Scheme Liability, Section 10(b), and Stoneridge Investment Partners v. Scientific Atlanta:

On October 9, the Supreme Court is will hear what is likely the most important securities law case in years: Stoneridge Investment Partners v. Scientific Atlanta. In this case, the Court will consider whether primary liability under Section 10(b) of the Securities Exchange Act extends to third-parties, such as auditors, attorneys, or vendors, who engage in allegedly fraudulent transactions with a public corporation. In a prior case the Court held that there is no aider or abettor liability under Section 10(b), but some courts have held (and academics have argued) that this leaves open the question of whether third parties could still be liable to a company's shareholders under a theory of "scheme liability." So, for example, when, if ever, should Enron's shareholders be able to sue other companies for allegedly engaging in fraudulent transactions with Enron that inflated Enron's earnings? It is an interesting and important question.

Next Friday, the Center for Business Law & Regulation at the Case Western Reserve University School of Law and the Federalist Society's Corporate Law practice group are co-sponsoring a preview of the case: "Scheme Liability, Section 10(b), and Stoneridge Investment Partners v. Scientific Atlanta." The event is free and open to the public. (3.5 hours of Ohio CLE are also available for a modest charge.) For those who can't make it, the entire event will be webcast. Details here.

Stoneridge Roundup:

Today the Supreme Court heard oral argument in Stoneridge Investment Partners v. Scientific-Atlanta, arguably the most important securities law case before the Supreme Court in at least a decade. At issue is whether third parties may be held liable under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 for engaging in transactions that enabled a corporation to misrepresent its earnings to shareholders. In the case at hand, shareholders of Charter Communications are suing Scientific-Atlanta and Motorola for their participation in allegedly fraudulent contracts for cable set-top boxes that enabled Charter to defraud its earnings by overstating its earnings. The implications of the case are potentially far broader, however. A decision for the petitioners (the plaintiff shareholders) could ease the way for lawsuits against bankers, accountants, and perhaps even lawyers who provide services to firms that misstate their earnings or otherwise defraud their investors.

Fortunately for the corporate defendants, most observers believe the Court is leaning against allowing suits against third parties without explicit Congressional authorization. As Lyle Denniston reported for SCOTUSBlog:

As the Court concluded an hourlong hearing in a vitally important securities case, there seemed hardly a chance — even a remote one — that federal law against stock fraud would be read to give investors a significant new tool to go after stock fraud themselves. With the seeming exception of only Justice Ruth Bader Ginsburg, and the possible added exception of Justice David H. Souter, members of the Court showed little to no sympathy for opening up a broad new category of liability to investors.

University of Denver law professor and "Race to the Bottom" blogger Jay Brown likewise thinks that the corporate defendants have at least five votes (of eight, as Justice Breyer is recused). UCLA's Professor Bainbridge rounds up more of the news coverage and analysis here. The oral argument transcript is available here.

Last Friday, the Center for Business Law & Regulation at the Case Western Reserve University School of Law hosted a conference previewing the case. Panelists included Professors Stephen Bainbridge (UCLA), Barbara Black (Cincinnati), Richard Painter (Minnesota), Jay Brown (Denver), Ohio AAG Andrea Seidt, and the Manhattan Institute's James Copland. The capstone of the day was a debate on the merits of the case between two attorneys who contributed to amicus briefs in the case: Eric Isaacson (Coughlin Stoia) and Ashley Parrish (Kirkland & Ellis). An archived webcast of the conference, co-sponsored by the Federalist Society's Corporate Law practice group, is available here. The conference was very interesting and informative. Those interested in learning more about the issues underlying the case should check it out.