More on scheme liability

A WSJ editorial says:

The Stoneridge gambit has nothing to do with investor protection. It is all about soaking investors by expanding the field of rich targets available for tort lawyers to sue. It is precisely the sort of lawsuit lottery that will cause even more companies to decide they are better off listing their shares in London, or Hong Kong -- anywhere but in the U.S.

I sympathize. But the task facing the Court is not an easy one, especially after the SEC has weighed in on Lerach's side. The problem is that this is a nebulous theory, with multifaceted application, as indicated by this recent review of the cases:  Annus, Scheme Liability Under 10(B) of the Securities Exchange Act of 1934. Here's the abstract:

In private securities litigation, plaintiffs often turn against entities who participated in various ways in the securities fraud of the issuer. However the Supreme Court held in 1994 that there is no private right of action against parties aiding and abetting securities law violations under § 10(b) of the Securities Exchange Act of 1934. In the last few years, plaintiffs have tried to avoid this limitation by using a theory called ?scheme liability.? This paper provides an overview of the recent cases from lower courts where plaintiffs have tried to utilize the theory. The paper shows that scheme liability is applied in cases involving very different fraudulent practices and against actors with very different functions. Due to this wide range of circumstances, it is probably inappropriate to formulate a single test or rule for deciding scheme liability cases. Instead, courts should approach each case separately, based on the type of defendant and the type of claim.

The best the Court could do would be to take cert on Lerach's Enron case, the most fully developed scheme liability case to date, and kill the monster and all of its limbs. But I doubt that will happen, and I'm not sure even that would work.

What would really work here is for the SEC or Congress to disimply private actions under 10b-5.  Fat chance.

Comments

[Robert Schwartz]

"What would really work here is for the SEC or Congress to disimply private actions under 10b-5. Fat chance."

SCOTUS has never followed the Commission's diktat's in these things, and I don't think they will here. They have have been fairly consistent in narrowing 10b-5 liability, and I don't think they will change course now.

[Burke]

Scheme Liability is an important concept to deal with fraudsters. Often these bad actors use banks, accountants, and yes even attorneys to pose a legitimate front for their bad acts. These fronts make a great deal of money by turning a blind eye to the torts of their clients. It is these very fronts that get many an investor to overcome their natural resistance to these fraudsters. Thus since their facilitation is key, there responsibility for the damages should be real.

[Robert Schwartz]

White House Differs With SEC On Shareholders' Lawsuits, WSJ,
June 13, 2007; Page A4

The White House said it opposes investors' suing third parties to recover losses caused by corporate fraud, preferring that the Securities and Exchange Commission help shareholders win compensation. The White House position, which echoes that of business groups, is at odds with that of the SEC, which recomended that the government support investors in a Supreme Court case concerning whether outside parties may be sued under federal securities laws for playing a role in another company's fraud.

U.S. Lets Pass Deadline to Back
Shareholders in High Court Case
By SIOBHAN HUGHES
June 12, 2007, WSJ; 10:56 p.m.

WASHINGTON -- The U.S. Justice Department on Monday let pass a deadline for supporting investors in a case before the Supreme Court, exposing disagreement within the government over how the court should rule in a case that may have implications for investors in Enron Corp.

U.S. Solicitor General Paul Clement refrained from filing an amicus brief by a midnight deadline even though he had been asked to do so by the Securities and Exchange Commission. The SEC had voted 3-2 to recommend that the solicitor general advocate on behalf of investors in a case about whether third parties can be sued under federal securities laws for allegedly playing a role in another company's accounting fraud.

[Burke]

You've missing the point. Public companies are rarely the problems, uless they are banks, its the rest of the 80+% of the companies and professionals not under the SEC where most of this goes on. However, you cannot treat public companies different than privte on than those requiresments of disclosure required to allow this companies to be public companies.

Keep scheme liability for those who assit frauds, they profit from they action and they should be held responsible for their actions.