Supreme Court Hears Argument in Stoneridge Securities Case

The Supreme Court heard argument Tuesday in the much-anticipated federal securities case, Stoneridge Investment Partners v. Scientific-Atlanta.  The case may help draw the dividing line between aiding and abetting a violation of the federal securities laws, which does not give rise to a private suit under those laws, and a primary violation, which, of course, does.  The question presented, more formally stated, is whether claims for deceptive conduct under Section 10(b) of the Securities Exchange Act of 1934 are barred by the Court's decision in Central Bank v. First International Bank (which rejected aiding-and-abetting liability), when the defendant engaged in fraudulent transactions designed to inflate a corporation's financial statements, but made no public statements concerning those transactions.

Linda Greenhouse at the New York Times reports here that the Justices appeared skeptical of the plaintiff's claim.  Make your own guess about where the Court is headed in the case by reading the oral argument transcript from Tuesday's argument.  Readers can also consult the Oyez Project for a concise discussion of the case and access to the briefs filed by the parties.

One quirky thing about the case:  When the Supreme Court agreed to hear the case, only 7 of the 9 Justices participated.  Chief Justice John Roberts and Associate Justice Stephen Breyer had recused, possibly because they owned stock in one of the parties (often the reason for a recusal).  But less than 3 weeks before oral argument, the Chief unrecused.  How often does that happen?

Comments

[Bill Hobbs]

a ruling for the defendants in Stoneridge would leave current law unchanged, while a ruling for the plaintiffs would radically alter current law.

The Court and every federal circuit court but one have made secondary liability (the plaintiffs call it “scheme” liability) off limits for private suits.

However, neither the Court nor Congress have set prosecution of accomplices off bounds in securities
cases - they have simply left that task solely to the SEC and the Justice Department.

This balances the need for justice in such cases with the need to protect the economy from being hamstrung and hog-tied by an avalanche of lawsuits.

The blog "10b-5 Daily" had an interesting post recently headlined "NERA Releases Study on Recent Trends In Shareholder Class Action Litigation."

The gist of it is that the NERA Economic Consulting study, included the following info:

The number of such filings has increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.

The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.

Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco’s announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.

Here’s the link: http://www.the10b-5daily.com/archives/000853.html

If the Stoneridge case is decided for the plaintiffs, the number of such lawsuits would skyrocket, putting a huge "scheme liability" tax on the economy.

And the economic costs of our out-of-control legal system are already huge:

According to the Pacific Research Institute's study Jackpot Justice: The True Cost of America's Tort System , America's out-of-control legal system imposes a staggering economic cost of over $865 billion every year calculated that the nation's tort system imposes a yearly "tort tax" of $9,827 for a family of four and raises health care spending in the U.S. by $124 billion.

In addition, according to the PRI study, the impact of America's overly expensive liability system on the health care industry costs lives because it "increases the cost of many risk-reducing products and services and health care services, making them less accessible, and in some cases unavailable to consumers.

From "Jackpot Justice":

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PRI estimates that more than 114,000 people would be alive and working today, but are not due to inefficiencies in the tort system over the last two decades.

The practice of "defensive medicine" by litigation-fearing physicians increases American health care costs by $124 billion per year and adds 3.4 million Americans to the rolls of the uninsured.
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PRI estimates that American companies suffer more than $367 billion per year in lost product sales because spending on litigation curtails investment in research and development, and lawsuits against American corporations generate an annual loss of $684 billion in shareholder value.

You can read the PRI study at this link: http://www.legalreforminthenews.com/PRI_JJ/07PRI_JackpotJustice_Launch.html