Tuesday, October 09, 2007

Justices to Consider the Liability of Bankers, Vendors

Submitted by: Ted Allen, RiskMetrics Group - Risk & Governance blog:

The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.
The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.
The closely watched case, which one industry group has called “the most important case in a generation,” has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.
The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.
While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring “scheme liability” claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.
On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court’s deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice’s decision to rejoin the case.
Roberts’ participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.

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