If there was any pretense that this country was anything other than a plutocracy, today’s Supreme Court decision should have dispelled that illusion. Banks and other vendors, meaning folks like auditors, now can operate more confidently in serving corporations at the expense of investors thanks to today’s ruling.
To give you an idea of how egregious it is, a reader sent along this excerpt from Justice John Steven’s dissent, which made it into the New York Times coverage of the case:
In dissent, Justice John Paul Stevens asserted that the majority had gone way beyond the boundaries of the 1994 Central Bank ruling, largely because Scientific-Atlanta and Motorola had clearly engaged in a fraud, unlike the defendant in the 1994 case.
In other words, it’s fine to profit knowingly from fraud as long as you aren’t its main architect.
Perhaps Rodney Dangerfield said it better:
You rob a convenience store and you go to jail for ten years. You rob $100 million and you go before Congress and get called bad names for ten minutes.
From the Times’ story:
In one of the most closely watched business cases in years, the Supreme Court on Tuesday upheld protections for secondary players in securities-fraud schemes, as opposed to the primary engineers of those plots. The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc., No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
In fact, four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
From Bloomberg:
The U.S. Supreme Court put new limits on shareholders suits against a company’s banks and business partners in a ruling that may thwart efforts to recoup billions of dollars lost in frauds at Enron Corp. and HealthSouth Corp.
The justices, voting 5-3, threw out a lawsuit by Charter Communications Inc. investors against two of its suppliers, Motorola Inc. and Scientific-Atlanta Inc. The court said the shareholders didn’t show they relied on the alleged deception by the suppliers in making investment decisions.
The ruling is a triumph for business groups in what they called their highest priority in the court’s 2007-08 term. Trade groups representing banks, accounting firms and law firms took an especially keen interest, saying their members might present tempting targets for shareholder lawyers.
“It is a complete and thorough victory for the defendants,” said Donald Langevoort, a securities-law professor at Georgetown University in Washington. He previously called the case “securities law’s Roe v. Wade.”
The ruling will bolster efforts by Merrill Lynch & Co. and other banks to block a lawsuit by Enron investors and by UBS AG to defeat claims by HealthSouth shareholders.
The case split the court along ideological lines. Justice Anthony Kennedy wrote the court’s majority opinion, which Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joined.
Kennedy wrote that allowing additional shareholder lawsuits “may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.”
Justices John Paul Stevens, Ruth Bader Ginsburg and David Souter dissented. Stevens wrote that Congress enacted the federal securities laws “with the understanding that the federal courts respected the principle that every wrong would have a remedy.”
16 comments
Comments are closed.
Scalia’s vote is DISGUSTING. He was on the three judge panel that upheld conspiratorial liability in the well-known case of Halberstam v. Welch, 705 F2d 472 (1983). Of Course, Welch was just a human being and a participant in a murder conspiracy, not a bank participant in a securities fraud conspiracy. This is a dark day for the Republic. If President Hillary is elected, one of the first things she can do is seek to overturn this decision.
Clinton against corruption? That’ll be a turn up for the book.
Banks and Auditors Get a Free Pass From Supreme Court
They don’t get it from the Supreme Court, they get it from the U.S. Congress.
This is passage from the New York times may help.
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
The Supreme Courts reasoning was as follows:
Did Scientific Atlanta and Motorola engage in fraud? Yes.
Did Scientific Atlanta and Motorola
aid and abet Charter? Yes
Do private Plaintiffs have the right, under U.S law ,to sue parties that aid and abet fraud? No
This is a deficiency of U.S securities law. Congress failed to legislate for the injustice.
The Supreme court has basically stated it does not have the authority to de facto legislate in areas where congress has failed to do so.
It is an injustice, but it is correct law.
Cheerio
Slumlord
No, slumlord, US law is: conspirators are liable for co-conspirator’s acts. Read a case like Pinkerton v US, 90 LEd 1489, 1946, a Supreme Court case. Conspiratorial liability preceeds the Republic. This is not a deficiency in securities law. The Supremes decided to protect the banks and invented whatever rationale they needed. That is how Oliver Wendell Holmes said judges really think. “Legal reasoning” is a fraud. It’s rationalization after the fact. By the way, the Supremes ruled against 1962(d) liability for whistleblowers under RICO about 10 years ago, overruling a 7th Circuit Court of Appeals decision by Richard Posner, in my less than humble opinion, the second finest jurist the North American continent ever produced. I was not surprised with the decision, but Scalia’s reversal of Halberstam is: DISGUSTING. That “Pretty Boy Roberts” and Alito decided to protect the banks was no surprise. That’s why Bush put them on the court!
