The Pendulum Swings – A Primer on Caselaw Scientific-Atlanta and Motorola successfully moved to dismiss the claims against them in the district court. Id. The 8th Circuit affirmed the dismissal, holding that the allegations did not show that either Scientific-Atlanta or Motorola “made misstatements relied upon by the public or violated a duty to disclose.” Id. The Court of Appeal observed that, at most, plaintiffs had alleged that Scientific-Atlanta and Motorola had aided and abetted Charter’s misstatements, and noted that aiding and abetting claims are not viable under Central Bank. Id. The Supreme Court granted certiorari to resolve a split among the Circuits as to “when, if ever, an injured investor may rely upon § 10(b) to recover from a party that neither makes a public misstatement nor violates a duty to disclose but does participate in a scheme to violate § 10(b).” Id. at 767-68. In its opinion, the Supreme Court affirmed, holding that the plaintiffs could not sustain a Section 10(b) private right of action against either Scientific-Atlanta or Motorola, because Charter investors did not rely upon any statements or representations allegedly made by these parties. The Supreme Court began its analysis with a review of Central Bank, the case in which it had previously held that Section 10(b) liability did not extend to aiders and abettors. Id. at 768. The Supreme Court noted that, although Central Bank “led to calls for Congress to create an express cause of action for aiding and abetting within the Securities Exchange Act,” Congress declined to do so, opting instead to direct the SEC to prosecute aiders and abettors. Id. at 768-69 (citing 15 U.S.C. § 78t(e)). Thus, because the Section 10(b) private right of action does not extend to aiders and abettors, the conduct of a secondary actor must otherwise satisfy each of the elements or preconditions for liability under Section 10(b). Id. at 769. In Stoneridge, that meant that plaintiffs were required to prove reliance upon a material misrepresentation or omission by the defendants. Id. The Supreme Court noted, however, that such misrepresentations or omissions need not be “a specific oral or written statement,” because “[c]onduct itself can be deceptive.” Id. Even so, a plaintiff is required to show reliance “upon the defendant’s deceptive acts,” because “for liability to arise, the ‘requisite causal connection between a defendant's misrepresentation and a plaintiff's injury’ exists as a predicate for liability.” Id. (quoting Basic, 485 U.S. at 243). While there is a rebuttable presumption of reliance (1) if there is an omission of a material fact by one with a duty to disclose, and the action is brought by the investor to whom the duty was owed, and (2) under the fraud-on-the-market theory, neither presumption applied in Stoneridge. Id. Neither Scientific-Atlanta nor Motorola had a duty to disclose, and their allegedly deceptive acts were not communicated to the investing public during the relevant time period. Accordingly, the Supreme Court held, plaintiffs could not “show reliance upon any of respondents’ actions except in an indirect chain that [the Court found] too remote for liability.” Id. The Supreme Court observed, if the Court were to adopt petitioner’s concept of reliance – “that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect” – then “the implied cause of action [under Section 10(b) would reach the whole marketplace in which the issuing company does business; and there is no authority for this rule.” Id. Instead, the Supreme Court confirmed that “reliance is tied to causation, leading to the inquiry whether respondents’ deceptive acts were immediate or remote to the injury.” Id. The acts of Scientific-Atlanta and Motorola, which were not disclosed to the investing public, were “too remote to satisfy the requirements of reliance, as it “was Charter, not [Scientific-Atlanta or Motorola], that misled its auditor and filed fraudulent financial statements; nothing [Scientific-Atlanta or Motorola] did made it necessary or inevitable for Charter to record the transactions as it did.” Id. Finally, the Supreme Court reasoned that the “scheme liability” theory “would put an unsupportable interpretation on Congress’ specific response to Central Bank in . . . the PSLRA,” because it “makes any aider and abettor liable under § 10(b) if he or she committed a deceptive act in the process of providing assistance.” Id. at 771. This “would revive in substance the implied cause of action against all aiders and abettors except those who committed no deceptive act in the process of facilitating the fraud; and [] would undermine Congress’ determination that this class of defendants should be pursued by the SEC and not by private litigants.” Id. The Supreme Court stated that “the practical consequences of such an expansion provide[d] a further reason to reject” it: In [Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975)], the Court noted that extensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies. Adoption of petitioner's approach would expose a new class of defendants to these risks. As noted in Central Bank, contracting parties might find it necessary to protect against these threats, raising the costs of doing business. Overseas firms with no other exposure to our securities laws could be deterred from doing business here. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets. Id. at 772 IV. The Future Members of the defense bar have hailed Dura, Twombly, Tellabs and Stoneridge as necessary responses to attorney-driven strike suits. Members of the plaintiffs’ bar, citing Enron, Tyco and Global Crossing as examples, view these opinions as a means to insulate directors and officers from liability for cooking the books and continuing to offer stock to the investing public at artificially inflated prices. As always, the district courts will apply law to fact in an attempt to filter out unfounded opportunistic claims from meritorious cases arising from dishonest behavior. If a conservative trend is truly in the offing, those securities cases that remain viable beyond the pleading stage certainly will decrease in number. However, creative members of the plaintiffs’ bar ultimately will find ways to have their voices heard and to raise legitimate concerns. One thing is certain – the pendulum swings. Another Basic may be coming around the next turn. Eric Landau and Shawn Harpen are partners at the securities and shareholder litigation & SEC enforcement group at Jones Day. Travis Biffar is a partner in McDermott Will & Emery’s trial department, and Kristel Robinson is an associate in the department. This article was prepared for the Claremont McKenna/RAND Conference on the Future of Securities Fraud Litigation, held in February 2008, for which Landau served as conference co-chair. Page: 4 of 4 pages for this article « First < 2 3 4
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