Category Archives: Appellate Monitor

Early reports from today’s Supreme Court oral argument in the Stoneridge case suggest that the court is unlikely to side with the plaintiff investors and adopt a broad definition of “scheme liability.” First-hand accounts can be found at SCOTUSBlog and the WSJ Law Blog. (Also worth reading is today’s coverage of the case in the Wall Street Journal, including an op-ed by SEC Commissioner Paul Atkins.)

Quote of note (SCOTUSBlog): “‘Congress has kind of taken over for us . . . They picked up the ball and are running with it . . . My suggestion is that we should get out of the business of expanding [the key securities fraud section]; Congress has taken over,’ the Chief Justice told New York attorney Stanley M. Grossman.”

As predicted by some observers, Chief Justice Roberts is rejoining the Stoneridge (a.k.a. Charter Communications) case after initially recusing himself. The speculation is that he has sold the securities that caused the conflict of interest. Justice Breyer remains recused, however, setting up the possibility of a split decision. Coverage can be found in the Blog of Legal Times and the WSJ Law Blog.

Quote of note (SCOTUSBlog): “If the Court were to divide evenly, 4-4, on Stoneridge, the result would simply be to affirm the Eighth Circuit decision without an opinion. The Court might then seek another test case in which to address the underlying legal question. A major Enron case, California Regents v. Merrill Lynch, et al. (docket 06-1341), raises the same issue; that case apparently is being held to await the outcome of the Stoneridge case.”

Two more items regarding the Stoneridge (a.k.a. Charter Communications) case on scheme liability:

(1) Although Chief Justice Roberts and Justice Breyer initially recused themselves from the case because of personal stockholdings, the New York Law Journal reports that they may be back in time for the argument (scheduled for October 9, 2007). Under a new federal law, the justices could sell their stockholdings and, because the sale was done to resolve a conflict of interest, defer any capital gains tax. The article speculates that Chief Justice Roberts may have rejoined a case earlier this year, the day before oral argument, by resolving a conflict through a stock sale.

Quote of note: “‘The justices who recused are – I don’t want to use the term – business-friendly,’ said Stephen Bainbridge, who participated in a brief that opposed the investors’ broad liability theory. But Mr. Bainbridge, a professor at UCLA School of Law, said the Court can be especially unpredictable in securities cases, because the justices and their law clerks are ‘institutionally incompetent’ to resolve complex securities cases. ‘I would never count the chickens before they hatch,’ he said.”

(2) The WSJ Law Blog has a post on the large number of amicus briefs that have been filed in the case.

Quote of note: “At final count, about 30 ‘friend of the court’ briefs (aka amicus briefs) were filed with the court in Stoneridge, which asks whether shareholders can sue to hold third parties — e.g., investment banks, accountants and law firms — liable for a company’s fraud. It’s a ‘startling’ number of friend-of-the-court briefs for a securities-law case, says Tom Goldstein, a Supreme Court practitioner at Akin Gump, not involved in the case.”

The long wait is over and everyone will be at least slightly disappointed. After significant public and private debate, the Solicitor General has submitted an amicus brief in support of the corporate defendants in the Stoneridge (a.k.a. Charter Communications) case on scheme liability.

The government’s legal argument appears to be something of a compromise position. The brief states that the Eighth Circuit erred to the extent it held that “non-verbal deceptive conduct is somehow beyond the reach of Section 10(b).” Instead, the plain language of the statute makes it clear that it reaches “all conduct that is ‘manipulative’ or ‘deceptive,'” in whatever form.

Nevertheless, the government argues that the Eighth Circuit correctly upheld the dismissal of the complaint based on the plaintiffs’ failure to adequately plead reliance and loss causation. The plaintiffs allege “only that the backdating of the contracts assisted Charter in mischaracterizing the payments from [its business partners] as revenue (and thus inflating its operating cash flow in its financial statements).” The “critical point” is that it was Charter’s misrepresentation of its cash flow, not the allegedly deceptive conduct of its business partners, on which the plaintiffs relied in purchasing their shares. The presumption of reliance created by the fraud-on-the-market theory also is unavailable to the plaintiffs, the government argues, because it applies only to public misrepresentations and the complaint “does not identify any public statements or actions” by the business partners. Finally, the brief states that for “many of the same reasons” the complaint fails to adequately allege that the conduct of the business partners caused the plaintiffs’ losses.

A few additional notes: (1) SCOTUSblog has a summary of the filing and additional coverage can be found on the WSJ Law Blog and the Blog of the Legal Times; (2) many (if not all) of the briefs in the case, including the briefs of the corporate defendants filed today, are available on the DU Sturm College of Law Corporate Governance site; and (3) the Stoneridge docket reveals that oral argument in the case has been scheduled for October 9, 2007.

