Stoneridge: Case of The Decade or Another Narrowly Drawn Decision?
The decision in Stoneridge v. Scientific-Atlanta, Inc., No. 06-41, which will be handed down later this term following argument yesterday before the Supreme Court, has been widely viewed as potentially the most important securities private damage action in years. It may be. Potential is not always actual, however. Indeed, many of the questions from the Justices yesterday suggested that the decision in Stoneridge may be an important decision, but not the decision of the decade.
At issue in Stoneridge is who may be held liable in a private damage action under Section 10(b) – that is, can business partners be held liable as part of a scheme to defraud with the primary violator public company? The resolution of this question has been closely watched by many, including business groups and shareholder advocates.
Plaintiffs relied on a theory of “scheme liability” (discussed in our earlier posting here), drawn from the Ninth Circuit’s decision in Simpson v. AOL Time Warner, Inc., 452 F.3d 1040 (9th Cir. 2006) and an amicus brief of the SEC filed in that case, to argue that the vendors in a barter transaction which Charter Communication used to cook its books were primary violators, liable to Charter’s shareholders. Early in the arguments the Chief Justice raised a key point of concern about plaintiffs’ theory, suggesting it would expand liability under Section 10(b) at a time when the Court should be contracting it: “I mean, we don’t get in this business of implying private rights of action any more. And isn’t the effort by Congress to legislate a good signal that they have kind of picked up the ball and they are running with it and we shouldn’t?” Later Chief Justice Roberts clarified and amplified his comment noting “my suggestion is not that we should go back and say that there is no private right of action. My suggestion is that we should get out of the business of expanding it, because Congress has taken over and is legislating in the area in the way they weren’t back when we implied the right of action under 10(b).” This has been a key theme in a number of the Court’s decisions construing the judicially crafted remedy under Section 10(b).
Similarly the Chief Justice, along with Justices Scalia, Kennedy and Alito, raised a number of questions about the difference between scheme liability and aiding and abetting, which the Court held in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) was not covered by the statute. The exchanges with counsel for plaintiffs on this issue prompted Justice Alito at one point to comment that “I see absolutely no difference between your test and the elements of aiding and abetting.” Justice Kennedy amplified this statement, noting that “there are any number of kickbacks and mismanagements and petty fraud that go on in the business, and business people know that any publicly held company’s shares are going to be affected by its profits, so I see no limits” to plaintiffs’ theory of scheme liability. A bright line and predictable result was a key point in Central Bank, and has been a theme of the Court’s 10(b) jurisprudence in recognition of the potential harm caused by frivolous securities fraud damage suits.
Respondents focused on the language of the statute. The complaint here, defendants argued, is little more than rendering substantial assistance to another who is making a false statement. This position prompted Justice Ginsburg to note that silence is, in fact, the point: “That’s the essence of the scheme. You said that they – they are home free because they didn’t themselves make any statement to investors. But they set up Charter to make those statements, to swell its revenues – revenues that it in fact didn’t have.”
In a series of questions which may suggest that the Justices are looking for a compromise position between the extremes of the parties, Justice Ginsburg asked whether there is some kind of middle ground between primary violator and aider and abettor: “That’s if they are aiders and abettors, which is what Congress covered [in Section 20e of the Exchange Act]. And I again go back to see if there is another category or is everyone – either Charter, the person whose stock is at stake, the company whose stock is at stake and everyone else is an aider?” Later Justice Kennedy raised essentially the same issue by asking defense counsel if, under the common law of torts, there was a category between primary violator and aider and abettor. Justice Souter echoed this theroy a short while later by asking whether there was “overlap” between the two categories – that is, some kind of common ground which would, in fact, be a third category.
As the arguments came to a conclusion, a series of questions may have suggested the potential basis the Justices are considering for their decision. First, Justice Stevens asked defense counsel whether reliance is an element of a private cause of action or an element of a statutory violation. Defense counsel noted that it is an element of a private action – a response drawn straight out of the Court’s Dura Pharmaceuticals, Inc., v. Broude, 544 U.S. 356 (2005) decision two years ago (discussed in our posting here). Next, defense counsel, who argued that the SEC should bring actions such as this one, essentially admitted that a government enforcement action could not really substitute for a damage action here in terms of compensating shareholders, since the Sarbanes Oxley fair funds provision could probably not be used in this case. Finally, the Chief Justice, in a comment echoed later by Justice Ginsburg, noted that the decision below was based on a determination that there was no deceptive act, not a lack of reliance. These questions may suggest the Court will not consider the reliance issue, which is a key part of the defense argument, as well as that of the Solicitor General.
While it is always prudent not to read to much into questions by the Justices, the arguments today may suggest that Stoneridge will leave the blockbuster decision to another day. To be sure, the Court raised key themes from its earlier cases about implied causes of action, the difference between aiding and abetting and a primary violation, and the lack of certainty of application offered by plaintiffs’ scheme liability theory. At the same time, repeated questions searching for a middle ground and concerning the fact that the lower court did not consider a key part of the arguments relied on by defendants and the Solicitor General suggest that the Court may opt for a narrow ground of decision focused on the what type of conduct – affirmative statement, deception, silence – violates the statute. In that event, the Court could leave the application of those principles for another day, just as it did last June in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) (discussed here). No doubt Stoneridge will be an important decision. It may not, however, be the decision of the decade.