Stoneridge and Senator Dodd: Advice Ignored

We have finally obtained the copies of the letters written by Senator Dodd (presidential contender and Chairman of the Senate Committee on Banking, Housing, and Urban Affairs).  Senator Dodd previously indicated an interest in entering the Stoneridge fray.  On August 13, he fired off letters to the President and to Paul Clement (then the Solicitor General, now the acting Attorney General).  Both letters are posted on the DU Corporate Governance web site (along with a letter from Senator Dodd dated May 25 to Chairman Cox on the same subject). 

In the letter to Clement, Senator Dodd wrote to "express my disappointment that you have not filed an amicus brief with the Supreme Court expressing the views of the United States Securities and Exchange Commission"  He went on to urge the Solicitor not to "file an amicus brief advocating any position other than the well-established position of the commission that parties who contribute to defrauding investors should be held accountable."  The letter noted:  

• "It has been reported that your office may file an amicus brief advocating views inconsistent with the views of the SEC.  If this occurs, it would in my view compound the damage already caused to the investing public by the failure thus far to advocate the views of the Commission in the Stoneridge case.  I would encourage the rejection of any such plan."

As we know from the brief filed by the Solicitor General on August 15, this was advice he chose to ignore. 

Comments

[Herrick Lidstone]

You have had a significant, and interesting, discussion criticizing the decision in the Stoneridge case finding that persons engaging in what I will call gross acts of aiding and abetting cannot be held liable as primary participants. Admittedly the alleged actions of Motorola and Scientific American in the Stoneridge case and Merrill Lynch and the other investment bankers in the Enron case were outrageous and with no business purpose for Charter (in the Stoneridge case) or Enron except to pump up earnings.

The other side to the transaction had no relationship with the public investors of Charter or Enron, and they did have a legitimate business purpose for the transactions -- to make money.

Admittedly, the courts have found strange things to involve securities, like orange groves (Howey), beavers (Continental Marketing), and the like. However, it is hard to see how a transaction in goods that does not involve an investment contract can give rise to securities fraud. In none of the cases at issue did the aiders/abettors make any disclosure to the shareholders of Charter or Enron; they did not even respond to audit confirmation letters (which might change my opinion). How does this meet the Blue Chip Stamps requirement that the actions be "in connection with the purchase or sale of a security"?

No doubt the aiders/abetters were bad actors. Especially in the Enron case, through e-mails they even showed conscious awareness of what they were doing.

No doubt the shareholders of Charter and Enron were damaged and deserve recourse. Unfortunately for them, the deep pocket theory does not and should not extend to aiders and abetters.

Jay -- By the way - thanks for the Race to the Bottom coffee mug. Unfortunately it broke in transit. I'll trade you lunch for a new one?

Herrick