Supreme Court Rejects Scheme Liability in 10(b) Cases

The Supreme Court on Tuesday handed a solid win to third-party defendants in securities litigation — including law firms, accountants and bankers — by shielding them from broad “scheme liability” for their tangential role in corporate fraud.

The victory came in the much-awaited case of Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc., in which investor groups that sued the cable operator Charter Communications for fraud also pursued the companies that sold cable boxes that figured in some of Charter’s fraudulent transactions.

By a 5-3 vote, the Court said that because investors victimized by Charter did not rely on any statements or omissions made by the vendors Scientific-Atlanta and Motorola, the vendors could not be held liable under Section 10(b) of the Securities Exchange Act of 1934.

The ruling, authored by Justice Anthony Kennedy, may curb what business defendants have portrayed as a relentless search by plaintiffs for alternative deep pockets in securities class actions when the main company involved has collapsed. One such piece of litigation, by Enron investors seeking billions in damages from bankers and Wall Street firms that did business with Enron, may be directly affected by Tuesday’s ruling.

“The proper way to look at it, I think, is that the Enron case is dead after today,” says Ted Frank of the American Enterprise Institute. Mayer Brown’s Stephen Shapiro, who won the case for respondents Scientific-Atlanta and Motorola, was happy with the decision and said it should not be viewed as a loss for investors. “It is a win for investors, because suits like this one take money from one group of investors at the expense of another group of investors, with big rake-offs for lawyers. And it is a win for the U.S. economy.”

John Engler, president of the National Association of Manufacturers, said in a statement, “The petitioners in this case were seeking an opening to go far beyond the law in search of deep pockets, and we really don’t need any more of that in our country. This decision will prevent creeping liability in this area of securities law.”

Lawyers representing investor-plaintiffs attacked the Court for succumbing to overblown corporate complaints and also cautioned that the ruling leaves the door open for suits against third parties, especially financial institutions, in some circumstances.

Stanley Grossman, a partner at Pomerantz Haudek Block Grossman & Gross in New York who represented Stoneridge, says bankers, lawyers and others who are directly involved in a corporation’s fraud should feel “little comfort.”

Steven Toll, a plaintiffs litigator in class actions at Cohen, Milstein, Hausfeld & Toll in Washington, says the Court took too narrow a view of “reliance,” when in the case before the Court, investors relied on financial statements by Charter that had been rendered false by its transactions with the vendors.

“The Supreme Court’s decision is yet another unfortunate example of the pro-business, anti-investor sentiment of a majority of judges on the Supreme Court,” says Toll.

The Stoneridge case took on larger-than-life proportions as it made its way before the Supreme Court, with some commentators billing it as the Roe v. Wade of securities law. Intrigue increased when Chief Justice John Roberts Jr. recused in the case, and then rejoined it — apparently after selling stock in Cisco, which is Scientific-Atlanta’s parent company. Justice Stephen Breyer, who also reported owning Cisco stock and apparently did not sell it, remained out of the case. Adding to the mix was conflicting pressure on Solicitor General Paul Clement — first from the Securities and Exchange Commission to side with investor-plaintiffs, and then from President George W. Bush and other top administration officials to side with corporate defendants. Clement ultimately filed a brief favoring the defendants.

But as important as Stoneridge was, it was also just the latest in a series of recent rulings by the high court that have raised the bar for securities class actions.

“Stoneridge completes the trifecta of recent securities fraud cases before the Supreme Court that have been decided in favor of business,” said Lisa Wood, a securities litigator at Foley Hoag in Boston, in a statement. She added that the ruling will “help relieve a huge amount of anxiety on the part of professional service providers working for public companies.”

The other rulings she referred to were last year’s Tellabs Inc. v. Makor and Dura Pharmaceuticals v. Broudo in 2005, which tightened pleading and causation standards for securities class actions, respectively.

Kennedy, the Court’s swing vote, was joined by Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr.

Kennedy’s majority opinion displayed the Court’s distaste for class actions, asserting that expanding causes of action in securities litigation “would allow plaintiffs with weak claims to extort settlements from innocent companies.”

Kennedy also voiced policy concerns that “overseas firms with no other exposure to our securities laws could be deterred from doing business here. … That, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.”

But third parties with unclean hands are, Kennedy cautioned, still subject to prosecution by the SEC and other kinds of civil litigation. Congress, Kennedy said, had decided that the SEC, not civil litigation, should be the arena in which third parties in fraud should be handled.

