An interview with Carolyn Nussbaum on the recent Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc. case. Reproduced with permission of the Rochester Business Journal.
Q: The U.S. Supreme Court ruled last week in Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc. that third parties such as banks, attorneys and vendors generally cannot be sued by victims of corporate fraud. Why and where did the court majority draw the line?
A: The court confirmed what has been a fairly bright line since the Central Bank case in 1994: Those who knowingly make false or misleading public statements that impact the securities markets can be sued by private plaintiffs. Those who “merely” participate in (or aid and abet) fraud cannot be sued by private plaintiffs, because their conduct does not directly affect the securities markets where investors are injured. The court was unwilling to expand the powers of private plaintiffs to reach these so-called secondary actors, in part because that would allow lawsuits against a vast number of people that simply did business with the Enrons of the world.
Q: Does this ruling affect regulators’ ability to pursue actions against third parties?
A: Not at all. In 1995, Congress expressly authorized the Securities and Exchange Commission to prosecute aiders and abettors— and the SEC has collected over $10 billion in the last five years. State regulators, including the New York attorney general, have actively prosecuted the financial community over research reports, and brokerage and trading practices. And, of course, the criminal laws reach conduct that is well beyond private civil claims. So those who aid and abet fraud will not escape suits and prosecution.
Q: How did the Stoneridge decision impact the class-action suit filed against Wall Street firms that did business with Enron Corp.?
A: Last year, an appeals court refused to certify a class of investors to pursue claims against the investment banks that structured Enron’s fraudulent off-balance-sheet transactions, effectively (but not officially) terminating those claims. The Supreme Court ended speculation about how Stoneridge might impact Enron on Tuesday, when it declined to hear a further appeal of the case.
Q: In his dissent, Justice John Paul Stevens criticized the court’s “continuing campaign to render (as) toothless” private shareholders’ right to sue. Would you agree there has been a significant shift in favor of business?
A: As a lawyer active in this specialized area, I still see teeth in the threat and reality of securities fraud suits. Stoneridge will not protect those who knowingly misrepresent facts, including accountants who issue false financial statements. The court has tried to distinguish cases of fraud from litigation over ordinary market losses. It was not inclined to expand the reach of the private plaintiffs’ bar to bring new claims. This conservative approach reflects the current judicial philosophy of the court and political leaning of the Congress that confirms the appointments of the justices.