Stoneridge and the Issue Before the Supreme Court

As we prepare for the arguments in Stoneridge, we thought it would be appropriate to raise some interesting issues in the case.  One might think that the issue before the Supreme Court in Stoneridge would be fairly straight forward. The debate has centered around whether deceptive behavior by parties that did not actually make disclosure can constitute securities fraud. Plaintiffs put the issue this way:

• QUESTION PRESENTED Whether this Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. § 240.10b-5(a) and (c), where Respondents engaged in their own deceptive conduct in transactions with a public corporation for the purpose and effect of creating a false appearance of material fact that enabled the publication of artificially inflated financial statements by the public corporation, but where Respondents themselves made no public statements concerning those transactions.

Phrased this way, the issue is a narrow one. Respondents, however, take a different view of the issue.

• QUESTION PRESENTED   Whether this Court should imply a private cause of action under Section 10(b) of the Securities Exchange Act against vendors whose transactions with a publicly traded company were improperly accounted for by the public company in its financial statements, when the plaintiff—an investor in the public company—did not rely on the transactions or on any statement by the vendors, and the vendors did not use or employ a deceptive device in connection with the purchase or sale of a security.

The statement of the issue by Respondents is straightforward.  The answer is no.  Moreover, probably everyone would agree on the answer.  The statute is limited to deceptive devices and manipulation.  Without them, there can be no violation.  The case is not about whether a deceptive device is necessary but the meaning of deceptive device.  Now that's a question that does not yield a unanimous response.