I’ve ceased to be surprised by this current kangaroo court, and I don’t use that term lightly.
Their naked disrespect for the law was most striking earlier this year, when in the very same day, the court upheld political advertising by special interest groups (something disallowed by the McCain-Feingold Act) as free speech in FEC v Wisconsin Right to Life, while simultaneously curtailing the free speech rights of kids in the infamous bong hits 4 jesus case.
In the first instance, Justice Roberts even wrote “Where the First Amendment is implicated, the tie goes to the speaker, not the censor.” Yet they didn’t extend that same consideration in the second case, of a kid holding up a dopey sign in hopes of getting on TV.
Seriously, is there any law professor out there that wouldn’t fail a 1st year student who was so inconsistent in his/her reasoning?
Glenn Greenwald, a blogger for Salon.com has a great entry about the definition of judicial activism that is worth reading. It fits this current court to a tee.
Independent Accountant,
Thanks for the legal/historical narrative and case detail.
Lune,
Agreed, it is so depressing that this is one area I follow only intermittently. And the public at large has no idea what is being done to them.
Thanks for the Salon link. Will have a look.
You are welcome. I do litigation support among other things, and without exaggeration have read: 10,000 cases, 800 law review articles and 150 law books in my life. If the public knew what really goes on in the courts, who knows what it would do, but it wouldn’t be pretty. If any of your readers want some “intellectual exercise”, read some of Richard Posner’s books on law and economics. He’s in a class by himself.
Independent Accountant,
Too bad there aren’t any more states where you could practice law just by passing the bar exam (assuming, of course, that you did want to practice law, but if nothing else being able to write your own demand letters and other nastygrams has certain advantages).
I wanted to go back to your comment some time ago about Jett. I’m sorry if it wasn’t clear, but I thought he was treated badly too. I’m no expert in SEC sanctions, but a books and records violation is ridiculous. I assume you’d have to be a firm principal for that to apply, and he wasn’t. The system made the errors, not him. It isn’t clear to me still whether he knowingly gamed the system or not (but if he understood the profits were phony, you would think he’d recognize the gig had to be up someday). But regardless, the firm did not lose money, merely stupidly paid him too much in bonuses. Since when is that a crime?
My beef was quite different, however: there is no scenario under which Jett can be a bad guy and his boss, Cerullo, be blameless, yet that is precisely where things came out. Jett made no effort to hide his actions. Everything was in full view, but management decided to play along with the fiction that there were zillions of arbitrage profits to be found in govvies. Appalling.
If this is an example of anything, it’s an example of the confusion of law and righteousness.
Law – especially civil law – does not exist to punish wickedness wherever it may be. It exists to establish predictable consequences for actions.
Was what Motorola and Scientific-Atlanta did wicked? Perhaps. Should they be liable for it? Um, I think it depends on the law. Do you know the law in the matter? I am not a lawyer and I don’t, so I have no opinion on it. However, I find the likes of Bainbridge quite credible:
Stephen Bainbridge, William D. Warren Professor of Law at the University of California at Los Angeles, who has written extensively about Stoneridge, said the case exemplifies European perceptions of capricious litigation risk when doing business in the United States.
“[The defendants] allegedly knew this was essentially a straw man transaction for accounting considerations, but they never lied to the investors and that is what the securities laws are designed to address,” Bainbridge said.
“It’s the kind of case that conveys the notion our law casts a very broad net and you face significant liability risks [in the United States] that are not present elsewhere,” he said. “Companies find they can raise capital from investors who will purchase their securities even in jurisdictions that seemingly offer fewer protections. Maybe the investors are making a big mistake, but the fact is investors are buying those securities, so the question is: Have we gone overboard here in the U.S.?”
And if you really think that executives at the likes of Mot and SA go around openly scoffing at the law or boasting, like H.R. Haldeman, of dancing through it like a minefield, you know a lot more about the corporate culture of American finance than about the actual productive sector. I realize that the latter is small and getting smaller, and perhaps it can just be ignored. But…
See also Richard Epstein, who is surely one of the US’s leading legal scholars.
Perhaps Professor Epstein, too, is a shill of the plutocracy?
Surely reasonable people can disagree on this case. I find it distressing that this doesn’t seem clear to you, and that you feel the need or at least the desire to shower those who do disagree with a stream of Vyshinskyesque rhetoric. There are more things under heaven and earth, etc.
