The Week In Review: An Old Case is Resolved While Everyone Argues in Stoneridge – Except the SEC

Significant events last week in SEC securities litigation focused on the resolution of an old case and continued silence from the SEC on Stoneridge. 

First, the old case.  

On August 15, 2007, the SEC finally settled with former McKesson Corp. executive, Michael G. Smeraski.  Mr. Smeraski, a one time McKesson senior sales vice president, was alleged to have acted together with other senior executives and participated in a long-running financial fraud at the company.  The settlement came with a consent to a statutory injunction, baring future violations of the antifraud provisions, and an agreement to pay a civil penalty of $50,000.  While the underlying conduct here took place in 1999, this was not a case where the SEC dallied in filing suit.  Indeed, its complaint was filed in September 2001.   However, it took another six years to get the settlement, meaning that it was eight years after the events at issue before the case finally ended.  One can only wonder what took so long.  SEC v. Smeraski, Case No. C-01-3651 MJJ (N.D. Cal.).  The SEC’s Litigation Release is available at   

The most significant event in securities litigation last week took place – or perhaps did not take place – in Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43, the case pending before the Supreme Court which will be argued in early October.  As discussed previously in this blog, Stoneridge is perhaps the most significant case to come before the Court in years concerning the construction of the antifraud provisions of the federal securities laws and private damage actions.  The question to be decided is the scope of liability under antifraud provision Section 10(b) and Rule 10b-5 thereunder – that is, whether there is “scheme liability.”  Stated differently, the question is who can be held liable under this catch-all antifraud provision if an issuer engaged in fraudulent conduct:  auditors, attorneys, vendors or others?  The resolution of this case can have an impact on the potential liability of all who deal with public companies. 

Last week, the U.S. government filed its amicus brief.  The Solicitor General sided with the defendant third party vendors and against the shareholder plaintiffs.  This is a significant filing since it eschews the usual SEC position, which typically argues that private damage actions by shareholders are a necessary supplement to its enforcement program.  The brief does, at points, attempt to harmonize the positions advocated with those previously taken by the SEC on scheme liability. 

Two groups of former SEC Commissions also filed briefs.  Former Chairman Donaldson and Levitt joined with former commissioner Goldschmid in arguing in support of the petitioners.  In contrast former Chairmen Hills, Williams and Pitt joined with former Commissioners Cox, Fleischman, Friedman, Grundfest, Hunt, Karmel, Lochner, Peters, Roberts, Unger and Wallman, arguing in favor of the respondent defendants.  In addition, Representatives John Conyers, Jr. and Barney Frank filed a brief in support of petitioners. 

In sum, what the Court and the public have is views from the parties, the government, two congressmen, a number of former SEC Commissioners and a host of interested persons.  What the Court does not have is the views of the SEC, the agency charged by Congress with administering the statutes.  Yet, it has been widely reported that the SEC wants to file a brief in support of petitioners.  In the past, when the SEC’s views did not comport with those of the Solicitor General, the agency filed a separate brief.  As I have written in the past, regardless of whether one agrees with the view the SEC would espouse, on this most important issue, the Court, the parties and the public should have the benefit of the Commission’s view.  Stifling argument is no way to argue a court case.