Stoneridge, Central Bank and the Historical Background

Oral argument in Stoneridge is today.  Because much of the case purportedly turns on the holding in Central Bank, we thought we'd take a walk down memory lane. 

I recently had lunch with Miles Gersh, one of the attorneys representing the Plaintiff in Central Bank.  He is a local attorney here in Denver in the firm Gersh & Helfrich.  Central Bank was an indenture trustee for bonds issued in 1986.  The case arose in connection with a second issuance of bonds in 1988.  Central Bank had no direct role in the offering but was scheduled to be the indenture trustee in the second offering.  With class action status denied for all bond holders, First Interstate served as the plaintiff, having been assigned the cause of action by customers who bought the bonds.  

Shortly before trial, the federal district court dismissed the case, concluding that plaintiff had not alleged scienter with respect to the aiding and abetting claim against Central Bank.  The 10th Circuit reversed and returned the matter to the trial court.  Miles recalls that at that stage of the litigation, he was confident the matter would settle in relatively quick order.

Central Bank, however, filed a petition for certiorari, solely on the issue of recklessness.  Miles recalls not long afterwards receiving a call from the Solicitor General's Office indicating an interest in supporting the petition.  While the Solicitor General would side with First Interstate, the support increased the likelihood that the Court would take the case and possibly reverse.  When the petition was granted, all of the parties learned for the first time that the Court wanted the aiding and abetting issue briefed. 

A Harvard graduate, Miles called one of the professors at his law school, Louis Loss, to help.  Loss agreed to act as a consultant for what was, at the time, the exorbitant rate of $500/hour.  Loss reviewed and commented all of the materials filed.  Miles and First Interstate at one point considered having Loss do the oral argument, to regal some of the Justices who had been his students, but ultimately decided otherwise. 

Oral argument was held on Nov. 30, 1993.  Miles remembers receiving 10 minutes of instructions on how to address the Justices (never call them judge and always call Justice Rehnquist the Chief Justice).  He also remembers the intimacy of the setting, with the Justices so close they could observe facial expressions or, as he put it, see you flinch.  At oral argument, he was quickly inundated with questions, with most coming from Justice Scalia.  Justice Thomas had the least to say, "not even clearing his throat" and Justice Kennedy, the eventual author of the opinion, said little.   

The transcript of the oral argument did reveal one interesting comment, coming from counsel for Central Bank, Tucker Trautman.  He noted the following: 

• However, I don't want the Court to get the impression that professionals could never be sued under a primary violation. I think clearly they could, but they would have to essentially have participated in and engaged in deceptive conduct, something that did not happen here. I think as Justice Scalia indicated, the allegation against our client is not that we participated in a misrepresentation, because we didn't. We had nothing to do with the selling process. What we are accused of doing is essentially by our conduct allowing the fraud to occur.

While Central Bank won the battle (aiding and abetting was eliminated by a 5-4 vote), it ultimately lost the war.  With respect to state claims, the parties had entered into a tolling agreement.  After resolution by the Supreme Court of the federal cause of action, First Interstate filed a state action.  The trial court dismissed the action, concluding that it amounted to res judicata and that the aiding and abetting claim under the state securities laws was subject to the statute of repose. 

The court of appeals reversed the dismissal, returning the matter for trial.  See First Interstate Bank of Denver, N.A v. Central Bank & Trust Company of Denver, 937 P.2d 855 (Colo. App. 1996).  Days before the trial, the parties agreed to a settlement, with Central Bank paying $3 million.  That, along with amounts obtained from other parties, essentially made the suing bond holders whole.  See Colorado Bank Settles Decade-Old Suit with Real-Estate Investors, Denver Post, October 7, 1999.