Blawgletter told y’all yesterday that the U.S. government filed an amicus brief favoring the Wall Street defendants in a big-time securities case pending in the Supreme Court — Stoneridge Inv. Partners LLC v. Scientific-Atlanta, Inc., No. 06-43 (U.S.).  Now we’ve had a look at the brief itself and find that it doesn’t go whole-hog against investors.  Half hog.

The Solicitor General parted ways with the defendants on whether the plaintiffs adequately pleaded "deceptive" conduct under the Securities Exchange Act of 1934:

Properly understood, a person engages in "deceptive" conduct for purposes of Section 10(b) when the conduct by its nature is objectively likely to mislead another person, e.g., when it has the effect of conveying a false appearance of material fact to an observer (assuming, of course, that the defendant possessed the requisite mental state in engaging in the conduct).  Respondents’ alleged conduct constituted a "deceptive device or contrivance" because it not only was likely to, but allegedly did, mislead Charter’s outside accountant, Arthur Andersen, about the nature of the transactions into which respondents had entered.

Brief for the United States at 8.  But the SolGen agreed with defendants that the complaint didn’t satisfy the "reliance" element:

Petitioner does not allege that it was even aware of the transactions that respondents executed with Charter; at most, petitioner relied on Charter’s misstatements in purchasing Charter stock.  Petitioner does not dispute that Charter independently decided to make the misrepresentations in its financial statements, and does not contend that respondents drafted or otherwise created those misstatements.  Accordingly, the causal connection between respondents’ conduct and petitioner’s stock transactions is simply too attenuated to satisfy the reliance requirement.

Id. at 9.  So plaintiffs lose anyway.

But does the SolGen’s split-the-baby approach matter?  It may — in another case pending in the certiorari queue — Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007).  See Blawgletter post here.

In Regents, the Fifth Circuit reversed a class certification order because, it concluded, Enron stockholders couldn’t invoke a "presumption of reliance" against Enron’s bankers.  Without the presumption, common issues didn’t predominate, rendering class treatment of the stockholders’ claims under Rule 23(b)(3) improper. 

But the court’s analysis rested on its conclusion that "[t]he district court’s definition of ‘deceptive acts’ . . . sweeps too broadly".  And the plaintiffs, like those in Stoneridge, did allege that the banks committed "deceptive acts" by fooling Enron’s auditing firm (also Arthur Andersen) about the nature of their transactions with Enron.  The Fifth Circuit thus rejected the SolGen’s test for "deceptive" conduct.

We don’t know of course whether the Supreme Court will adopt the SolGen’s position.  But we do hazard a guess.  If the Court does agree with him about what counts as "deceptive" conduct, the Fifth Circuit will get Regents back.  And it will have a harder time decertifying the second time around.

Beats a poke in the eye with a sharp stick.

Barry Barnett

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