Stoneridge: Court Slaps Down Scheme Liability

Posted by John Carney, Jan 15, 2008, 10:47am

Breaking: The Supreme Court ruled against scheme liability in the closely watched Stoneridge case. The result is a blow to self-styled shareholder advocates and their friends in the plaintiff's bar but ultimately a win for actual shareholders who faced losses from a potential litigations explosion under the scheme liability theory. Here and hear (heh) are two early reports from DealBreaker on the case.

What's "scheme liability?" It was the idea that third parties could be held liable for securities fraud committed by companies with whom they do business. This would have made investment bankers, accountants law firms and suppliers liable for fraud committed by their public company clients. Today's decision greatly curbs this risk.

We'll probably have more to say on this once we've properly digested the opinions.

Update: The Associated Press tags the story with a stupidly misleading headline: "Court Rules Against Investors." Hey, AP, pay attention: not all investors were on the side of the plaintiff's bar in this case that threatened to let shareholders of companies that misstate earnings and commit fraud raid the treasuries of other companies that did business with them.

Shareholder Suits Against Vendors, Banks Limited by High Court [Bloomberg]

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Posted in: Legal, Stoneridge

Comments

Posted by One synapse clapping, Jan 15, 2008 11:12AM

Spare us the dogma Carney. You don't know the first thing about the law, economics in the presence of asymmetric information, the precedence for perverse incentives, institutional myopia or just about anything else for that matter. All you know is what they tell you, so remove your head from your colon and stop talking out your ass.

Posted by John Carney, Jan 15, 2008 11:18AM

That's mildly entertaining because "they" don't tell me anything. There is no "they" as far as I know. I make up my own opinions on this based on my training and experience. As for whether I understand law, economics, asymmetrical information, incentives and anything else, I won't bother to run through my credentials. Instead I'll let my work here speak for me.

Posted by series7.5, Jan 15, 2008 11:23AM

John thanks I actually liked this post since I had completely missed this story what with all the fun of bank earnings and yes the AP is a populist rag, obv

Posted by heds, Jan 15, 2008 11:50AM

The case involved a group of investors suing businesses. The Court ruled against the investors. What's so hard to understand about that? "Court Rules Against Investors" is factually correct. Not all companies were on the side of Scientific Atlanta, either. That doesn't mean that the businesses didn't win the case.

Posted by John Carney, Jan 15, 2008 12:12PM

So, let's say that a group of conservative black students who oppose affirmative action sue in court claiming it is a form of outlawed racial discrimination. If the court rules the affirmative action isn't prohibited would the AP headline the story "Court Rules Against Blacks"? Probably not.

This case in particular shows how dumb it is to believe that investors are on one side of an issue while businesses are on the other. At issue were investors in company A suing company B for allegedly assisting in a scheme of fraud. A victory on the part of the company A investors would have meant wealth transfers to them from company B investors. In short, there would be investors on both sides.

More importantly, the drag on business from increased legal and other costs due to the risk of incurring scheme liability would have hurt all investors.

Posted by hed, Jan 15, 2008 12:19PM

No, it would say "Court Rules Against Students"

Posted by John Carney, Jan 15, 2008 12:29PM

Equally misleading. Court would be ruling for some perspective students and against others.

Posted by , Jan 15, 2008 12:31PM

Carney,

Thank you for the post -- very informative.

Knowing that you are a) a lawyer by training, b) have a great grasp of economics, etc., and c) like to party, I'd certainly welcome more of your digests of the legal opinions concerning the industry.

Posted by , Jan 15, 2008 12:37PM

look, your objection aside it is obvious that the media is doing just what john says. turn on your tv right now. cnbc : "Supreme Ct Ruling Win For Business"

for a certain business? no. they are unambiguously saying that this represents a finding for the interests of businesses in general of that of investors in general

Posted by s75, Jan 15, 2008 12:38PM

look, your objection aside it is obvious that the media is doing just what john says. turn on your tv right now. cnbc : "Supreme Ct Ruling Win For Business"

for a certain business? no. they are unambiguously saying that this represents a finding for the interests of businesses in general of that of investors in general

Posted by Man With No Life, Jan 15, 2008 1:13PM

perspective students? Was this the Optometrist University?

Posted by , Jan 15, 2008 1:13PM

LONG LIVE CARNEY!!!
Btw, when is your next appearance on CNBC?

Posted by , Jan 15, 2008 2:02PM

This seems to be a TANGIBLE loss for investors as a whole--monetarily or what have you. To say that the court rules against investors is not necessarily wrong. It's investors that took the case to court, it's investors that loss. It's pretty straight foward on that count.

Posted by One synapse clapping, Jan 15, 2008 2:04PM

I should be unsurprised by your inability to spot a metaphor John. This after all is the same person capable of divining business purposes for a company's moving non-performing assets and associated liabilities to shell entities with implicit or explicit repurchase agreements and/or other recourse to shareholder equity. Even when the business isn't a confidence scheme.

Indeed, the extent of your expertise has been well documented on this blog. Now go home and get your shine box.

Posted by Lawyer, Jan 15, 2008 2:11PM

Leave the the legal analysis to abovethelaw Carney, your knee-jerk Republican talking point adds nothing to the coverage.

Posted by , Jan 15, 2008 3:03PM

"This would have made investment bankers, accountants law firms and suppliers liable for fraud committed by their public company clients." Carney, you complain about simplisitic headlines when this is as simplistic as it gets. Read the opinion--specifically, the facts. You'll see that Motorola and Scientific Atlananta knowingly and actively participated in Charter's fraudulent scheme.

Posted by , Jan 15, 2008 3:05PM

"This would have made investment bankers, accountants law firms and suppliers liable for fraud committed by their public company clients." Carney, you complain about simplisitic headlines when this is as simplistic as it gets. Read the opinion--specifically, the facts. You'll see that Motorola and Scientific Atlananta knowingly and actively participated in Charter's fraudulent scheme. This included, among other things, creating phoney documents.

Posted by EroticTangerines, Jan 15, 2008 3:14PM

But was there any corn found in the deuceage?

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