Earlier today, in a closely-watched case, the U.S. Supreme Court dramatically limited the types of claims that can be brought by plaintiffs against so-called “secondary actors” (accountants, attorneys, or bankers of those accused of committing securities fraud) under the implied private right of action of § 10(b) of the Securities Exchange Act of 1934. The Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et al. follows the trend of the Court’s recent decisions in Dura and Tellabs in making it harder for investors to sue under § 10(b). Unlike Dura and Tellabs, which were decided unanimously and by an 8-1 majority, respectively, the Court’s decision in Stoneridge was a 5-3 split. The majority opinion was written by Justice Kennedy, who was joined by the Court’s conservative block of Chief Justice Roberts and Justices Scalia, Thomas, and Alito. Justices Stevens, Ginsberg, and Souter dissented while Justice Breyer took no part in the decision.
Stoneridge presented the Court with a clear case of alleged wrongdoing on the part of the secondary actors, Scientific-Atlanta and Motorola, both of whom were alleged to have knowingly entered into transactions with Charter Communications, Inc. that had no economic substance, were based on backdated documents, and allowed Charter to inflate its revenue and operating cash flow by $17 million in order to meet Wall Street expectations. Notwithstanding these allegations, the Court found that there was no basis for liability against Scientific-Atlanta and Motorola because they had no duty to disclose the alleged deceptive acts and since no public statements had been made, “[n]o member of the investing public had knowledge, either actual or presumed, of respondents’ deceptive acts during the relevant times.”
In short, the clear implication from the Court’s decision is that a public statement is a necessary predicate for a secondary actor to be liable to investors under § 10(b). Secondary actors are insulated from private litigation where they engage in business transactions that are not disclosed to the public. The Court’s opinion, however, should not be read as an invitation to aid or abet a fraud. The Court recognized that the Securities and Exchange Commission has the express authority to bring a regulatory action against secondary actors, and emphasized that federal and state criminal and regulatory sanctions remain in place as significant deterrents against those who would aid and abet a securities fraud.
In its decision, the Court took note of, and was persuaded by, recent concerns that an unduly burdensome litigation environment in the U.S. could deter foreign investment and the capital formation process. The Court stated that an expansive reading of § 10(b) could discourage overseas firms with no other exposure to U.S. securities laws from doing business with U.S. companies, and potentially raise the cost of being a publicly traded company under U.S. law, thereby shifting securities offerings away from domestic capital markets.
In sum, over the course of the last two years, the Supreme Court has expressed continuing skepticism towards the implied private right of action under § 10(b) and will likely reject any attempt to expand such liability beyond, in the Court’s words, “its present boundaries.”