Katie Couric asked a certain hockey mom to discuss any Supreme Court case besides Roe v. Wade. The answer was silence.
Before we judge too harshly, let us consider that Sarah Palin is actually representative of the way the majority of Americans view the Supreme Court’s role. When—that is to say 'if'—most people think about the Court, it is as the final arbiter of polarizing social issues: guns, the death penalty, abortion, and so on. But what that silver-tongued Calvin Coolidge said of the American people also applies to our highest court: The “chief business” of the Supremes is business.
Cases concerning antitrust, interstate commerce, corporate liability, securities and other areas of business law are the Court’s bread and butter. Under the stewardship of Chief Justice John Roberts, whose own background is largely in appellate litigation on behalf of corporate interests, business cases are a “growth area” of the Court’s docket. Decisions in these cases will directly affect the rules by (or around) which companies—and their C-level executives—must play.
There’s no question the most important business case from the last term was Stoneridge Investment Partners v. Scientific-Atlanta and Motorola. Dubbed by The Washington Post as the “Roe v. Wade of Securities Fraud Suits,” the case pitted investors in Charter Communications, a cable television company, against two of Charter’s partners in phony cable box transactions. The scam was a “round-trip” transaction: Charter overpaid the defendants for the boxes and the defendants turned around and returned the extra money to Charter by overpaying them for advertising. The effect was to artificially inflate Charter’s financial statements in order to boost its stock price. The investors argued that Scientific- Atlanta and Motorola should be liable for the fraud because they were party to a “scheme” to inflate the stock price. A federal judge is Missouri dismissed the complaint, and the 8th Circuit affirmed. The investors then appealed the Supreme Court, asserting that “the simplicity of the scheme was trumped only by its brazenness.”
Before the Court was this question: Whether third parties may be held liable under SEC rules for “engaging in transactions that enabled a corporation to misrepresent its earnings to shareholders?” The ‘service sector’ of the securities industry trembled at the prospect of a decision for the plaintiff shareholders. Such a ruling might open the door for suits against third parties who provide services to public companies that defraud their investors.
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Brazen or not, the defendants prevailed. In a 5-3 decision, the Court held that “non-speaking” third parties could not be sued by investors for conspiring to deceptively inflate a company’s stock price. The “non-speaking” modifier is crucial: a third party cannot be liable if the plaintiffs did not rely on any statements or conduct of those defendants in making the decision to purchase or sell securities. Give that rule a bath in some of Oliver Wendell Holmes’ “cynical acid” and it might read “Go ahead and work with all the shady public companies all you like. Just keep your mouth shut and your hands to yourself; do nothing that might be interpreted as vouching for the accuracy of their financial statements.
As famine follows drought, so do massive securities fraud class action suits follow a global financial meltdown. But I-bankers, lawyers, consultants, accountants and other members of the ‘service sector’ of the securities industries can breathe little easier in the post-Stoneridge era: third party liability just ain’t what it might have been.
Brian Dalton is Vault's senior law editor. He has J.D. from Fordham, and a B.A. in History from Middlebury.
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