June deadlines for SEC on fraud cases
on May 17, 2007 at 8:25 pm
UPDATED Friday a.m.
The Securities and Exchange Commission, under building pressure to join in a Supreme Court test of financial institutions’ liability for securities fraud committed by others, appears to be faced with a decision by next month, perhaps as early as the first of the month. The outcome of an already granted case, and the potential linkage with that lawsuit of a significant new case growing out of the Enron scandal, may affect billions of dollars in claims of investors.
On March 26, the Court agreed to hear the case of Stoneridge Investment Partners v. Scientific-Atlanta, Inc. (docket 06-43). The question is whether a 1994 ruling by the Court (Central Bank v. First Interstate Bank) barring aiding-and-abetting liability under the primary federal securities fraud law also bars lawsuits against financial institutions that made no public statements that might have deceived investors, but joined in transactions that helped a company inflate its financial strength in the company’s public reports and thus boost the stock price — in other words, third party liability, or “scheme liability.”.
That is an issue that has divided the Circuit Courts, and the Supreme Court agreed to resolve it in the Stoneridge case. That case grows out of alleged transactions to help inflate artificially financial statements issued by a giant cable TV firm, Charter Communications, Inc. So far, the SEC is not involved in the lawsuit.
Earlier this month, labor unions and pension fund officials urged the SEC to join in the Stoneridge case as an amicus supporting investors’ right to bring a lawsuit against third parties that aided in the alleged Charter scheme. Under the present schedule in that case, amicus briefs that support Stoneridge in the appeal must be filed by June 11. (Under the Court’s Rule 37.3, amicus filings on that side of the case are due when the topside brief on the merits is due.)
But there is another third party case — more highly visible, with much more money at stake — awaiting the Court’s initial reaction. That is the case growing out of the Enron financial debacle, Regents of the University of California v. Merrill Lynch (06-1341). If the SEC were to decide to enter that case as an amicus, to urge the Court to hear this dispute (perhaps in tandem or consolidated with the Stoneridge case), an amicus brief would have to be filed by June 1, under the present schedule. (Since the case has not yet been granted, amicus filings are due, under the Court’s Rule 37.2,when the Merrill Lynch brief in opposition is due — now, June 1 — unless a further extension to file is sought and granted.)
The Fifth Circuit Court decided the Merrill Lynch case on March 19, one week before the Court granted Stoneridge, and the appeal by the California Regents as investors was filed on April 5. In the petition, lawyers argued that “the Enron case presents a singular fraud — well pleaded — ready for trial, involving a rich factual setting presenting the kind of complex securities fraud in which there are likely to be multiple violators.” Thus, the petiiton said that “this case should be reviewed with Stoneridge as a superior vehicle to resolve the scheme-liability issues.”
At present, Chief Justice John G. Roberts, Jr., and Justice Stephen G. Breyer are recused from the Stoneridge case; they have given no reasons.
NOTE: Tony Mauro of Legal Times, who is diligent in keeping up with recusals, offers this suggestion for the Stoneridge absences:
“Recusals noted on March 26: A seven-member Court will rule on Stoneridge Investment v. Scientific-Atlanta Inc. when the case is considered this fall. In announcing that it was granting review in the case, the Court said both Chief Justice John Roberts Jr. and Justice Breyer are recusing themselves. In his 2005 financial disclosure form, Roberts reports owning between $15,001 and $50,000 in Scientific-Atlanta stock. Breyer’s latest form reports that he owns between $15,001 and $50,000 in stock in Cisco Systems Inc., which is Scientific-Atlanta’s parent company.”
(Tony’s Recusal Report can be found here).
