MARCH 26, 2007
The Supreme Court granted certiorari today in one case of
interest to the business community:
of Third Parties When Issuer Knowingly Engages in Fraud.
Bank v. First Interstate Bank, the Supreme Court held that
Section 10(b) of the 1934 Securities Exchange Act does not
create liability for aiding and abetting securities fraud. 511
U.S. 164, 177 (1994). That case involved claims under Rule
10b-5(b), which bars misleading statements and omissions. The
Court explained, however, that “secondary actors,” such as “a
lawyer, accountant, or bank, * * * may be liable as a primary
violator under 10b-5, assuming all of the requirements
for primary liability under Rule 10b-5 are met.” Id. at 191. The
Court granted certiorari in Stoneridge Investment v.
Scientific-Atlanta, Inc., No. 06-43, to determine whether
Central Bank also bars claims under Rule 10b-5(a) and (c)
that a party, without itself making any misstatement,
participated in a transaction that was used by a public
corporation to manipulate its earnings.
Charter Communications, a major cable television provider,
agreed to pay an additional $20 for each set-top box purchased
from two of its vendors, Scientific-Atlanta and Motorola, in
exchange for the vendors’ agreement to return those funds by
purchasing advertising from Charter. The effect of this scheme
was to increase Charter’s advertising revenue and, because the
set-top box expenses were capitalized, its short-run profits.
Two of Charter’s officers were indicted for the scheme, which
also resulted in an SEC Cease and Desist Order.
Investment Partners sued Scientific-Atlanta and Motorola, on
behalf of purchasers of shares in Charter, alleging that the
vendors’ knowing participation in this arrangement constituted
“a scheme or artifice to defraud” under Rule 10b-5(a) or a
“course of business which operates * * * as a fraud or deceit”
under Rule 10b-5(c). The district court dismissed the claims
against the vendors and the Eighth Circuit affirmed on the
ground that Central Bank bars aiding and abetting
liability “under § 10(b) or any subpart of Rule 10b-5.” 443 F.3d
987, 992-93 (8th Cir. 2006). The court explained that “[t]o
impose [primary] liability for securities fraud on one party to
an arm’s length business transaction in goods or services other
than securities because that party knew * * * that the other
party would use the transaction to mislead investors” would be a
radical extension of § 10(b) that “should be made by Congress.”
arguably conflicts with the Ninth Circuit’s ruling in Simpson
v. AOL Time Warner, 452 F.3d 1040 (9th Cir. 2006). In its
petition for certiorari, Stoneridge also contends that the
transactions at issue were not arm’s-length but “absolute sham
transactions” and that the Eighth Circuit’s application of
Central Bank to 10b-5(a) and (c) was inconsistent with the
statutory text and with subsequent decisions of the Supreme
Court and lower courts.
raises an important question regarding the scope of § 10(b)
liability and should be of interest not only to public companies
but also to vendors and service providers that do business with
them. Absent an extension, which is likely, amicus briefs in
support of the petitioner will be due on May 10, 2007; amicus
briefs in support of the respondents will be due 35 days after
petitioner's brief is filed. Any questions about this case
should be directed to
(312-701-7829) in our Chicago office.
On March 19, 2007, and February 26, 2007, the Supreme Court
invited the Solicitor General to file briefs expressing the
views of the United States in the following cases of interest to
the business community:
Joblove v. Barr Labs, Inc., No. 06-830. The question
presented is whether it violates the antitrust laws for a
brand-name pharmaceutical manufacturer (and patent holder) to
share a portion of its future profits with a generic
manufacturer (and alleged patent infringer), in exchange for the
generic manufacturer’s agreement not to market its competing
(and allegedly infringing) product.
LaRue v. DeWolff, Boberg & Associates, Inc., No.
06-856. The question presented is whether Section 502(a) of the
Employee Retirement Income Security Act of 1974 (“ERISA”)
permits a participant in a defined-contribution plan to recover
money losses in his or her pension account caused by a fiduciary
breach by plan managers or administrators.