By James Hamilton, J.D., LL.M.
Former SEC Chairs William Donaldson and Arthur Levitt 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. Former SEC Commissioner Harvey Goldschmid also joined them on the brief.
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.
Calling the action one of the most important securities cases to be heard by the Supreme Court in many years, the former SEC senior officials said it is critical to the antifraud purposes of the federal securities laws that actors, other than issuers and their officers and directors, who actively engage in deceptive conduct for the purpose and with the effect of creating a false statement of material fact in the disclosure of a public company continue
to be held liable in private securities fraud actions.
In their view, the Court’s reaffirmation of liability for actors, such as investment banks and accounting firms, that actively engage in deceptive conduct as part of a fraudulent scheme will have a profound effect on the deterrence of fraud and the ability of investors to recover their losses.
On the other hand, the rejection of fraudulent scheme liability would make invulnerable those who purposely engage in deception and immunizes non-issuers who commit securities fraud from private liability merely because they were cunning enough to avoid making a public statement.
The former SEC officials pointed out that the Commission’s traditional position has been that a person may commit a manipulative or deceptive act constituting a primary violation of the antifraud rule without making a public statement. The SEC consistently has expressed this position through rulemaking, amicus briefs, and enforcement actions.