See No Evil, Hear No Evil, Speak No Evil: Stoneridge Investment Partners, LLC V. Scientific-Atlanta, Inc. and the Supreme Court's Attempt To Determine the Issue of Scheme Liability
Monday, 14 September 2015
by Seth Gomm, JD MBA
In the spring of 2008, the United States Supreme Court handed down the much-anticipated Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. decision, which addressed whether shareholder-plaintiffs can sue secondary actors who may have participated in a fraudulent transaction with the plaintiffs' company. This theory of so-called “scheme liability” would give shareholder-plaintiffs legal recourse under § 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. In this context, a “secondary actor” is a company or individual, other than the direct issuing company, that does not have a duty of disclosure to the issuing company's shareholders but who nonetheless aids the issuing company in defrauding its shareholders through schemes and fraudulent transactions.
In Stoneridge, the Court held that there is not an implied private right of action for injured shareholder-plaintiffs under § 10(b) against secondary actors unless such plaintiffs relied on the secondary actors' deceptive acts. In reaching its decision, the Court reasoned that to show adequate reliance, shareholder plaintiffs must at least rely on public representations made by the secondary actors, or the secondary actors must have some duty to disclose to the injured shareholder-plaintiffs. In Stoneridge, the necessary reliance on the secondary actors' deceptive acts was too remote to justify a § 10(b) private action. The Court explained its fear of potential backlash in United States markets if it allowed private plaintiffs to pursue secondary actors under a theory of scheme liability and concluded that Congress alone has authority to permit such private actions.
Stoneridge, however, is not without its problems. The Court's opinion focused heavily on the theory of reliance and appeared to confuse precedent and statutory language as it worked to justify its holding. Several cases, similar to Stoneridge, which involve petitions to hold secondary actors liable for their scheming conduct, worked their way through the circuit courts and created a circuit split. Simpson v. AOL Time Warner Inc. was vacated and remanded by the Supreme Court, and Regents of the University of California v. Credit Suisse First Boston (USA), Inc. was denied certiorari. The plaintiffs in both cases, however, still have the slim chance of establishing a private § 10(b) cause of action. Although the current Court is unlikely to allow private scheme-liability actions in the near future, Congress may act in favor of shareholder-plaintiffs when it sees the wisdom of allowing such § 10(b) actions.
This article argues that while Stoneridge has further empowered the Securities and Exchange Commission (“SEC”) in its mandate to police the securities market, it has also left a discouraging and confusing result for injured shareholders who want to seek private restitution for their losses. The result appears to be that, so long as companies do not disclose to the public the truth behind sham contracts and transactions in which they have participated (thereby causing reliance), the companies probably will not be vulnerable to private actions from shareholders. Notwithstanding the Court's holding in Stoneridge, permitting shareholders to bring private § 10(b) actions against scheming secondary actors would improve the efficiency, transparency, and integrity of the United States securities market. Investors that are directly victimized by such schemes should be able to initiate private actions in order to seek redress for their losses without having to wait for the SEC to act.
Part II of this article discusses the transaction structures of alleged “schemes” that could be subject to a theory of scheme liability, as well as the necessary elements of a § 10(b), a Rule 10b-5, or a securities fraud action. It also reviews past Supreme Court case law addressing the issue of secondary-actor liability. Part III details the split in authority that existed among the circuit courts of appeal on the topic of scheme liability and the various approaches taken by those courts regarding scheme liability. Part IV reviews the Supreme Court's decision in Stoneridge. Part V analyzes that decision and discusses the possible unfortunate consequences of the Court's decision.
This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.
In Stoneridge, the Court held that there is not an implied private right of action for injured shareholder-plaintiffs under § 10(b) against secondary actors unless such plaintiffs relied on the secondary actors' deceptive acts. In reaching its decision, the Court reasoned that to show adequate reliance, shareholder plaintiffs must at least rely on public representations made by the secondary actors, or the secondary actors must have some duty to disclose to the injured shareholder-plaintiffs. In Stoneridge, the necessary reliance on the secondary actors' deceptive acts was too remote to justify a § 10(b) private action. The Court explained its fear of potential backlash in United States markets if it allowed private plaintiffs to pursue secondary actors under a theory of scheme liability and concluded that Congress alone has authority to permit such private actions.
Stoneridge, however, is not without its problems. The Court's opinion focused heavily on the theory of reliance and appeared to confuse precedent and statutory language as it worked to justify its holding. Several cases, similar to Stoneridge, which involve petitions to hold secondary actors liable for their scheming conduct, worked their way through the circuit courts and created a circuit split. Simpson v. AOL Time Warner Inc. was vacated and remanded by the Supreme Court, and Regents of the University of California v. Credit Suisse First Boston (USA), Inc. was denied certiorari. The plaintiffs in both cases, however, still have the slim chance of establishing a private § 10(b) cause of action. Although the current Court is unlikely to allow private scheme-liability actions in the near future, Congress may act in favor of shareholder-plaintiffs when it sees the wisdom of allowing such § 10(b) actions.
This article argues that while Stoneridge has further empowered the Securities and Exchange Commission (“SEC”) in its mandate to police the securities market, it has also left a discouraging and confusing result for injured shareholders who want to seek private restitution for their losses. The result appears to be that, so long as companies do not disclose to the public the truth behind sham contracts and transactions in which they have participated (thereby causing reliance), the companies probably will not be vulnerable to private actions from shareholders. Notwithstanding the Court's holding in Stoneridge, permitting shareholders to bring private § 10(b) actions against scheming secondary actors would improve the efficiency, transparency, and integrity of the United States securities market. Investors that are directly victimized by such schemes should be able to initiate private actions in order to seek redress for their losses without having to wait for the SEC to act.
Part II of this article discusses the transaction structures of alleged “schemes” that could be subject to a theory of scheme liability, as well as the necessary elements of a § 10(b), a Rule 10b-5, or a securities fraud action. It also reviews past Supreme Court case law addressing the issue of secondary-actor liability. Part III details the split in authority that existed among the circuit courts of appeal on the topic of scheme liability and the various approaches taken by those courts regarding scheme liability. Part IV reviews the Supreme Court's decision in Stoneridge. Part V analyzes that decision and discusses the possible unfortunate consequences of the Court's decision.
This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.
