Stoneridge: The Supreme Court’s Rulings and its Impact (Part 1)

Today begins a new occasional series on the Supreme Court’s January 15, 2008 ruling in Stoneridge Investment Partners, LLC, v. Scientific-Atlanta, Inc., No. 06-43, slip op. (Jan. 15, 2008). In that class action securities damage suit, the Court ruled in favor of the third-party vendor respondents, holding that plaintiff failed to plead reliance. While the ruling is clearly pro-business, it is not the “decision of the century” which might have rewritten the scope of liability under antifraud Section 10(b) and Rule 10b-5 many commentators predicted and business groups sought.

At the same time, it is beyond dispute that Stoneridge is an important decision for reasons which include the fact that:

1) it narrows the scope of private securities damage actions;
2) it effectively reaffirms the broad reach of SEC enforcement actions;
3) it suggests the manner in which future damage actions might be brought; and
4) it provides guidance for proactive steps to avoid liability.

All issuers, along with their directors, officers and general counsel, should carefully consider analyze the bright line test of liability offered in Justice Kennedy’s majority opinion, examine the policy and federalism principles on which the ruling is based, and carefully assess the impact of the ruling on SEC enforcement.

To examine the significance of Stoneridge this series will consider five key areas:

1) the origins of “scheme liability” as argued by the Stoneridge petitioner-plaintiffs;
2) the ruling by the Eighth Circuit as it has been reviewed by the SEC and selected other decisions which have considered the “scheme liability” issue;
3) the majority and dissenting opinion in Stoneridge;
4) an analysis of the Court’s decision in the context of its other securities law rulings; and
5) conclusions and suggestions to avoid liability in the future.

This Week In Securities Litigation (January 18-24, 2008)

This week is dominated by the aftermath of the Supreme Court’s decision in Stoneridge discussed here and the SEC’s continued war on insider trading.

Following Stoneridge, some cases involving some of the biggest corporate scandals are starting to wind down:

• Enron Litigation – the Supreme Court entered an order denying certiorari, ending the class action suit brought against investment bankers claimed to have helped the once-high flying company to cook its books and defraud its shareholders. Regents of the Univ. of Calif. v. Merrill Lynch, Case No. 06-1341

• Homestore.com – the Supreme Court granted certiorari, reversed the decision of the circuit court adopting a variation of the SEC’s scheme liability theory, and remanded for reconsideration in view of the Court’s decision. Avis Budget Group, Inc. v. Calif. State Teachers’ Retirement, Case No. 6-560.

• Parmalat – the Court scheduled a hearing to discuss the effect the Court’s ruling in Stoneridge on the issue of summary judgment in that matter. In re Parmalat Securities Litig., 376 F. Supp. 2d 472 (S.D.N.Y. 2005).

No doubt there will be others, although Stoneridge is not necessarily the end of these cases as discussed here.

The SEC also continued its vigorous pursuit of insider trading:

• SEC v. Tapanes, Civil Action No. 08-60064 CIV (S.D. Fla. Filed January 17, 2008) is a settled insider trading case. The complaint alleged that Mr. Tapanes, an oceanographic surveying consultant to Odyssey Marine, traded in the securities of the company prior to the announcement that it had the discovery of an 18th century ship wreck, code-named the Black Swan which contained tons of silver and gold coins. After the public announcement of the discovery, Mr. Tapanes sold his shares for a profit of over $107,000. To resolve the matter, Mr. Tapanes consented to the entry of a statutory injunction and the entry of an order requiring him to disgorge all trading profits, pay a civil fine in an amount equal to the profits and pay prejudgment interest. The Commission’s Litigation Release is here.

• SEC v. Saiyed Atiq Raza, Case No. CV 08-0375 (N.D. Cal Filed January 22, 2008) is also a settled insider trading case that was brought against the former director of OrthoClear Holdings Inc. The defendant is alleged to have made nearly $1.5 million by trading on inside information obtained from the company. The defendant consented to the entry of a statutory injunction, and the entry of an order requiring him to pay nearly $3 million is disgorgement, prejudgment interest and penalties. The Litigation Release for this matter can be viewed here.

Finally, the former CEO of MonsterWorldwide settled an option backdating case with the SEC. SEC v. McKelvey, Case No. 08 CV 0555 (S.D.N.Y. Filed January 23, 2008). To settle the action, Mr. McKelvey consented to the entry of a statutory injunction and an order requiring him to pay disgorgement, prejudgment interest but not a civil penalty. The Commission cited personal reasons for not imposing a penalty, The Commission’s Release regarding this case is here.