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 White House
Declines to Support Investors in Stoneridge Case
By Ted Allen,
Director of Publications
The Bush administration declined to support investors in
an upcoming U.S. Supreme Court case that concerns the liability of
investment bankers, lawyers, auditors, and others who help companies
inflate their earnings without directly misleading shareholders.
While the case before the Supreme Court focuses on the
liability of two corporate vendors for Charter Communications, the justices’
decision on the extent of “scheme liability” may impact other
securities cases, including a class-action lawsuit by Enron investors against three
underwriters. So far this decade, investors have obtained billions of
dollars in settlements with banks that worked with WorldCom, Enron, and other
companies.
The decision by the Bush administration is unusual because
the Securities and Exchange
Commission had recommended that the Solicitor General,
which represents federal agencies in Supreme Court cases, submit a brief in
support of investors before the June 11 deadline for such pleadings. The
case, known as Stoneridge Investment
Partners v. Scientific-Atlanta,divided the SEC; Chairman
Christopher Cox joined with the agency’s two Democratic commissioners
in a 3-2 vote to support the investors.
At a June 26 Congressional hearing, Cox explained his vote by
noting, “I thought it was important to be consistent” with the
2004 position that the agency took in the Homestore litigation, where investors claimed that
AOL Time Warner helped the company
inflate its revenues.
According to the
Associated Press, White House officials said President George W. Bush
expressed concern that “unnecessary lawsuits” are a burden on
the economy and ultimately hurt investors. The Treasury Department, the Federal Reserve, and the Comptroller of the Currency all urged the Solicitor General
to refrain from supporting investors, AP reported.
The Council of
Institutional Investors (CII), the AFL-CIO, and other investor
advocates expressed surprise and disappointment over the Bush
administration’s decision.
“If the Supreme Court were to agree with the Bush administration
and adopt a strict test for ‘scheme liability,’ investors would
be harmed,” said Jeff Mahoney, CII’s general
counsel. “Such a ruling would eliminate an important deterrent
to bankers, lawyers, accountants, and other ‘gatekeepers’ who
might otherwise participate in financial frauds that jeopardize the assets
of millions of American workers and other investors who participate in the
capital markets.”
CII is one of a long list of shareholder advocates and state
officials that have filed briefs in the case. Among those supporting the
investors are 30 state attorneys general; the North American Securities Administrators
Association; the University
of California; the New
York State Teachers’ Retirement System; the Change to Win labor federation;
Professor James Cox of Duke
University and five other securities law professors; and
the public employee pension funds for New Jersey, New York, Pennsylvania,
Michigan, Arkansas, and Rhode Island.
The Securities
Industry and Financial Markets Association (SIFMA) praised
the administration’s decision not to support investors in the Supreme
Court case.
“Expanding the
scope of class-action lawsuits to include third-parties would send large
ripple effects throughout the U.S. economy,” SIFMA CEO Marc Lackritz
said in a June 13 press release. “The inclusion of third-parties
would cause litigation costs to skyrocket at the expense of the American
economy and its workers, by raising the costs for companies in the U.S. and
deterring foreign investment in our economy.”
In Stoneridge, the investors allege that
Charter made $17 million in overpayments to Motorola and Scientific-Atlanta to purchase cable-television
boxes. The vendors then used that money to buy unneeded advertising from
Charter--with the understanding that the sole purpose of the transaction
was to help Charter increase its revenue and cash flow, the investors
contend. The U.S. Court of Appeals for the Eighth Circuit ruled that the
Charter shareholders could not bring claims against the vendors under Section
10(b) of the Securities Exhange Act of 1934. The St. Louis-based appeals court
relied on the Supreme Court's Central Bank of Denver decision that rejected claims
against “aiders and abettors.” On appeal, the investors argue that the vendors
engaged in a “deceptive device or contrivance,” which is
prohibited by Section 10(b).
The Supreme Court plans
to hear the Stoneridge case during its next term, which begins in October.