Justice John Paul Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, dissented. Stevens criticized the majority’s “mistaken hostility towards the 10(b) private cause of action.” He invoked the old common law rule that “every wrong shall have a remedy” and even cited a 1980 decision by the 2nd U.S. Circuit Court of Appeals, Leist v. Simplot, written by Judge Henry Friendly during the year that Roberts, now chief justice, clerked for Friendly. In that decision, Friendly reviewed the history of implied causes of action in securities and other laws.

Source: Law.com

Filed under: Corporate law, Securities law, The Supreme Court

Boehner v. McDermott Headed Back To Supreme Court

You may – or more likely don’t – remember the case that sprung out of the surreptitious tape recording of a telephone call that took place in 1996 and involved, among others, current US House Minority Leader John Boehner on the subject of how the GOP ought to deal with then pending ethics charges against then Speaker Newt Gingrich. You may also remeber – or likely do not – that the tape found its way into the hands of a Democrat Congressman, James McDermott. Out of this sequence of events, and a few more, sprang the lengthy Boehner v. McDermott litigation. The case is now headed to the US Supreme Court, for the second time. The SCOTUS Blog ran the following post on the case today:

The following column, featuring a selected petition up for consideration at the Justices’ private conference on November 30, appears in today’s edition of Legal Times (available to subscribers here). To see the full list of “petitions to watch” for Friday’s conference, click here.

Conference Call: GOP Spying Case Heads to Supreme Court

Justices asked to decide whether nearly $1 million in civil penalties against House Democrat should stand

In 1998, Rep. John Boehner (R-Ohio) filed what is believed to be the first lawsuit against a fellow member of Congress. The target was Rep. Jim McDermott (D-Wash.), who during the previous year had shared with reporters a tape of an embarrassing phone call involving Republican Party leaders originally recorded by a Florida couple using a police scanner from RadioShack.

While the making of the recording violated federal law, McDermott, who had merely received a copy of the conversation, has consistently maintained that the First Amendment protected his right to pass its contents along. Now, more than a decade after the original conference phone call – and more than six years after the Supreme Court remanded the case in light of another decision – the justices will decide on Nov. 30 whether to settle the matter once and for all. (The petition is No. 07-439, McDermott v. Boehner.)

The call in question occurred in 1996, just hours before then-House Speaker Newt Gingrich admitted wrongdoing in a House ethics subcommittee probe. In lieu of embarrassing hearings, members agreed to accept Gingrich’s mea culpa on the condition that Gingrich not launch a counterattack against the committee itself. On a December morning in Florida, however, John and Alice Martin overheard a conference call involving Boehner, who was talking on a nearby cell phone; Gingrich; and other Republican leaders orchestrating the GOP’s response to the charges.

Recognizing Gingrich’s voice, the couple recorded the conversation and, less than three weeks later, arrived in Washington to give it to McDermott, then the highest-ranking Democrat on the House Ethics Committee. Presented in a sealed envelope, the tape came with an attached letter stating that the call was “heard over a scanner” and indicating the couple’s belief that they would be granted immunity for turning it over. After listening to the tape, McDermott played it for reporters from The New York Times and Atlanta Journal-Constitution, while insisting they not name him in their stories.

Shortly thereafter, the Florida couple publicly acknowledged giving the tape to McDermott and paid a $500 fine for illegally recording the conversation. The following year, Boehner sued McDermott under the federal wiretapping statute for disclosing an illegally intercepted communication.

In the first round of proceedings, Chief Judge Thomas Hogan of the U.S. District Court for the District of Columbia dismissed the suit on First Amendment grounds. A divided panel of the U.S. Court of Appeals for the D.C. Circuit reversed. The Supreme Court granted the case, vacated the judgment, and remanded the decision in light of its 2001 opinion in Bartnicki v. Vopper, in which the Court – by a vote of 6-3 – held that radio commentators could not be prosecuted for their role in playing an illegally recorded tape they had received from an anonymous source.

On remand, Hogan ruled that because McDermott was aware the tape had been illegally intercepted, Bartnicki did not shield him from liability. The court imposed $60,000 in damages, plus attorney fees now estimated at nearly $900,000. A divided D.C. Circuit panel affirmed the judgment, as did the court last May, sitting en banc.

In a 5-4 opinion written by Judge A. Raymond Randolph, the majority reasoned that Bartnicki did not grant blanket First Amendment protection to disclose any information of public importance that a person had lawfully obtained – citing, among other examples, speech limits on grand jurors, intelligence officials, and Internal Revenue Service employees. Relying instead on the Court’s 1995 decision in United States v. Aguilar, the panel held that officials who accept “positions of trust” inherit special duties not to disclose information acquired while performing their responsibilities.

