If there was any pretense that this country was anything other than a plutocracy, today’s Supreme Court decision should have dispelled that illusion. Banks and other vendors, meaning folks like auditors, now can operate more confidently in serving corporations at the expense of investors thanks to today’s ruling.
To give you an idea of how egregious it is, a reader sent along this excerpt from Justice John Steven’s dissent, which made it into the New York Times coverage of the case:
In dissent, Justice John Paul Stevens asserted that the majority had gone way beyond the boundaries of the 1994 Central Bank ruling, largely because Scientific-Atlanta and Motorola had clearly engaged in a fraud, unlike the defendant in the 1994 case.
In other words, it’s fine to profit knowingly from fraud as long as you aren’t its main architect.
Perhaps Rodney Dangerfield said it better:
You rob a convenience store and you go to jail for ten years. You rob $100 million and you go before Congress and get called bad names for ten minutes.
From the Times’ story:
In one of the most closely watched business cases in years, the Supreme Court on Tuesday upheld protections for secondary players in securities-fraud schemes, as opposed to the primary engineers of those plots. The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc., No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
In fact, four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
The U.S. Supreme Court put new limits on shareholders suits against a company’s banks and business partners in a ruling that may thwart efforts to recoup billions of dollars lost in frauds at Enron Corp. and HealthSouth Corp.
The justices, voting 5-3, threw out a lawsuit by Charter Communications Inc. investors against two of its suppliers, Motorola Inc. and Scientific-Atlanta Inc. The court said the shareholders didn’t show they relied on the alleged deception by the suppliers in making investment decisions.
The ruling is a triumph for business groups in what they called their highest priority in the court’s 2007-08 term. Trade groups representing banks, accounting firms and law firms took an especially keen interest, saying their members might present tempting targets for shareholder lawyers.
“It is a complete and thorough victory for the defendants,” said Donald Langevoort, a securities-law professor at Georgetown University in Washington. He previously called the case “securities law’s Roe v. Wade.”
The ruling will bolster efforts by Merrill Lynch & Co. and other banks to block a lawsuit by Enron investors and by UBS AG to defeat claims by HealthSouth shareholders.
The case split the court along ideological lines. Justice Anthony Kennedy wrote the court’s majority opinion, which Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joined.
Kennedy wrote that allowing additional shareholder lawsuits “may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.”
Justices John Paul Stevens, Ruth Bader Ginsburg and David Souter dissented. Stevens wrote that Congress enacted the federal securities laws “with the understanding that the federal courts respected the principle that every wrong would have a remedy.”