Republican Lawmakers Call for
Litigation Study by the SEC
Rep. Ed Royce of
California and 15 other Republican lawmakers have asked the SEC to prepare
a report on the costs and benefits of securities lawsuits. Royce cited the
concerns about frivolous litigation raised in a report by U.S. Senator
Charles Schumer and New York Mayor Michael Bloomberg and noted Columbia University Law Professor John C.
Coffee’s calls for limits on securities damages.
In a June 22 letter to Chairman Christopher Cox, the
lawmakers asked the agency to examine settlements and detail the
transaction costs--including attorneys’ fees--that decrease the value
of shareholders’ investments. The letter also asked the SEC to
address whether there are sufficient legal protections to deter
“professional plaintiffs,” and whether there is a need for a
“pay-for-play” ban on political contributions by
plaintiffs’ lawyers to government officials who oversee public
pension funds. Finally, the SEC was asked to recommend whether private
settlements should be coordinated with Fair Fund distributions by the
agency.
Royce has asked the SEC to complete the report by the end of
the year. At a June 26 House committee hearing, Cox said the agency would
produce the report, and he appeared receptive to the suggested pay-for-play
ban.
Cox was asked by several Democrats about whether the SEC was
considering a proposal to allow companies to mandate the arbitration of
investors’ claims. In response, Cox said, “we have no pending
proposal” to do so, repeating comments that he made to a Senate panel
in May.
Supreme
Court Rejects Antitrust Suit by IPO Investors
On June 18, the
Supreme Court threw out an antitrust lawsuit by investors against Credit Suisse, Morgan Stanley, and other investment banks
over their marketing of initial public offerings.
The investors, who had sought billions of dollars in damages,
claimed that the banks’ syndication and marketing practices
artificially inflated the price of shares in 900 companies that had IPOs
from 1997 to 2000.
The high court, in a 7-1 opinion written by Justice Stephen
Breyer, said the determination of which IPO practices are permissible
should be left to the SEC, rather than federal judges and juries.
“Antitrust courts are likely to make unusually serious
mistakes,” Breyer wrote, noting that the SEC is best equipped to make
the fine distinctions of what underwriters may do to promote IPOs.
“Who but the SEC could do so with confidence?” he asked.
While the high court gave the banks immunity from antitrust
suits, the investors are still seeking to recover damages in separate
lawsuits under the federal securities laws. In December, a U.S. appeals
court ruled that the investors’ IPO claims were not similar enough to
be tried in a large class-action case. The court later said that lawyers
suing the banks may ask a trial judge for permission to pursue a suit on
behalf of a smaller group of investors, according to Bloomberg News.
Christopher Lovell, the lead lawyer for the investors, said
the Supreme Court’s ruling underscores the importance of the
securities cases that investors have brought. “The court decision is
saying that the premise is that the securities laws will redress
this,” Lovell said, according to Bloomberg News. “This puts the
focus on the securities cases.”
WorldCom
Investors Receive $500 Million in SEC Payments
On June 14, the SEC
announced that it had distributed more than $500 million to WorldCom
investors from its $750 million Fair Fund settlement with the
telecommunications company.
“The distribution of over a half-billion dollars
through the SEC's WorldCom Fair Fund marks an important milestone in our
successful program to return monies to injured investors,” Chairman
Christopher Cox in a press release. “In the last four years, through
this and other SEC distributions, the commission has returned nearly $2
billion to investor victims. I anticipate substantial additional
distributions to investors in the near future.”
Richard Breeden, the former SEC chairman who is
administrating the WorldCom Fair Fund, estimates that the rest of the fund
will be distributed later this year, the SEC said.
In May, Cox told a Senate panel that the agency plans to
create a new office to help investors collect securities settlements. The
Fair Fund program was created after the Sarbanes-Oxley Act gave the SEC the
authority to use civil penalties to compensate investors.
The agency sued WorldCom in July 2002 after the company
disclosed it had misstated its financial results during the preceding five
quarters. The company later emerged from bankruptcy as MCI and was acquired
by Verizon Communications. In
addition to the Fair Fund settlements, WorldCom investors have obtained
more than $6 billion in settlements from the company’s former bankers
and directors.
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