As the U.S. Supreme Court began hearing oral arguments on Oct. 9 in Stoneridge Investment Partners v. Scientific-Atlanta, numerous powerful voices urged the court to think very carefully about the case’s implications for extending shareholder rights in cases of corporate wrongdoing.
The suit was launched by inves-tors in Charter Communications Inc., a St. Louis-based cable-TV company. In April 2005, four Charter executives were convicted of conspiring to distort costs and financial statements relating to business with two other companies, Motorola Inc., and Scientific-Atlanta. Following the finding that Charter executives acted illegally, Charter shareholders are now seeking the right to sue Charter’s business partners, including banks, accounting firms, law firms, vendors and others.
Enron Corp. shareholders are watching closely in the belief that a victory for the Stoneridge inves-tors against Scientific-Atlanta and Motorola will boost their chances of pursuing their claims against the banks that financed Enron’s schemes. Several banks, including TD Bank Financial Group and CIBC, have already paid substantial fines to settle Securities and Exchange Commission charges that they improperly colluded with Enron.
The Stoneridge plaintiffs face a major hurdle, however, in the form of a 1994 judgment from the same court, holding that U.S. securities law prohibits claims for “aiding and abetting” wrongs committed by another company. A year later, the SEC was given the power to bring such claims, but that right was not extended to private shareholders.
Early in the case, some of the judges suggested that they would not be sympathetic to extending the right to sue to private shareholders and that such decisions should be left to Congress.
In a commentary released the morning before the Supreme Court began hearing arguments in the Stoneridge case, SEC commissioner Paul Atkins described the suit as “a backdoor attempt to expand the realm of private suits through so-called scheme liability, by recasting secondary liability as primary liability.”
In Atkins’ view, if the court endorses scheme liability, it will create “a hidden tax on the American economy.” He adds: “Ultimately, all of us would pay the price: inves-tors with reduced shareholder returns, workers with fewer jobs and consumers with higher prices for goods and services.”
But Atkins didn’t confine his wrath to the plaintiffs. He directly attacked three of his four fellow SEC commissioners, who, he noted, have “urged the solicitor general to advocate in favour of scheme liability.”
The SEC isn’t the only institution in which scheme liability is creating heat. Briefs on the case have been filed with the court by a wide array of financial power-brokers, including Christopher Dodd, chairman of the U.S. Senate’s committee on housing, banking and urban affairs, who supports the plaintiffs’ position. Dodd also sent open letters to the U.S. president, the U.S. solicitor general and the SEC. Each letter urges support for the extension of scheme liability.
The case is also attracting intense attention from U.S. money managers. Briefs have been filed by numerous large U.S. pension funds, the Organization for International Investment, the American Bankers Association and the Council of Institutional Investors, which represents fund managers who administer US$3 trillion in assets.
Depending on the U.S. Supreme Court’s ruling, the ripples could be felt in Canada.
“The case is one that presses the very outer reaches of American securities law and, by extension, will have an impact on our law if the plaintiffs are ultimately successful,” says David Debenham, a lawyer and forensic accountant with Lang Michener LLP in Ottawa. Debenham thinks Stoneridge could use much simpler means to seek legal remedy than through an ambitious renovation of the language in U.S. securities laws.
That makes Debenham question Stoneridge’s efforts to persuade the court “to stretch that language outward to get a lot of other people.” It’s a case Canadian money managers should watch closely, he says.
“It’s a symptom that the Enron phenomenon,” Debenham argues, “notwithstanding Sarbanes-Oxley [corporate ethics laws], still has legs.”
In his view, the campaign by U.S. investors to recover from almost any group that had some knowledge of wrongdoing may have gone too far.
It can end up creating havoc for companies, including depressing their stock prices, he notes, even if the impugned conduct is unproven or of a minor nature. IE
U.S. investors seeking legal remedy from third parties
Aggressive shareholders are igniting a controversy concerning scheme liability that could spill into Canada
- By: Paul Webster
- November 12, 2007 November 12, 2007
- 10:35