The Supreme Court surprised few by ruling in favor of the vendors, 5 to 3 (Justice Stephen Breyer recused himself from the case). In the last decade, the Court has drifted slowly and inexorably toward the interests of business, since the Bush Administration replaced Chief Justice William Rehnquist with John G. Roberts and Justice Sandra Day O'Connor with Samuel Alito. Both Roberts and Alito voted with the majority in the Stoneridge opinion, which was written by Justice Anthony Kennedy.
But what was surprising — to everyone except perhaps Karmel — was how the Court ruled in the case. In focusing on the failure of the plaintiffs to prove they relied on statements by Motorola and Scientific-Atlanta, the Court stifled Grossman's scheme liability claim that they could be liable absent a public statement. "In our view," wrote Kennedy, "this approach does not answer the objection that petitioner [the plaintiff class] did not in fact rely upon respondents' own deceptive conduct." He went on to explain that the vendors' admittedly deceptive dealings with Charter "were not disclosed to the investing public" and "are too remote to satisfy the requirement of reliance. It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did."
The Supreme Court's affirmation of the Eighth Circuit satisfied Karmel. "This was just an aiding and abetting case," she says. "The plaintiffs manufactured the fraud." She agrees that investors need to be protected from fraudulent activities of companies like the vendors in Stoneridge. "The SEC can bring these cases," she insists. "The plaintiffs' approach in Stoneridge is a costly way to protect investors. In successful cases, funds are shifted from one group of investors to another group of investors, with plaintiffs' lawyers taking a high percentage of the judgment."
Grossman isn't giving up, despite claims in the legal industry that scheme liability is dead. After all, three of the Justices sided with him. "Many lawyers don't understand what's left open by the opinion," he says. "It's not as bad for investors as a lot of people think." For instance, because financial transactions are often the subject of public announcements, public disclosure of situations in which deceptive transactions played a part could satisfy the reliance requirement, he explains. In addition, lawyers who create and publish misleading descriptions of fraudulent transactions are also on the hook: "If their deceptive conduct is disclosed to the market," Grossman says, "the reliance element would be satisfied."
Relief for 'Ordinary Business'
The Supreme Court's opinion makes it clear that cases like Grossman's are a threat to business that can't be tolerated at the federal level. It also echos the concerns raised by Karmel and the defendant vendors' amici about questionable or excessive litigation for businesses. Karmel's Business Lawyer article warned that the reasonableness of presumptions of reliance should be closely examined in cases where the securities-issuing company had no duty to speak.
The Court reassured the "ordinary business" markets in Kennedy's majority opinion. In addressing the direct issue of whether the private cause of action under §10(b) should be further expanded, Kennedy reminded the parties that aiding and abetting liability is only authorized in cases brought by the SEC, and that if the Court were to agree with Grossman's more expansive reading of §10(b), it would revive an implied cause of action that Congress specifically gave to the SEC, and not to private litigants. "The practical consequences" of such an expansion, said the Court, include "extensive discovery and the potential for uncertainty and disruption" that would allow "plaintiffs with weak claims to extort settlements from innocent companies." Kennedy continued, "Adoption of petitioner's approach would expose a new class of defendants to these risks."