The Supreme Court has released the transcript of today’s oral argument in the Stoneridge case. A few highlights from the justices:
(1) Justice Scalia noted that private actions pursuant to Rule 10b-5 are a judicial creation. He then wondered why they could not also be judicially limited.
“If it’s our creation, couldn’t we sensibly limit it so that, for example, schemes can be attacked by the SEC, but schemes do not form the basis for private attorney generals’ actions? You need actual conveyance of a misrepresentation to the injured party.” (p. 5)
(2) Chief Justice Roberts, on the other hand, appeared inclined to defer to Congress given its active legislating in the area of securities litigation.
“My suggestion is that we should get out of the business of expanding [Rule 10b-5 liability], because Congress has taken over and is legislating in the area in the way they weren’t back when we implied the right of action under 10(b).” (p. 7)
(3) Justice Kennedy expressed concern over the potentially broad scope of liability under a scheme theory (while painting an unflattering portrait of the corporate world).
“[T]here are any number of kickbacks and mismanagements and petty frauds that go on in business, and business people know that any publicly held company’s shares are going to be affected by its profits, so I see no limitation to your – to your proposal .” (p. 18)
(4) Justice Ginsburg wondered whether scheme liability occupied a middle ground between aiding and abetting, which is a claim that can only be brought by the SEC, and a primary violation by the company.
“That’s if they are aiders and abettors, which is what Congress covered. And I again go back to, is there another category or is everyone – either Charter, the person whose stock is at stake, the company whose stock is at stake and everyone else is an aider?” (p. 35)
(5) Justice Souter alluded to the public controversy over the Solicitor General’s amicus brief by asking the government “whether the SEC has publicly taken a position” on the question of whether there was a violation of Rule 10b-5. Counsel for the government outlined the course of events, but noted that there has not been “any official SEC Commission statement.” (pp. 49-50)
(6) Chief Justice Roberts and Justice Ginsburg expressed skepticism over whether the issue of reliance, which the government focused on, was addressed by the appellate court. Counsel for the government replied that “it’s not as complete a discussion of the reliance issue as we would have thought appropriate if we had been writing the opinion, but it certainly does touch on the question and we think it’s wholly presented.” (pp. 56-7)