Secondary Liability and Credit Suisse: Enron and the Petition for Certiorari

Lost in the discussion over Stoneridge v. Scientific Atlanta (In re Charter Communications) and the failure of the Solicitor General to file a brief on behalf of the SEC, Monday, June 11 was also the date that the Petitioners (the Regents of the University of California) filed their reply to the opposition brief with respect to their petition for certiorari in Regents v. Credit Suisse (the Enron case).  All of these briefs are at the DU Corporate Governance web site. 

In opposing the cert petition, the Investment Banks argued that the petition was duplicative (given that the Supreme Court will already address the same legal issue in Stoneridge) and therefore a waste of resources, was an "inferior vehicle" to address the secondary liability issue because it involved the review of an interlocutory denial of class certification, and the "strained merits argument do not justify the extraordinary measure of granting a tag-along petition."  The opposition brief described the Regent's arguments as "recycled" and an attempt to nullify Central Bank. 

The briefs by the two sides at least factually read like entirely difference cases.  The briefs for the Investment Banks described their behavior this way:  "Respondents entered into a variety of financial transactions with Enron at different times and with varying degrees of frequency."  That's it.  No mention of Nigerian barges or making debt look like equity.  The Regents, in their reply brief, not only described a litany of bad behavior by these Investment Banks but they took the time to remind the Court that they "are the very actors whose misconduct involving public companies and our securities markets led to the stock-market Crash of 1929 and was a primary motivation for enacting our federal securities laws". 

The arguments to the contrary notwithstanding, this case is a superior vehicle for reviewing the definition of primary liability.  It is still the case that, despite problems with the application of the facts, the 8th Circuit in Stoneridge adopted a test that imposed primary liability not only on those that made false statements but also on those that caused false statements to be made.  As the 8th Circuit itself suggests, this test would reach vendors that engaged in sham business transactions designed to facilitate financial fraud.  The 5th Circuit went further.  By requiring a duty to disclose, the court exonerated even those actors that engaged in a sham transaction for the sole purpose of facilitating securities fraud.  Regents, therefore, contains the clearest (and most restrictive) limitation on the reach of Rule 10b-5, making it an appropriate vehicle for determining the boundaries of the provision.