Will the SEC Speak On The Key Issue of Who Can Be Liable In Securities Damage Cases Before the Supreme Court : Merrill Lynch/Enron and Stoneridge

The deadline has passed for the SEC to file an amicus brief in support of the petition filed by Enron shareholders requesting that the Supreme Court hear their case. . No brief was filed. See, Regents of the University of California v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 06-2007 (S.Ct.)(the Circuit Court decision is reported at University of California v. Credit Suisse First Boston(USA), Inc, 2007 WL 816518 (5th Cir. Mar. 19, 2007). Apparently the Solicitor General decided not to file a brief despite a previous request from the SEC to do so in support of the shareholders. This inaction follows weeks of reported lobbying by counsel for the plaintiffs seeking support from the SEC.

According to an article in today’s Washington Post by Carrie Johnson, the inaction by the Solicitor General follows an interagency dispute on the key issue presented in the Merrill Lynch case. See “Investors Lose Key Advocate In Case on Financial Crimes,” Washington Post, June 12, 2007 at D 1. Apparently Treasury Department officials are not in agreement with the views the SEC sought to express. Treasury officials view such law suits as impeding U.S. competitiveness. That view may stem from the report of the so-called Paulson Committee (named after the Treasury secretary although he is not a member of the Committee) issued earlier. That report claimed that U.S. competitiveness is being hurt by private securities litigation.

The issue in Merrill Lynch may be the most significant question decided by the Supreme Court regarding private securities damage cases in years. Earlier this year the Court agreed to hear another case next term raising the same issue. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc et al., No. 06-43 (S.Ct.).

At stake in these cases is who can be held liable in securities fraud suits brought under antifraud provision Section 10(b) of the Exchange Act, the key provision in most securities class actions. The resolution of the issue will require the high court to draw a line between those who may be named as defendants and held liable in securities damage actions and those who can not. A host of parties will be watching the Court including corporate directors and officers, outside auditors, outside lawyers, vendors and others who deal with public companies. Depending on where the line is drawn all, some or none of these persons may face future liability.

In view of the significance of the issue in Merrill Lynch it is regrettable that the SEC will not be permitted to voice its views. Regardless of which side of this issue one takes, when a key question concerning the construction of the securities laws is being resolved, the high court should have the opportunity to hear all of the competition views before making its determination. This is particularly true with respect to the agency charged by congress with administering the statutes being construed — the Securities and Exchange Commission.

At this point it remains unclear whether the agency will be permitted to file an amicus brief on the merits in Stonebridge or, assuming the Court decides to hear Merrill Lynch/Enron, in both cases. Again, on an issue as important as the one presented by these cases, regardless of which side of the fence your views fall on, the Court should have the opportunity to hear the views of all sides. If the solicitor general does not want to file a brief then perhaps he should give the SEC permission to file a brief on its behalf rather than on behalf of the U.S. which as been done in the past.

We will explore the issues in these cases and other key Supreme Court cases dealing with private securities damage actions in an occasional series which will begin later this week.