Roberts, Alito Appear Skeptical Of Plaintiffs' Arguments in Stoneridge
By JESS BRAVIN and KARA SCANNELLOctober 10, 2007; Page A4
WASHINGTON -- A long-shot claim by class-action lawyers to hold third parties liable for stock fraud looked even more dicey after Supreme Court arguments yesterday.
BEFORE THE COURT
Only two justices, David Souter and Ruth Bader Ginsburg, showed much sympathy for the theory that private investors should be able to seek compensation from suppliers or others for helping a public company mislead the market.
Since the mid-1990s, Congress has been raising the bar for private shareholder lawsuits, and the court has followed Capitol Hill's direction, construing securities laws to limit class-action suits in favor of enforcement by the Securities and Exchange Commission and the Justice Department.
In a 1994 case, the court ruled that "aiders and abettors" couldn't be held liable in private lawsuits for another party's stock fraud if they didn't directly mislead the public. Plaintiffs' lawyers yesterday argued that a middle category of defendants, neither principals nor aiders and abettors, played an important role in the scheme and therefore should be liable, even if they didn't make misleading public statements.
The stakes are high, because the case could determine whether investors can seek damages from third parties when the principal company -- for instance, Enron Corp. -- is bankrupt.
The case before the court, Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., involves a scheme to pump up the stock price of Charter Communications Inc., a St. Louis cable provider. The cable-television company allegedly overpaid suppliers for equipment, and the suppliers in turn used the overpayments to buy advertisements on Charter's cable system, thereby inflating the company's income. The suppliers made no public statements about their actions. The question is whether their silence leaves them as aiders and abettors -- and thus immune from private liability.
Stanley Grossman, representing investors, told the court that the suppliers, Scientific-Atlanta, now a unit of Cisco Systems Inc., and Motorola Inc., were "not passive bystanders," but rather "integral to the scheme." The distinction, he argued, was that the suppliers had facilitated the fraud through deception, unlike the 1994 case in which the defendant, a bank, hadn't been proven to commit a deceptive act.
The high court had few buyers, however. "I see absolutely no difference between your test and the elements of aiding and abetting," said Justice Samuel Alito.
"There are any number of kickbacks and mismanagements and petty frauds that go on in the business, and business people know that any publicly held company's shares are going to be affected by its profits," said Justice Anthony Kennedy, "so I see no limitation to your proposal for liability."
Justice Souter, while otherwise sympathetic to investor claims, asked if there was any "real world" difference between fraud committed to deceive the public and that for other purposes. Mr. Grossman offered this example: "'Do me a favor,' says the sales manager. 'I want to make my numbers for this period so I can take my wife on a trip to Hawaii that the company will give me.' So the company gives him a phony order, thinking that's the purpose of it...to help this guy along."
The defendants' lawyer, Stephen Shapiro, took a simple tack. In effect, if a company wasn't a principal in the fraud, it must be an aider and abettor, and thus free from private liability. Congress, he argued, had decided that SEC enforcement was the "better mousetrap" for protecting the public.
The Bush administration, overruling the SEC, agreed with the defendants. Deputy Solicitor General Thomas Hungar argued that the pivotal question for private lawsuits was whether the defendant had "spoken to the market" to mislead investors. He observed that the government had more latitude to pursue fraud cases, as long as the alleged misconduct was "in connection with" a securities transaction.
Justice Ginsburg suggested that such a rigid rule would leave many victims of stock fraud with no recovery.
Mr. Hungar insisted that there were sufficient federal remedies.
Write to Jess Bravin at jess.bravin@wsj.com and Kara Scannell at kara.scannell@wsj.com
By JESS BRAVIN and KARA SCANNELLOctober 10, 2007; Page A4
WASHINGTON -- A long-shot claim by class-action lawyers to hold third parties liable for stock fraud looked even more dicey after Supreme Court arguments yesterday.
BEFORE THE COURT
Only two justices, David Souter and Ruth Bader Ginsburg, showed much sympathy for the theory that private investors should be able to seek compensation from suppliers or others for helping a public company mislead the market.
Since the mid-1990s, Congress has been raising the bar for private shareholder lawsuits, and the court has followed Capitol Hill's direction, construing securities laws to limit class-action suits in favor of enforcement by the Securities and Exchange Commission and the Justice Department.
In a 1994 case, the court ruled that "aiders and abettors" couldn't be held liable in private lawsuits for another party's stock fraud if they didn't directly mislead the public. Plaintiffs' lawyers yesterday argued that a middle category of defendants, neither principals nor aiders and abettors, played an important role in the scheme and therefore should be liable, even if they didn't make misleading public statements.
The stakes are high, because the case could determine whether investors can seek damages from third parties when the principal company -- for instance, Enron Corp. -- is bankrupt.
The case before the court, Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., involves a scheme to pump up the stock price of Charter Communications Inc., a St. Louis cable provider. The cable-television company allegedly overpaid suppliers for equipment, and the suppliers in turn used the overpayments to buy advertisements on Charter's cable system, thereby inflating the company's income. The suppliers made no public statements about their actions. The question is whether their silence leaves them as aiders and abettors -- and thus immune from private liability.
Stanley Grossman, representing investors, told the court that the suppliers, Scientific-Atlanta, now a unit of Cisco Systems Inc., and Motorola Inc., were "not passive bystanders," but rather "integral to the scheme." The distinction, he argued, was that the suppliers had facilitated the fraud through deception, unlike the 1994 case in which the defendant, a bank, hadn't been proven to commit a deceptive act.
The high court had few buyers, however. "I see absolutely no difference between your test and the elements of aiding and abetting," said Justice Samuel Alito.
"There are any number of kickbacks and mismanagements and petty frauds that go on in the business, and business people know that any publicly held company's shares are going to be affected by its profits," said Justice Anthony Kennedy, "so I see no limitation to your proposal for liability."
Justice Souter, while otherwise sympathetic to investor claims, asked if there was any "real world" difference between fraud committed to deceive the public and that for other purposes. Mr. Grossman offered this example: "'Do me a favor,' says the sales manager. 'I want to make my numbers for this period so I can take my wife on a trip to Hawaii that the company will give me.' So the company gives him a phony order, thinking that's the purpose of it...to help this guy along."
The defendants' lawyer, Stephen Shapiro, took a simple tack. In effect, if a company wasn't a principal in the fraud, it must be an aider and abettor, and thus free from private liability. Congress, he argued, had decided that SEC enforcement was the "better mousetrap" for protecting the public.
The Bush administration, overruling the SEC, agreed with the defendants. Deputy Solicitor General Thomas Hungar argued that the pivotal question for private lawsuits was whether the defendant had "spoken to the market" to mislead investors. He observed that the government had more latitude to pursue fraud cases, as long as the alleged misconduct was "in connection with" a securities transaction.
Justice Ginsburg suggested that such a rigid rule would leave many victims of stock fraud with no recovery.
Mr. Hungar insisted that there were sufficient federal remedies.
Write to Jess Bravin at jess.bravin@wsj.com and Kara Scannell at kara.scannell@wsj.com
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