The 'Roe v. Wade of Securities Law'

The Supreme Court this morning hears oral argument in a securities case that has lawyers, accountants, bankers and other potential "aiders and abettors" quaking in their white shoes. Will the justices expand the scope of federal law to allow more fraud lawsuits against corporate targets? Or will they hold the line and limit that scope?

You don't need to be a doomed Enron investor or employee to care about the result.

The case is Stonebridge Investment Partners v. Scientific Atlanta, and in it the investor-plaintiffs claim that the defendant (and another big-money corporate defendant) assisted another company in defrauding them. While the defendants in this case are decidedly not from the so-called service-sector of the securities industry, it is not hard to understand why other third-parties who help corporate clients do deals and keep the books are worried about a brave new world of liability.

The good news for those professionals is that the justices marked themselves last term as a decidedly pro-business group. The bad news for the corporations here is that the legal and political momentum in our post-Enron world seems to be in favor of expanding investor rights. And, indeed, the decision here will affect one way or another the Enron-related cases that are pending even as Jeffrey Sklling is moldering in prison and Ken Lay is moldering in his grave.

Precedent? It goes to the corporations. The Supreme Court in 1994 ruled that a private plaintiff (instead of, say, a governmental entity) could not successfully sue any "aiders and abettors" under the Federal Securities Act of 1934. The link between the fraud and these third-parties, the court's majority determined, was too tenuous to bring them under the scope of the private action clause of the statute. And it's fair to say that the court is more conservative and more pro-business than it was in 1994.

If the justices keep the Stonebridge lawsuit alive, other investors surely will add new corporate defendants to ongoing fraud cases -- or initiate new ones. And if the justices end the Stonebridge case? Then it will be up to Congress to amend the securities law to make it clear which third parties can be held liable and which cannot. So you might say that this is a conflict that is going to live on no matter what the justices decide.

By Andrew Cohen |  October 8, 2007; 8:40 PM ET
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I find it interesting that the SEC originally sided with investors on this one. Of course, the Bush Administration overruled the SEC and threw its support behind the corporations.

The suit begs the question about what to do when the banks, accountants and lawyers set up illegal and fraudulent schemes for their corporate clients. If the corporations lose in court, they can always sue for indemnification and contribution, but how often will that actually happen? How about joint and several liability?

Of course, this is keeping in mind that there are a lot of bogus shareholder suits out there. But this is the kind of thing that needs to be addressed with the serious fraud, like Enron, Tyco, WorldCom, etc.

Posted by: Nellie | October 9, 2007 10:55 AM


Have you heard about the Supreme Court Khaled el-Masri case that the Court tossed without comment? Just curious on your thoughts? He is not a US citizen, nor were the events taking place on US soil, however the acts were allegedly committed by US agents in the name of the US.

Posted by: Drew Fan | October 9, 2007 05:02 PM

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