WASHINGTON — Investors will confront corporations on Tuesday when the Supreme Court considers the highest-profile business case of the year.
There are hundreds of millions of reasons, each with a dollar sign attached, why the University of California, the state of Pennsylvania’s pension plan, Merrill Lynch and many more are following Stoneridge v. Scientific-Atlanta. The high court’s decision will determine how far legal liability extends in securities fraud cases.
“I actually think this is the most important securities law case since the securities laws were passed,” said Patrick Coughlin, a San Diego-based attorney who represents the University of California in a closely related lawsuit.
Think Enron. There's no commercial connection between that failed company and Stoneridge v. Scientific-Atlanta, but they're legal brethren.
StoneRidge involves television set-top boxes. Enron involves energy wheeling and dealing. Both raise questions about how far blame should spread.
When Enron collapsed, investors started suing not only the bankrupt energy company but also the banks, accounting firms and associates that allegedly enabled it to engage in fraudulent business practices.
Something similar happened with a cable company called Charter Communications. StoneRidge Investment Partners, based in Malvern, Pa., sued Charter in 2002 for allegedly cooking the books. StoneRidge also sued Scientific-Atlanta and Motorola, makers of the set-top boxes Charter used.
Charter overpaid Scientific-Atlanta and Motorola for the equipment by $17 million. The latter companies allegedly then turned around and bought unwanted advertising from Charter.
“These phony transactions had no business purposes whatsoever,” charged New York-based attorney Stanley M. Grossman, who represents StoneRidge. “Their only purpose was to overstate Charter’s reported revenues and cash flow, and consequently the price of its stock.”
Charter, based in St. Louis and chaired by Microsoft co-founder Paul Allen, describes itself as the third largest publicly traded cable operator in the United States. The company settled the investor lawsuits in 2005.
The remaining legal question with the Enron cases as well as with StoneRidge is whether secondary actors _ also called third parties — also can be held accountable.
Corporations say no.
“This broad expansion (of liability) should be rejected because it would …substantially increase the dangers of vexatious litigation,” former Clinton-administration Solicitor General Seth Waxman argued, in a brief filed for the Business Roundtable, an organization of top officials of major corporations.
Investors say yes.
“Financial institutions were active, knowing and crucial participants in the Enron fraud; they were not innocent bystanders,” Charles Robinson, the University of California’s general counsel, declared earlier this year. “For victims of one of the most egregious corporate frauds in history, we are simply asking for our day in court.”
Robinson was speaking as the university filed an amicus brief siding with investors, one of about 30 friend-of-the-court briefs filed in the Stoneridge case. This is more than most other case.
Then again, the tangible stakes are immense.
The University of California lost an estimated $140 million in what the university’s lawyers term “the notorious Enron fraud.” With Enron already squeezed dry, the university is pursuing a separate lawsuit against firms, including Merrill Lynch and Credit Suisse, that lawyers claim “designed and implemented deceptive financial transactions” on Enron’s behalf.
Pension plans representing public workers in Los Angeles, the states of California, Pennsylvania, New York and other states likewise have weighed in on behalf of the StoneRidge investors.
Scientific-Atlanta and Motorola respond that investors didn't rely on the companies’ transactions or statements when making investments in Charter Communications. The companies say this means that, at most, they may have “aided and abetted” Charter’s scheme but can't be considered primary violators.
“They had no involvement in the preparation or review of Charter’s financial statements, and they made no statements to Charter’s investors or accountants, and had no duty to do so,” Washington-based attorney Stephen M. Shapiro declared in a legal filing for the companies.
A 1994 opinion by Justice Anthony Kennedy declared that simply aiding and abetting isn't sufficient to be the basis of lawsuits against third parties under securities law. Coughlin, who is representing the University of California in a pending Enron lawsuit, predicted that Kennedy would again be the swing vote in the StoneRidge case.
Justice Stephen Breyer complicated the picture by recusing himself, leaving the court potentially split along 4-4 lines. Breyer reports owning between $15,000 and $50,000 worth of stock in Cisco Systems, Scientific-Atlanta’s parent company.
Chief Justice John G. Roberts reported owning a similar amount of Cisco Systems stock, and he likewise recused himself for a time. He's since rejoined the case, presumably, Coughlin said, because he sold his Cisco stock.
“In business cases, the Supreme Court defies the stereotype of a house divided,” Washington-based attorney Gene Schaerr noted at a Chamber of Commerce briefing, adding that “the pro-business interpretation usually prevails today.”