A Review of the Stoneridge Oral Arguments

(Side note: I have tried to simplify this a little, because the arguments can be unbearably heavy on the law at times. Unfortunately, space constraints have made that difficult. So if you're having trouble understanding the case, fear not. I will have the space to give more detail and explanations in my article, which is in process. Keep checking back for more!)

The Justices were most concerned with the constitutional issue of whether Congress has taken over legislating private securities litigation rules, and if they have, whether the Court can make a decision that is seemingly in opposition to the legislation. Justice Scalia pointed out that statutes provide for action by the SEC against aiders and abettors and for action by the SEC and investors against primary actors in securities fraud. Thus, it appears as though Congress laid out the framework for liability, and the Petitioners were asking the Supreme Court to change that. Chief Justice Roberts seemed particularly troubled by this. He emphasized that Congress has "taken over" for the courts in private securities litigation, and the court cannot undo limits that Congress has imposed. He said that the Court must "get out of the business" of expanding private causes of action for investors when Congress has imposed legislation to govern those actions.

Hammering the point home further, Chief Justice Roberts said, "Why shouldn't we be guided by what Congress did in the action to the Central Bank case? There we said there's no aiding and abetting liability, Congress amended the statute in 20(e) to say yes, there is, but private plaintiffs can't sue on that basis. Why shouldn't that inform how we further develop the private action under 10b-5?"

Petitioner's counsel claimed that the scheme liability in this case turns not on Scientific-Atlanta and Motorola personally defrauding Charter's shareholders, but rather on recklessly participating in the scheme. Thus, he argued the Respondents must have intent to deceive, or knowledge of and a willingness to maintain indifference to fraud.

Justice Alito asked questions that indicate that he believes that "aiders and abettors" in securities fraud ought to be treated differently in the courts from the principal actors. He was concerned that Petitioners were blurring the lines between primary and secondary actors. For example, this exchange -

Justice Alito: "Is your theory dependent on the proposition that Scientific-Atlanta and Motorola deceived Arthur Andersen?"
Mr. Grossman: "That certainly is a large part of it. Yes, Your Honor."
Justice Alito: "But didn't you allege exactly the opposite in your complaint?"

Justice Kennedy also wanted confirmation whether Petitioners were alleging that aiders and abetters did not need fraudulent intent to be liable. Petitioner's counsel consistently agreed with the Justices that scienter (intent) was a requirement for 10b-5 liability, but also argued that Scientific-Atlanta and Motorola ought to be liable as aiders and abetters for their "reckless" actions. Justice Souter attempted to help clarify this inconsistency by clarifying that anyone who participates in fraud with a public company ought to know that the fraud will have an effect on share value. Unfortunately, this attempted clarification brought about another question: if we can attribute intent to all aiders and abetters, then wouldn't that make them primary actors? The Petitioner seemed to have a problem determining whether Scientific-Atlanta and Motorola were primary actors or secondary actors. The Petitioner's dilemma is in order to make them liable for fraud as aiders and abetters, they must have the intent to defraud that would actually make them primary actors under 10b-5.

When Respondents' counsel addressed the court, he focused on the fact that Congress has already tackled the issue and made a decision that scheme liability would be handled by the SEC only. He noted that, even assuming the worst of the Petitioner's factual arguments are true, at most the Respondents' acts amount to Section 20(e) liability for aiders and abetters.

Respondents' counsel pointed out that the 10b-5 requirements include reliance on the statements by investors, and thus a statement must be made to investors for liability under a private action. Justice Ginsburg asked whether communication of the true nature of the advertising/box price scheme would have negated the scheme, and thus the Respondents' silence could be construed as a deceptive communication (or failure to communicate).

Justice Ginsburg also wanted the Respondents to clarify their apparent position that only the party whose stock price is affected can be the primary actor, and all other would be aiders and abetters. Mr. Shapiro continuously specified that only parties who communicated with shareholders or the market can be liable as primary actors under 10b-5. Mr. Shapiro also pointed out that Section 303 of Sarbanes-Oxley states that anyone who misleads an auditor is liable only to the SEC and not in private actions, which is apparently consistent with the 20(e) limitation of liability for aiders and abetters.

Obviously it can be difficult to make a prediction regarding Supreme Court decisions, but I can discuss the major issues. First, we have the idea that Respondents' actions amount to, at most, aiding and abetting securities fraud. If that is true, then Congress has already legislated that only the SEC can pursue criminal or civil actions against those secondary actors. When Congress has spoken, the Court can only interpret the law - and not rewrite it, as the Petitioners are asking the Court to do.

Second, there is a question of whether the Respondents' actions (again, assuming the Petitioner's allegations are true) made them primary actors instead of mere aiders and abetters. This may require the Court to clarify what constitutes a communication to shareholders, and then shareholders' reliance on the communication. This will bring in the question of whether the Respondents actions constituted intent to defraud or were merely reckless, whether reckless actions can be a "communication" under 10b-5, and what level of intent is required to constitute a communication.