Chamber of Commece Calls Scheme Liability a Label in Search of a Cause of Action

The theory of scheme liability under which non-speaking actors, such as auditors and investment banks, can be held liable for securities fraud is no more than aiding and abetting liability disguised behind a new name, asserts the US Chamber of Commerce in a brief filed with the Supreme Court. It is instructive to note, said the Chamber, that scheme liability emerged after the Court and Congress rejected aiding and abetting liability in private securities fraud actions. The theory has been extended to counterparties involved with an issuer merely through a commercial or financial transaction. Moreover, scheme liability has no effective limiting principle, which the Chamber believes is reason enough to reject the theory.

The Chamber further contends that scheme liability would put US companies at a tremendous competitive disadvantage. For example, issuers of securities would have to price their commercial transactions to reflect the substantial added risk of liability for their counterparties. Moreover, in order to avoid litigation risk, both domestic and foreign companies would have significant incentives to do business with companies listed on foreign exchanges, or with private companies. Business choices would be based on factors like price, efficiency, quality, and service, said the Chamber, rather than on litigation risk.

In the case of Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (No. 06-43), the Supreme 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 Chamber’s brief addressing this question, a concept known as scheme liability, was filed in support of the defendants in the Stoneridge case.

Calling scheme liability the antithesis of the legal certainty that business requires, the Chamber observed that a counterparty has no ability to audit or dictate accounting decisions made by the company’s management and auditors. Moreover, business transactions are often subject to complex, changing, or inherently subjective accounting rules. Requiring a business to monitor its counterparty’s accounting in every commercial transaction, said the Chamber, will greatly expand costs and litigation risk. The Chamber questions the very efficacy of a theory of scheme liability that would subject business to such extreme hazards.

The Court’s approval of scheme liability, warned the Chamber, would send a chill through boardrooms worldwide since any firm, anywhere, doing business with US companies would have to live with the risk that the transaction could later be portrayed as fraudulent.

Unlike scheme liability, argued the Chamber, a duty to disclose is individual, not derivative, and provides an objective and workable, bright line standard that looks at the relationship between the parties rather than the defendant’s subjective intent. Duty to disclose is a legal question, and there is well-developed law to guide businesses concerning when such a duty exists.