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Using the financial reform conference committee to reverse Stoneridge

The House-Senate conference committee has been meeting on H.R. 4173, the financial reform bill, and among the points of negotiation is whether the bill should expand the grounds for private civil actions for aiding and abetting in securities fraud -- i.e., overturning the U.S. Supreme Court decision in Stoneridge Investment Partners v. Scientific Atlanta.

Rep. Maxine Waters (D-CA) is offering the amendment on the behalf of the House conferees, even thought the version of the bill that passed the House didn't have the Stoneridge language in it. And neither did the Senate! When the Senate was debating the bill, Sen. Arlen Specter (D-PA) urged the cosponsors to come to floor to support him in his amendment, but no one did. (Specter had sponsored a stand-alone bill, S. 1551, to reverse Stoneridge, as well.)

It's shoddy lawmaking to try to add extraneous amendments via a conference committee without the provision having passed one of the two chambers first. It happens, but it's arrogant and invites disregard for Congress.

My employers, the National Association of Manufacturers, strongly supports the U.S. Supreme Court's 2008 Stoneridge decision, which protects manufacturers from unfairly being held liable in securities litigation solely because they might have deeper pockets than the company that engaged in securities fraud.

The decision also reaffirmed that defendants may not be sued for aiding and abetting another corporation's violations; only the Securities and Exchange Commission or certain state prosecutors may bring such actions.

The Waters amendment overturns Stoneridge and re-opens the door to frivolous lawsuits. Specifically, it does not require defendants to have "actual knowledge" that their conduct is assisting a fraud; rather, it requires only that defendants have "actual knowledge of the improper conduct underlying the violation." Defendants could still be subject to liability claims even when they have no knowledge that the conduct of their business partners is unlawful.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.