I don’t give a damn what Epstein thinks. If you participate in a fraud, you should be liable. That’s my opinion. That’s also common law. “The knowing recipient of the fruits of a fraud inferentially ratifies the fraud therefore become liable”. That’s from a Supreme Court case in about 1915. I would have to look for the citation. The case law on this is extensive. It is clear to me we have multiple classes of citizens in this country. If you wish to call me a Bolshevik, be my guest. If you wish to call me a Jacobin, be my guest. It you wish to say it is merely my policy preference, based on my balancing of the equities and deterrence that Citibank pay in the Enron case, be my guest. It seems to me from a law and economics perspective, we would be better off with Citibank paying in Enron. Why? It would be the “least cost fraud exposer”. As the prophet Milton Friedman used to say, “If you want more of something subsidize it, if you want less penalize it”. This decision will increase corporate fraud and by decreasing the plaintiffs bar’s incentive to go after fraudsters, decrease the SEC’s incentives to police them. Further, I think the SEC is a classic example of “regulatory capture”.
As a matter of fact, there is a concept in RICO called, drumroll please, “GROUP PUBLISHED FINANCIAL STATEMENTS”. I would go further than the plaintiffs in Stoneridge and automatically make a financial institution which enagages in any “structured finance” transaction, liable under this concept. If the financial institution doesn’t want the liablilty, avoid the transaction. Now Mencius, feel free to call me a Maoist. You’ll not change my mind.
Only contract law Mencius, not tort law. There is a wonderful law review article, my favorite, “The Path of the Law”, 10 Harvard Law Review 457, 1897, Holmes, Oliver. It’s also Richard Posner’s favorite. A paraphrase, “If you want to understand the law, you must understand it as a bad man. He only knows if he does something he may face an undesireable consequence, going to prison or paying money”. That’s all he knows.
I concluded Epstein is “a shill of the plutocracy” decades ago.
Yves, I didn’t realize you sympathized with Jett.
@Independent Accountant.
From the New York Times article on Oct 9 2007:
I’ve highlighted the pertinent bit.
The difference between aiding and abetting and a primary violation is crucial to the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc., No. 06-43, and was the subject of intense debate during the argument. The reason was that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled there was no “aiding and abetting” liability under the securities laws. Congress responded by giving the S.E.C. the authority to bring such suits, while withholding the same authority from private litigation.
The evil lay with Congress, not the Supreme Court. Congress specifically legislated that private parties could not litigate.
Cheerio
Slumlord
With the ascension of Roberts and Alito, predictability of consequences for actions has taken a major leap forward for those who favor managerial and crony capitalism. The messy ambiguity that has bedeviled lawyers and courts gives way to Bushist black and white rules that, while not grounded in what used to pass as the rule of law based in principle (e.g. fraud doers are liable for fraud), are nonetheless very very clear. If you have power, you win. If words need to be interpreted by Bushist judges to ensure such victory, they will find those words.
Welcome to the world of result-driven jurisprudence.
Slumlord:
Grow up. Judges can offer any rationalization they want. The Attorney General of Texas, Dann, was interviewed on the radio this morning, 88.7 FM in Houston about the Supreme Court decision. His opinion: crazy. He says if five people conspire to rob a bank, and one plans the robbery who also drives the getaway car, he is not liable to the bank. Why? The tellers never saw him since he did not enter the bank. That’s not the law. That hasn’t been the law of conspiracy since before the Republic was formed! Congress did not have to provide for anything under securities law for people to sue. That’s nonsense.
I agree with IA. Here’s a quote from the WaPo article.
“Justice Anthony M. Kennedy, writing for the majority, said stockholders had no knowledge of the actions of the two vendors and thus cannot show those companies’ actions influenced investors “except in an indirect chain that we find too remote for liability.” “
This is just plain ridiculous. The principal information stockholders get on which to base all decisions about a company is in the SEC filings. The vendors took deliberate action to participate in the falsification of those filings i.e. fraud. I don’t get what is “indirect” about this chain.
The “indirect” issue is a canard. Read Pinkerton, read Halberstam. The issue is: did the entity participate in a conspiracy? If so, it then becomes liable for all the co-conspirators’ acts. It’s that simple. As Halberstam makes clear, the conspirator need not even have known of the injurious act to become liable for it. Another judge on the Halberstam court was the well-known leftie, Robert Bork. Imagine, Scalia and Bork endorsed Halberstam!