LIABILITY IN SECURITIES FRAUD ACTIONS: Part XXIII: Conclusion: Stoneridge – Themes Which Will Influence the Decision

This series has examined the impact or potential impact of three key Supreme Court decisions on private securities fraud damage actions under Section 10(b).  Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) and Dura Pharmaceuticals, Inc., v. Broude, 544 U.S. 356 (2005) have been decided.  Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43 will be argued on October 9.  Tellabs and Dura are already having a significant impact, generally making it more difficult for plaintiffs to plead and prove a securities fraud action. Stoneridge is widely expected to be the most important decision in this area in years and will almost certainly continue the trend of its predecessors.

As the Supreme Court prepares to hear and resolve the case, it will not be at a loss for views, theory and argument.  Not only does the Court have the briefs of the parties, but also 31 amicus briefs.  Those briefs include parties from Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007); Pet. For Cert. filed, 75 U.S.L.W. 3557 (March 5, 2007) (No. 06-13) (the Enron class actions), arguing their positions, the solicitor general supporting the defendants, and groups of former SEC Commissions arguing each side, along with a variety of business and investor groups.  The SEC was not permitted to file a brief, but its theory of scheme liability, a variation of which was adopted by the Ninth Circuit in Simpson v. AOL Time Warner, Inc., 452 F.3d 1040 (9th Cir. 2006), is being presented.

What is at issue in Stoneridge is the way business is conducted.  In Stoneridge as well as Enron, Simpson and other similar cases, the basic allegations patterns involve entities in business deals with a public company which books the transaction in a manner which defrauds its shareholders.  Those supporting plaintiffs claim that the parties, acting with the public company in those deals, have defrauded the shareholders.  Those supporting the defendants claim that parties to a business transaction are not responsible for how the public company books a deal or communicates that deal to its shareholders. 

As the Supreme Court considers Stoneridge, the themes of Tellabs, Dura and the predecessor of StoneridgeCentral Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) – will be key to the decision.  The Court can be expected to begin any analysis of the scope of liability under Section 10(b) by closely reading the statutory language.  This approach is particularly evident in Central Bank, which is little more than a reading of the text of Section 10(b) to conclude that the words “aiding and abetting” are not in the statute. 

At the same time, the Court is keenly aware of the fact that the cause of action under Section 10(b) has been implied by the courts and not created by Congress.  This theme is evident, for example, in Dura, where the Court traced back to traditional common law fraud elements to craft its loss causation theory.  In this context, the Court will be aware of the fact that following Central Bank Congress restored aiding and abetting liability for SEC enforcement actions, but not private damage cases.  The Court’s concern here ties to its close focus on the literal language of the statute to create a restrictive view of liability under Section 10(b), despite the fact that it is viewed as a “catch-all” antifraud provision.

Another key theme from Central Bank, Dura and Tellabs is notice and predictability.  Collectively, these cases evidence a kind of “bright line” approach to liability which aids planning for business transactions and decisions.  The concern for predictability and the impact of securities damage suits on business it driven in part by recognition of the havoc abusive, frivolous securities suits can cause as documented in the legislative history of the PSLRA.

As the Supreme Court considers and decides Stoneridge, these themes from Central Bank, Dura and Tellabs can be expected to significantly influence the decision.  Viewing Stoneridge through these themes suggests that the decision will be carefully drawn, tied closely to the statutory language and the elements the Court has crafted over the years for a Section 10(b) claim.  What may ultimately be the key to the decision however, will be the quest for predictability and the necessity for a bright line test, underscored by a concern regarding the impact of frivolous suits based on a court-created cause of action.