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.