The Bush administration, per an amicus brief by the U.S. Solicitor General, sided with Wall Street yesterday in an important securities law case.  See WSJ article, Dow Jones item, and Washington Post story.

The case tests the edges of federal securities law.  The plaintiffs claim that investment banks, law firms, accountants, and suppliers may incur liability if they participate in a scheme to defraud investors even if they don’t tell lies themselves.  They lost in the Eighth Circuit.  In re Charter Communications, Inc., Securities Litig., 443 F.3d 987 (8th Cir. 2006).

The defendants — and now the administration — argue that "secondary" actors deserve immunity from such claims.  Otherwise, they assert, a Pandora’s box of unpredictable and far-reaching liability will open.

The U.S. Supreme Court granted review to consider the following question:

Whether this Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation’s financial statements, but where Respondents themselves made no public statements concerning those transactions.

The court will hear arguments in the case on Octoer 9, 2007.  Stoneridge Inv. Partners LLC v. Scientific-Atlanta, Inc., No. 06-43 (U.S.).  Briefs available here (scroll down to find).

A Fifth Circuit decision went the other way earlier this year, rejecting the fraud-by-silence theory.  Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007).  See Blawgletter post here.

If the pro-business trend from the 2006 Term continues into the 2007 Term — and Blawgletter has no reason to suppose it won’t — Wall Street will get good news from the Court when it decides Stoneridge.

Barry Barnett

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