Quote of note (SG’s brief – citations omitted): “More fundamentally, Congress’s unwillingness to recognize a private right of action for aiding and abetting suggests that this Court should be loath to create the functional equivalent of such a right of action itself. Such an action would upset the deliberate balance struck by Congress. Insofar as petitioner and its amici advance various policy arguments in favor of broad liability for secondary actors, there are ample policy arguments to the contrary (some of which apparently struck a chord when Congress last expressly addressed the issue). In any event, all of those policy arguments ‘are more appropriately addressed to Congress than to this Court.'”

The Wall Street Journal has an editorial (subscrip. req’d) on the amicus brief filed by Congressmen Frank and Conyers in the Stoneridge case. The newspaper is critical of the congressmen’s decision to have a law firm that does lobbying work for plaintiffs lawyers write the brief.

Quote of note: “We trust the Supreme Court Justices, who are due to hear Stoneridge arguments as early as October, will notice the provenance of Mr. Frank’s legal wisdom.”

The first circuit court opinion to extensively apply the Tellabs decision has arrived and it contains a number of interesting holdings. Given that the opinion comes from the U.S. Court of Appeals for the Seventh Circuit and is authored by Judge Easterbrook, that will come as no surprise to any regular reader of this blog.

In Higginbotham v. Baxter Intern., Inc., 2007 WL 2142298 (7th Cir. July 27, 2007), the court addressed the impact of Tellabs on the use of confidential witnesses. Noting that the Supreme Court has required plaintiffs to plead an inference of scienter that is both cogent and at least as compelling as any opposing inference that can be drawn from the alleged facts, the court found that “anonymity frustrates that process.” In particular, the failure to name sources “conceals information that is essential to the sort of comparative evaluation required by Tellabs,” because the court is unable to fully evaluate the reliability of the witnesses. Accordingly, allegations from confidential witnesses must be “discounted” in determining whether a plaintiff has plead a strong inference of scienter and that discount will usually be “steep.”

The court went on to find that the plaintiffs had failed to plead a strong inference of scienter. In addition to discounting the statements of confidential witnesses, the court also poked holes in a number of other alleged inferences of scienter put forward by the plaintiffs. Notably, the court found that allegations of a publicly-announced antitrust investigation, stock sales by two company managers, and the company’s failure to disclose a fraud at its Brazilian subsidiary as soon as management was informed of its possible existence were insufficient to meet the plaintiffs’ pleading burden.

Holding: Dismissal affirmed.

Quote of note: “It is hard to see how information from anonymous sources could be deemed ‘compelling’ or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don’t even exist.”

Quote of note II: “Prudent managers conduct inquiries rather than jump the gun with half-formed stories as soon as a problem comes to their attention. Baxter might more plausibly have been accused of deceiving investors had managers called a press conference before completing the steps necessary to determine just what had happened in Brazil. Taking the time necessary to get things right is both proper and lawful. Managers cannot tell lies but are entitled to investigate for a reasonable time, until they have a full story to reveal.”

The Solicitor General’s decision not to support the investor plaintiffs in the Stoneridge (a.k.a. Charter Communications) case has spurred another attempt at a post-deadline amicus brief filing, this time from a pair of prominent congressmen. The Washington Post reports that House Financial Services Committee Chairman Barney Frank (D-Mass.) and House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) have sought permission to file an amicus brief in the case. The effort follows on the heels of a similar request from a group of former high-ranking SEC officials.

Quote of note (proposed amicus brief): “The interpretation of Section 10(b) and Rule 10b-5 adopted by the Court of Appeals and urged by Respondents ultimately rests on policy considerations at odds with the statutory text that should more appropriately be addressed to Congress than to this Court.”

The Washington Post has an article on an unusual effort by three former high-ranking SEC officials to file a post-deadline amicus brief in the Stoneridge (a.k.a. Charter Communications) case. The request evidently is being made in response to the Solicitor General’s decision not to file a brief in support of the investor plaintiffs. Professor Arthur Miller, who recently argued the Tellabs case before the U.S. Supreme Court, is representing the officials.

Chairman Christopher Cox of the SEC testified before the House Financial Services Committee this week. CFO.com has an article on a mostly unnoticed part of his testimony where Chairman Cox discussed his participation in the SEC’s decision to ask the Solicitor General to support the investor plaintiffs in the Stoneridge (a.k.a. Charter Communications) case. The Solicitor General ultimately decided not to file the requested amicus brief.
Quote of note: “Cox’s vote was part of the majority in a 3-2 SEC vote in the so-called StoneRidge case. ‘It is my view that precedent matters,’ he said during a House Financial Services Committee hearing at which all five commissioners attended. ‘The SEC rules and policies should not be so effervescent as to change with one or two people on board.’ . . . In 2004 � a year before Cox joined the commission � the SEC weighed in favor of a broad definition of liability for companies indirectly involved in violations of the securities laws.”
Addition: In a related story, the WSJ Law Blog had an interesting post this week on the campaign by the American Association of Justice (i.e., the main trial lawyer association) to influence public opinion regarding the government’s position in the case.