Corporate Governance

Stoneridge Affirmed (Part 2)

By J. Robert Brown

The Supreme Court affirmed the 8th Circuit's decision in Stoneridge, concluding that the vendors in that case could not be sued in a private action under Rule 10b-5.  The opinion is here.

We offer a number of observations and will continue to do so over the next couple of days.  First, in the aftermath of oral argument, we predicted a 5-3 decision.  So much for the supposed Delphic quality of oral arguments.

Second, we have to hand it to Steve Bainbridge at UCLA who got this case exactly right.  He noted that the Supreme Court was largely incapable of analyzing securities issues on its own.  He predicted that, as a result, the Court would decide the case by largely duplicating the brief of the government.  With almost all of the participants fighting over whether deceptive conduct could violate Rule 10b-5, thesolicitor general's brief took the position that the case turned on the element of reliance.  Guess what?  Justice Kennedy's opinion turned on the issue of reliance.

Third, as we noted on this Blog, in order to find no violation of the antifraud provisions, the Court had to sidestep the actual language of Section 10(b) and Rule 10b-5.  The language of these provisions is clear and compels a finding that the behavior of the vendors could violate the antifraud provisions.  Kennedy's opinion quotes both provisions in their entirety and then does not rely on the language in any significant respect for the rest of the opinion.   

Fourth, the Court not only avoids the language of the relevant provisions, but includes a holding that is in flact contradiction with the language.  Plaintiffs, according to the Court, alleged that the vendors were liable because they had committed a "deceptive act."  (Recall that Section 10(b) makes actionable a "deceptive device" and Rule 10b-5 makes actionable a "device [or] scheme . . . to defraud").  The Court didn't find an absence of deception (how could it?  there were allegations of falsified documents) but instead concluded that a deceptive act wasn't enough to establish securities fraud.  As the Court noted, if it accepted plaintiff's position, "it would revive in substance the implied cause of action against all aiders and abettors except those who commit no deceptive act in the process of facilitating the fraud;" 

Let's try this again.  The statute specifically references deceptive behavior.  The plaintiff pleads deceptive behavior.  Yet the Court concluded that this is nothing more than a type of secondary liability.  On this issue, the dissent rightfully has a field day. 

This opinion, as we'll talk about later, is nothing more than a policy decision designed to reduce the right of shareholders to bring actions against those who commit securities fraud.  It is part of a general approach to reduce the rights of shareholders, with the Commission's denial of access part of that.  

Full post as published by The Race to the Bottom on January 15, 2008 (boomark / email).