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Overview
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 Supreme
Court affirms the Eighth Circuit, 5-3
- Holds that secondary actors are not liable under
Exchange Act §10(b) and Rule 10b-5 where plaintiffs cannot prove reliance
- Rejects use of scheme liability by
private plaintiffs against secondary actors where there was no actual reliance on
the deceptive conduct by the plaintiffs or a separate duty for the defendants to speak
- A setback to private plaintiffs who have been
advancing scheme liability claims
- See
Opinion syllabus summary of holding
Background
- Plaintiffs alleged that Charter Communications, a
cable company, had inflated its financial performance
- Claims were also brought against Scientific-Atlanta and Motorola,
who were alleged to have participated in a scheme
by agreeing to charge Charter additional amounts for cable set-top boxes that were then
circled back to Charter as advertising revenue
- Effect was to boost Charter's current income and
cash flow, as the additional charges were capitalized - and thus deferred - while
the advertising revenue was booked immediately
Lower
court proceedings
- District court granted vendors' motion to
dismiss,
relying on Central Bank 1994
- "no Rule 10b-5 private right of action for aiding and abetting a Rule 10b-5 violation"
- Court noted the lack of any statements,
omissions,
or actions by the Vendors relied upon by the plaintiffs
- Court could "find no precedent for the conclusion that business partners, such as [Vendors], made false and misleading statements by virtue of engaging in a business enterprise with a company such as Charter, the entity purported to have made the statements at issue."
- In re Charter Communications, Inc., Securities Litigation,
443 F. 3d 987 2006
- "any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under 10(b) or any subpart of Rule 10b-5."
- "To impose liability for securities fraud
on one party to an arm's length business transaction in goods or services other
than securities because that party knew or should have known that the other
party would use the transaction to mislead investors in its stock would
introduce potentially far-reaching duties and uncertainties for those engaged in
day-to-day business dealings. Decisions of this magnitude should be made by
Congress."
Majority
opinion
- Private 10(b) liability does not extend to
aiders and abettors because plaintiffs do not rely upon those who merely assist
the primary violator
- See
Opinion Section
II
- Found that Stoneridge plaintiffs couldn't
establish reliance
- Defendants had no duty to disclose, and their
acts were not communicated to the public
- See
Opinion Section
III.A
- Rejected use of scheme liability by
private plaintiffs against secondary actors where there was no actual reliance on
the deceptive conduct by the plaintiffs or a separate duty for the defendants to speak
- Refused to find a private right of action to
support
scheme liability on these facts
- As Congress did not overturn
Central Bank's limitation on private rights of action when it adopted the
PSLRA amendments to the Exchange Act in 1995
- See
Opinion Section
III.C
Aiding
and abetting liability
- Majority emphasized that secondary actors are
subject to criminal penalties and SEC civil enforcement
- Congress expressly authorized the SEC to bring
aiding and abetting charges when it adopted the PSLRA amendments to the Exchange
Act in 1995
- SEC doesn't have to prove reliance to bring these
claims
- See Opinion Section IV
- SEC has used this authority several times,
including to go against a Stoneridge defendant (same cable set-box scam
involving a
different cable company). JP Morgan and Chase paid
$255mm in fines because they facilitated Enron earnings manipulation. Two
Merrill bankers even got lengthy sentences over an Enron barge trade
- See
Aiding and Abetting Liability
Dissenting
opinion
- Minority would have remanded to determine whether
the plaintiffs had in fact established reliance
- "This Court has not held that investors must be aware of the specific deceptive act which violates 10(b) to
demonstrate reliance."
Our
own take
- Is this "the most
important securities law decision of the last decade" as some claim?: Only
if the Court had delivered an unexpected contrary ruling. Outcome was
easily predicted, given the Court's current line-up. As decided, Stoneridge
just reaffirms Central Bank with a gloss on reliance
- The greatest immediate effect will probably be on
subprime securities litigation, where a contrary ruling would have given the
plaintiffs bar a ready-made vehicle for claims against the banks which sponsored
troubled subprime entities
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Supreme Court Opinion Hyperlinked
Briefs
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Litigants
Amicus
briefs
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PSLRA - Exchange Act §20(e) SEC_CODE_REF_0090001192884
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Pertinent
part of statute:
- Prosecution of persons who aid and abet violations
For purposes of any action brought by the Commission under paragraph (1) or (3) of section 21(d), any person that knowingly provides substantial assistance to another person in violation of a provision of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.
Added to Exchange Act by the PSLRA
- Private Securities Litigation
Reform Act of 1995,
Pub L No 104-67, 109 Stat 737, 747
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Circuit Split
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Circuit
Split
- Regents of Univ. of Cal. v. Credit Suisse First
Boston (USA), Inc.
482 F. 3d 372
(CA5 2007)
- In re Charter Communications, Inc., Securities Litigation, 443 F. 3d 987
(CA8 2006)
These
cases were cited in Supreme Court's opinion
- Click on links for opinion PDFs
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Commentary
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After
Supreme Court opinion issued
Before
Supreme Court opinion issued
Other
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Related Topics
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