House Leaders File Brief in Scheme Liability Case

Although the SEC and DOJ did not file an amicus brief in the scheme liability case now before the Supreme Court, two House senior leaders have filed a brief on behalf of investors urging the Court to hold that non-speaking actors who engage in deceptive acts as part of a scheme to defraud investors may be liable under Rule 10b- 5 even if they did not directly issue fraudulent statements. This is also the position of the SEC, said Representations Barney Frank and John Conyers, respective chairs of the Financial Services and Judiciary committees.

The House chairs filed the brief because they believe the law in the case is clear that third parties who knowingly engage in manipulative or deceptive acts as part of a scheme to defraud investors should be held liable for their actions under the federal securities laws. In the brief, the members note that, if the Supreme Court decides against investors in this case, third parties will effectively be immune from suit no matter how reprehensible their conduct.

In the case of Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (No. 06-43), the Court is slated to determine whether non-speaking actors, such as investment banks and auditors, that knowingly commit securities fraud can be held liable for their actions. The brief addressing this question, a concept known as scheme liability, was filed in support of the investors in the Stoneridge case.

The brief noted that the Solicitor General rejected the SEC’s specific recommendation that the United States file an amicus brief in support of investors and urge the Court to follow the Commission’s long-standing interpretation of the statutory and regulatory provisions at issue. Disturbingly, said the House leaders, this appears to have been done as a result of White House intervention. The House chairs called the Solicitor General’s decision to follow the directives of the President rather than support the SEC’s position a dangerous course to follow.

The rejection of scheme liability for non-speaking actors elevates a policy argument over the clear text of the antifraud statute, reasoned the brief, and is an invitation to engage in the policy-based judicial activism the Court has repeatedly condemned in statutory interpretation cases. Unless and until Congress so amends Section 10(b), continued the brief, the Court should honor the legislative policies established by the Congress reflected in the clear language of the statute and in SEC rules, as well in the Court’s precedents.

In that context, said the brief, the Financial Services committee stands ready to facilitate through hearings a discussion of whether to amend Section 10(b) to immunize from liability persons who knowingly engage, directly or indirectly, through conduct or speech, in manipulative or deceptive acts as a part of a scheme to defraud investors.