Panelists Consider Stoneridge, Tellabs Cases

The Supreme Court's recent decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (CCH Federal Securities Law Reporter ¶94,556) will have a profound impact on private class action process, noted a panel at the Securities Regulation Institute sponsored by Northwestern University Law School. Another recent case, Tellabs v. Makor Issues & Rights, Ltd., Inc. (CCH Federal Securities Law Reporter ¶94,335), may turn out to be less than a "blockbuster," however.

In Stoneridge, which involved the alleged complicity of third-party vendors in round-trip transactions, the court held that the non-speaking third parties could not be held liable in private actions because investors did not rely on any public statements. Panel chair Prof. James D. Cox of Duke University asked if the decision effectively eliminated liability in private actions for non-speaking third parties. According to Sean Coffey of Bernstein Litowitz Berger & Grossman in New York City, a small window of opportunity may exist for plaintiffs if the market perceived the third party's deceptive acts, but he acknowledged that this approach is largely foreclosed.

Mr. Coffee also noted that the high court recently declined to hear the case against Enron's investment bankers, Regents of the University of California v. Merrill Lynch Pierce Fenner & Smith, Inc. (CCH Federal Securities Law Reporter ¶94,173), in which the 5th Circuit held that the banks may have aided and abetted Enron's deceit by making its misrepresentations more plausible, but that their conduct did not rise to primary liability under Rule 10b-5. While cautioning that it is difficult to draw conclusions from a denial of certiorari without comment, the panel indicated that the court may be indicating that its restrictive view of private aiding and abetting liability is not limited to its facts and non-speaking parties acting in the ordinary course of business, such as the Stonebridge vendors. As former SEC general counsel Giovanni Prezioso stated, the decision shows the Supreme Court "hates" private class actions.

Current SEC general counsel Brian Cartwright observed that the case had no impact on the ability of the Commission to prosecute these cases. Under the Private Securities Litigation Reform Act, the SEC has authority to bring these cases. Because Stonebridge was decided on reliance grounds, which is not a required element of liability in SEC enforcement actions, Commission authority was not effected.

With regard to the Tellabs scienter decision, Mr. Coffey indicated that the potential was there for this case to be a "blockbuster." While the Stonebridge-style third-party claims are relatively rare, scienter is an element in every fraud case. However, Mr. Coffee stated that he does not believe that the new standard will have a significant impact on private actions. The "tie goes to the plaintiff" holding actually lowered the pleading standard in some instances, noted Mr. Coffey, such as in the 6th Circuit, which required that the inference of scienter be more likely than competing non-culpable ones. In addition, the 7th Circuit's recent finding on remand that the fraud allegations in Tellabs were sufficient even under the new standard indicated that the Supreme Court's holding did not present a particularly difficult obstacle to successful fraud pleading.