Stoneridge: More Pro-Business Than It Appears
Stoneridge is clearly a pro-business decision. While the Supreme Court did not render the blockbuster decision many anticipated by dramatically reinterpreting the contours of key anti-fraud Section 10(b), the Court clearly delimited the contours of private damage actions. Under the Court’s decision, third party vendors who contribute to an issuer’s fraud on its shareholders are simply too remote from the securities transaction to be liable – at least for damages. Those persons are, however, still potentially liable in SEC enforcement actions under Section 20(e) which gives the agency authority to bring suits for aiding and abetting.
Examination of Stoneridge in the context of recent amendments to the federal securities laws and another key decision by the Supreme Court suggests that the decision may have far broader implications than what might initially appear from reading the opinion. Traditionally, remedies available to plaintiffs under the federal securities laws are a supplement to those under state law. For example, Section 28 of the Securities Exchange Act of 1934 provides in part that “the rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity … .” According, plaintiffs had the option of bringing an action for damages under either the federal securities laws or the applicable state laws.
Congress, of course, altered this balance with the passage of the Securities Litigation Uniform Standards Act (“SLUSA”) of 1998. Generally, under that Act class actions alleging Section 10(b) type fraud can only be brought in federal court – state court suits are pre-empted. See, e.g., Merrill Lynch Pierce Fenner & Smith v. Davit, 547 U.S. 271 (2006). The purpose of SLUSA was not to deny those with meritorious claims the right to bring suit but rather to ensure that class action plaintiffs do not evade the stringent pleading and procedural requirements of the Securities Litigation Reform Act of 1995 (“PSLRA”) intended to weed-out frivolous suits.
If, however, Stoneridge is read together with SLUSA, a significant question arises as to whether certain types of actions have been left without a remedy. Stated differently, does Stoneridge and SLUSA effectively immunize third parties from private securities fraud class action liability?
Under Stoneridge the conduct of the third party vendors is fraud within the meaning of Section 10(b) according to the Court. Indeed, as the Court points out, the vendors may be subject to suit by the SEC for aiding and abetting violations of the anti-fraud provisions. Accordingly under SLUSA a class action suit against those vendors could only be maintained in federal court. Under Stoneridge however, once that suit is filed or removed to federal court it must be dismissed. SLUSA and Stoneridge thus preclude plaintiffs who claim to have been injured by the actions of third party vendors from bringing a fraud suit in either federal or state court as a class action. Since the cost of securities actions is typically to great to permit individual cases, effectively this reading of SLUSA and Stoneridge immunizes third party vendors from suit. This result would be consistent with Dabit (concluding that “holder suits” are pre-empted by SLUSA despite the fact that the Court’s earlier decision in Blue Chip Stamps v. Manor Drug, 421 U.S. 723 (1975) would require dismissal once removed. Under this reading Stoneridge has far broader implications than might have initially appeared.