In McDermott’s case, Randolph noted that the House Ethics Committee itself had admonished him for violating a committee rule against disclosing evidence involving individuals under investigation. “If the First Amendment does not protect Representative McDermott from House disciplinary proceedings,” Randolph concluded, “it is hard to see why it should protect him from liability in this civil suit.”

McDermott’s petition for certiorari – filed by Christopher Landau of Kirkland & Ellis in Washington – contends that any sanction leveled by the House is wholly irrelevant to McDermott’s liability under the federal wiretapping statute. On the First Amendment question, the petition says, the D.C. Circuit opinion so blatantly disregarded Bartnicki as to threaten “the hierarchy of the federal court system.”

Landau further argues that the D.C. Circuit violated separation-of-powers principles by linking the Ethics Committee’s report to McDermott’s First Amendment claim. “The courts are not in the business of enforcing internal House rules, either directly or indirectly, or attaching adverse collateral consequences to internal legislative activity,” the petition says.

In any event, Landau contends, McDermott had no knowledge of the Florida couple or the tape before they handed it to him, and he could not recall whether he read the accompanying letter stating how they had recorded the conversation.

Boehner’s brief in opposition, filed by Michael Carvin of the D.C. office of Jones Day, counters that McDermott was unquestionably aware the conversation had been recorded illegally – as evidenced by the subsequent New York Times account stating that the couple told McDermott they heard the call over a radio scanner.

Carvin further contends that it makes “perfect sense” for public officials in sensitive positions to enjoy fewer First Amendment protections over the disclosure of illegally intercepted information. Such officials, he argued, “voluntarily relinquished any ‘right’ to disclose information that comes to them in the course of their job.”

Source: SCOTUS Blog

Filed under: Political Cases, The Supreme Court

C-SPAN: Panel Discusses Roberts Court

C-SPAN last week broadcast an interesting panel discussion, available on the C-Span website through this link (its the October 6, 2007 program) on the Roberts Court last week on its “America and the Courts” program, in which a distinguished panel, including Erwin Chemerinsky, John Yoo, Kathleen Sullivan and Linda Greenhouse discuss the current Supreme Court, the term concluded in June, and the term just started. There was a bit of disagreement about whether or, more accurately, how far to the right the Roberts Court has swung in comparison to the Court over which the late Chief Justiced William Rehnquist presided. Chemerinsky sees the sky falling. I suppose time will tell. In any event, the discussion is interesting, and I highly recommend it.

Filed under: America and the Courts, The Supreme Court

Does the Supreme Court Still Matter?

This is the title of what is, I think, a rather silly and superficial article that ran in this week’s issue of Time magazine. Of course the Supreme Court, as the final arbiter of federal Constitutional and statutory questions, still matters. Just not, perhaps, in the way that the author of the article, and many others who might pine for a return to the Court’s activist past, might hope.

Filed under: The Supreme Court

Senator Specter Was For the Military Commissions Act Before He Was Against It

While reading Linda Greenhouse’s piece in The New York Times this morning discussing today’s opening of the Supreme Court’s 2007 term (which is NOT the subject of this post), there was a little bit in the section about the Guantanamo Bay detainees case. That case, as you likely already know, involves the question of whether the Military Commissions Act, which Congress passed and the President signed into law last year, impermissibly prohibits the federal courts from considering habeas corpus petitions brought by Guantanamo detainees. So far so good. In the course of describing the case, she notes that Pennsylvania Senator Arlen Specter, who was the Chairman of the Senate Judiciary Committee, had voted in favor of the Act, but has now “filed a brief telling the justices he believes it is unconstitutional.” It is curious – to me at least – that Senator Specter would vote in favor of a law that he believes to be unconstitutional.

As a voting member of a coequal branch of the federal government, Senator Specter has a duty to protect and uphold the Constitution, just as the President does, and just as the Supreme Court does. It seems to me to be an abrogation of that duty to vote in favor of a bill that one believes violates the Constitution. If Senator Specter REALLY believes that the Act is unconstitutional, in my view he had a duty to vote against it. Hos vote in favor of the Act was no less an instance of dereliction of duty than was the President’s signing into law of McCain-Feingold, which, the President opined at the time, he believed was, at least in substantial part, unconstitutional.

Of course we are talking about the Senator who famously voted “not proven” at the conclusion of the Clinton impeachment trial. But still, if Senator Specter had concerns about the constitutionality of the Act grave enough to justify his filing of an amicus brief, ought he not have voted against it in the first place?

Filed under: Congress, Constitutional Law, The Supreme Court