March 27, 2007
Supreme Court Grants Cert in Case That Re-opens Central Bank
Posted by Christine Hurt

Yesterday, the Supreme Grant decided to consider a case posing questions about aider and abettor liability under Section 10(b) during OT 2007.  The case, Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., presents the following question presented:

Whether the Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under 10(b) of the Securities Exchange Act of 1934. . . ., where Respondents engaged in transactions with a public corporation with no legitimiate business or economic purpose except to inflate artifically the public corporation's financial statements, but where Respondents themsleves made no public statements concerning these transactions.

In the case below, In re Charter Communications, Inc. Securities Litigation, 443 F.3d 987 (8th Cir. 2006)shareholders of Charter, a cable television provider that sold cable service through TV-top boxes provided by vendors Scientific-Atlanta and Motorola, alleged securities fraud by the two vendors for entering into sham transactions with Charter amounting to $17 million to inflate the stock price. Obviously, neither Motorola or Scientific-Atlanta prepared disclosure documents for Charter shareholders with false statements or were under a duty to speak to them but kept silent. However, shareholders alleged that the defendants were otherwise primary violators because they were necessary to the sham under 10b-5(a) and (c). Neither the district court nor the Eighth Circuit agreed with them (the appellate opinion is a brisk 7 pages, with headnotes.)

So, the Supreme Court will hear this case next term. mentions that the Ninth Circuit has held that an "aider and abettor" can be liable under some circumstances, such as "creating a false appearance of fact."  The district court in the Southern District of Texas in the Enron litigation had also held that many stereotypical "aiders and abettors" such as outside banks, a law firm and an accounting firm, could be held liable under Section 10(b), although that ruling was muddied by the Fifth Circuit's refusal of class certification last week due to the fact that the defendants were mere aiders and abettors.  So, lots of people will be watching this case, including law firms, accounting firms, and commercial and investment banks.  Of course, the case could do several things:  (1) keep the status quo; (2) broaden the definition of primary violator to include a broader range of persons; or (3) reverse Central Bank (the least likely scenario, I would think).

Interestingly, Chief Justice Roberts and Justice Breyer took no part in the review or granting of cert, almost certainly due to their personal stock holdings.  However, Roberts divested himself of certain stock holdings to be able to participate in the Credit Suisse case today, and those in the know (not me) predict that he will do the same in order to ensure that this case, with its potential for wide-ranging consequences for several industries, will not be heard by only seven justices.

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