Stoneridge and Ununited Amici: "Each individual amicus may not endorse every argument presented"

Stoneridge is a very important case. It will determine the boundaries of Rule 10b-5 and determine whether third parties who engage in sham transactions deliberately designed to facilitate fraud can be sued for securities fraud even though they do not participate in the drafting or otherwise make a false statement. The case will resolve whether, for example, shareholders of companies like Enron can sue investment banking firms who faciliate massive financial fraud by an issuer.

The case has already involved a considerable amount of controversy. The SEC wanted to file an amicus brief to support shareholders but the Solicitor General said no. A large number of amicus briefs were nonetheless filed, including one from a group of law faculty. Two congressmen and two SEC chairmen have sought to file a brief out of time. One Senator has written a critical review to the President and another is contemplating filing a brief.

The latest salvo was fired by a veritable gaggle of commissioners, former general counsels, and professors, this time on the side of Respondents (a copy of the brief will be posted on the DU Corporate Governance web site later today). It was a self described "bipartisan group" who "have devoted substantial parts of their professional careers to implementing, drafting, and/or studying the federal securities laws, including how those laws should be interpreted to ensure the protection of investors and the promotion of efficiency, competition, and capital formation." Who are we talking about?

Three SEC chairmen: Roderick M. Hills, Harvey L. Pitt, and Harold M. Williams;

Eleven SEC commissioners: Charles C. Cox, Edward H. Fleischman, Stephen J. Friedman, Joseph A. Grundfest, Isaac C. Hunt, Jr., Roberta S. Karmel, Philip R. Lochner, Jr., Aulana L. Peters, Richard Y. Roberts, Laura S. Unger, and Steven Wallman;

Two general counsels: James Doty and Simon M. Lorne;

Eleven professors: Stephen M. Bainbridge (UCLA); Stephen J. Choi (NYU); Robert C. Clark (Harvard); John C. Coates (Harvard); Richard A. Epstein (Chicago); Allen Ferrell (Harvard); Larry E. Ribstein (Illinois); Richard W. Roll (UCLA); Roberta Romano (Yale); Kenneth E. Scott (Stanford); and Jeff Strnad (Stanford). 

We offer a few observations.  We will not quibble with the characterization of the list as "bipartisan" although most on the list have a predictable view.  We do note that the brief was not a product of unified thinking.  As the brief noted: "This brief reflects the consensus view of the amici, all of whom believe that the decision below should be affirmed. Each individual amicus may not endorse every argument presented herein, however."

Finally, we note that, for all of the fire power involved in the brief, it is a disappointment. The brief frames the issue this way: "Both the text of Section 10(b) and the structure of the Exchange Act preclude judicial implication of a private right of action against a non-trading, non-speaking entity that merely “enables” the commission of an alleged fraud by a public company on its shareholders."  But no one is seriously arguing that merely enabling equals primary liability.  A telecom company can "enable" by allowing the fraud to take place over its wireless network.

Instead, Petitioner have argued that,to be primarily liable, there must be separate, deceptive act that facilitates the fraud.  As the Petitioners put it, primary liability applied "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."  

As for legal analysis, the brief does little more than claim that the facts in Stoneridge are no different than the facts in Central Bank.   See Brief at 10 ("The conduct at issue in Central Bank would fit squarely within the definition of “scheme liability” that petitioner proposes in this case").  In the end, the Supreme Court may agree with this but there are plenty of ways the facts in the two cases can be distinguished.  There is, for example, no allegation that Central Bank engaged in a sham transaction for the purpose of facilitating fraud.  Thus, the Supreme Court could disregard much of the analysis in the brief simply by concluding that Stoneridge involves conduct that cannot squarely fit within Central Bank. 

More on this tomorrow.