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.
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Posted by: Nellie | October 9, 2007 10:55 AM
Posted by: Drew Fan | October 9, 2007 05:02 PM