Corporate Governance

Overturning Stoneridge and the Symbolic Passing of an Era

By J. Robert Brown

Stoneridge, as we have written, was an overt policy decision made by the conservative justices on the Supreme Court who interpreted Section 10(b) and Rule 10b-5 in a manner divorced from Congressional intent, the language of the statute, and common law fraud principles.  It was based on a heretofore unannounced policy of cutting off actions under Rule 10b-5. 

The case has generated a Congressional response.  Newly turned democrat, Senator Specter, has introduced legislation that would reinstate actions by private parties for aiding and abetting liability. Specifically, the 2009 Liability for Aiding and Abetting Securities Violations Act (S. 1551) would authorize actions against 'any person that knowingly or recklessly provides substantial assistance to another person in violation of' federal securities laws.

The language would likely capture the vendors in Stoneridge (although there is still room to fight over "substantial").  In introducing the Bill, Senator Specter specifically noted that it was intended to overrule both Stoneridge and Central Bank. 

It is of course too early to predict what will happen with the Bill, although given the actions in the House on compensation, there is growing legislative activity in the corporate governance area and room to combine disparate pieces into a single bill, much the way SOX was written (to the dissatisfaction of many, see the analysis in Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance).  Indeed, SOX contained a Section 10(b) provision, extending the statute of limitations and effectively overturning another Supreme Court decision, Lampf.  See Section 804 of SOX. 

The introduction also demonstrates how the financial crisis and the advent of regime change has altered the debate.  In the last years of the Bush administration, the growing tenor was that securities litigation was harming markets in the United States.  Superficial analysis asserted that litigation was responsible for any number of ills, including the decline in foreign listings on the NYSE.  It was never a particularly well reasoned approach (which is not to say that there are not problems with litigation that ought to be addressed) and was often tendentious in its call for reforms. 

Nonetheless, nothing came of the movement and circumstances have changed.  Now, rather than talk about limitations on securities litigation, the legislation introduced by Senator Specter would expand the cause of action for fraud.  While the Bill may never become law, it is, if nothing else, a symbol of the changed attitudes and atmosphere in connection with securities regulation.

Full post as published by The Race to the Bottom on August 14, 2009 (boomark / email).