By James Hamilton, J.D., LL.M.
In a very interesting brief, a consortium of international business organizations has urged the US Supreme Court to reject scheme liability for non-speaking secondary actors in private securities fraud actions. From the perspective of foreign companies in particular, said the brief, scheme liability is unworkable and would convert foreign companies in overseas transactions with U.S. entities into de facto auditors of their U.S-listed counterparty’s financial statements. In turn, the imposition of scheme liability would have a material chilling effect on the willingness of foreign companies to engage in general commercial transactions with US public companies.
More broadly, the brief, citing the German press, notes that scheme liability endangers transatlantic economic relations because it could be at odds with the spirit of the April 2007 U.S.-E.U. Economic Summit at which the parties agreed to work towards the harmonization of the regulatory environment for financial markets. The brief was filed by, among others, the International Chamber of Commerce and the Confederation of German Industries.
According to the international groups, scheme liability would inject into the United State’s carefully considered securities law enforcement system an unpredictable and potentially arbitrary mechanism for determining liability. Moreover, that mechanism would be placed in the hands of the class action bar, not the SEC. In the consortium’s view, that combination creates precisely the litigation risk that discourages foreign companies from doing business in the United States.
The brief posits that foreign companies are particularly ill-suited to this gatekeeper role. The legal structures in the world’s other major financial centers do not impose such illogical burdens.
For example, the UK Financial Services and Markets Act contains provisions akin to
Section 10(b) that impose civil liability for misleading statements made in financial statements. Under these provisions, issuers, as well as directors or other persons discharging managerial duties in relation to such issuers, may be liable for any false or misleading statements. But liability is not imposed by statute or regulation on third parties that enter into transactions with the issuer which the issuer then misreports.
Similarly, the German Securities Trading Act limits liability for misstatements to the issuer and, potentially, its directors and officers. But the Act does not provide for claims against silent third-parties to commercial transactions that the issuer misreports.