Results matching “stoneridge”

Arbitrary and Unfair - PointOfLaw Columns

By Ted Frank

This piece originally appeared in the Wall Street Journal, 5-31-07.

Subsequent to the publication of this article, the Securities and Exchange Commission voted 3-2 to recommend submitting a plaintiffs' side brief in Stoneridge. The Department of Justice declined to accept the SEC's recommendation and did not submit a brief for the plaintiffs; the DoJ may or may not decide to file a defendant's side brief within the remaining filing deadline.

Treasury Secretary Henry Paulson called securities litigation the "Achilles heel for our economy," endangering the global competitiveness of American financial markets. Last January a report released by Senator Charles Schumer, Democrat of New York, and New York City's Republican Mayor Michael Bloomberg concluded that investors were being driven away from American shores because "the highly complex and fragmented nature of our legal system has led to a perception that penalties are arbitrary and unfair."

The proposed solution to the legal mess offered by the so-called Paulson Committee Report was modest enough: "Greater clarity for private litigation." Yet even this small step could suffer a big setback. The plaintiffs' bar is heavily lobbying the SEC to intervene in a pending Supreme Court case, Stoneridge v. Scientific-Atlanta, on the side of a gigantic expansion of private litigation.

The case's facts are straightforward: Charter Communications purchased set-top cable boxes, but got back some of the money in the form of advertising bought by the vendors. Charter executives recorded the outgoing money as a "capital expenditure" (to be depreciated over several years) but the incoming money as revenue recorded within a single year, thus falsely inflating operating cash flow. Three Charter executives went to prison over the shenanigans. Plaintiffs' attorneys sued Charter and the executives, of course, but named as codefendants two of the vendors, Motorola and Scientific-Atlanta.

The suit makes little sense. The vendors had no say in how Charter accounted for or reported its transactions. Worse is the precedent it represents: How can a business function if it is potentially liable for hundreds of millions because those whom they trade with misreport a day-to-day transaction? The Supreme Court stopped such private "secondary liability" suits in Central Bank v. First Interstate Bank, a 1994 decision that Congress ratified the next year, explicitly rejecting private suits for "aiding and abetting" in the Private Securities Litigation Reform Act (repeating the rejection in the 2002 Sarbanes-Oxley Act.)

A federal court in Missouri dismissed the case against the equipment vendors, and the Eighth Circuit Court of Appeals affirmed that decision: Such liability would, the court said, create far-reaching "uncertainties for those engaged in day-to-day business dealings." Nevertheless, the Supreme Court has agreed to hear an appeal.

Why? The Court may—one hopes—be stepping in to reassert itself, since some courts have permitted plaintiffs' lawyers to whittle away at Central Bank. In the Enron litigation, for example, a federal court in Houston erroneously certified a class action after plaintiffs alleged investment banks doing business with Enron were "primary violators" of the securities laws—even though these defendants took huge losses when Enron collapsed. With plaintiffs claiming total liability of $40 billion, many banks caved when offered a chance to settle for less than a nickel on the dollar. Such a settlement is a better bargain than a 90% chance of winning at trial—a basic cost-benefit analysis the plaintiffs' bar counts on when bringing baseless litigation. (Plaintiffs with meritorious cases do not settle for pennies on the dollar with a solvent defendant.)

Innocent investors paid out $7.3 billion in settlements, about $700 million of which was diverted to attorneys, including Democratic fundraiser and trial lawyer William Lerach. Merrill Lynch, among others, fought the court's ruling and was vindicated when the Fifth Circuit Court of Appeals tossed out the case.

Mr. Lerach has appealed to the Supreme Court, asking that his case be joined with Stoneridge. Representative Barney Frank, Democrat of Massachusetts, will helpfully hold hearings in June to highlight trial-lawyer criticisms of the SEC; meanwhile trial lawyers are attacking SEC Chairman Christopher Cox for supposedly being insufficiently supportive of investors—by which they mean, of course, the interests of trial lawyers.

But one can help investors without paying billions to the likes of Mr. Lerach. The SEC has criminal and civil enforcement authority against real "secondary violators," and Sarbanes-Oxley mandated that fines collected by the SEC be returned to defrauded investors instead of to the Treasury. These "Fair Funds," while suffering from bugs of government bureaucracy, are still more efficient and fair than the contingency fees of up to 30% to trial lawyers.

Unfortunately, we cannot be certain why the Supreme Court has taken the case, or if it will do the right thing. While Chief Justice John Roberts and Justice Stephen Breyer have spoken of the need for judicial modesty, both have recused themselves from the case. All the more reason for Treasury and the SEC to stand firm and ask the solicitor general to urge the Supreme Court to keep liability circumscribed. And for Senator Schumer to explain to his Democratic colleagues why that would be a wise choice—before they criticize the Bush administration for making the wrong decision.

Ted Frank is a resident fellow and director of the Liability Project at AEI.

Trial lawyers begin backlash over Stoneridge - PointOfLaw Forum

While political pressure from trial lawyers caused SEC Chair Chris Cox to take the poor public policy position of supporting the trial-lawyer position in the pending Stoneridge appeal, the Bush administration held firm for protecting investors from trial-lawyer predation and refused to file an amicus brief in support. The question now becomes whether they'll file an amicus brief in opposition in July. Barney Frank and the AFL-CIO carry water for Bill Lerach and try to make political hay over the fact that the Bush Administration is doing the right thing. The Washington Post story, written by Carrie Johnson, somehow manages to ignore the litigation lobby's role in all this. Lyle Roberts has additional links, including to the plaintiffs' brief.

And still more on Stoneridge - PointOfLaw Forum

Add a Wall Street Journal editorial and an AEI On The Issues by me to the wealth of voices (Jun. 7) criticizing SEC Chair Cox for breaking with common sense and two other SEC commissioners to vote to support the plaintiffs' case. Bloomberg is reporting that Treasury Secretary Paulson asked Solicitor General Clement to ask the Supreme Court for clarity on the primary liability of companies for other companies' fraud. (Update: also Washington Post.) We'll know how the intra-administration battle shapes up on Monday when briefs are filed.

Ribstein also comments: "The best the Court could do would be to take cert on Lerach's Enron case, the most fully developed scheme liability case to date, and kill the monster and all of its limbs."

Wallison on Stoneridge - PointOfLaw Forum

At American.com, AEI's Peter Wallison adds his voice to the condemnation of the Stoneridge class action, which I discussed in the Wall Street Journal May 31. And Hugh Hewitt prints an email from a reader who suggests that I "underplayed the implications of this case" in that op-ed.

Stoneridge and Enron update - PointOfLaw Forum

Earlier: May 31.

The Washington Post is reporting that the SEC has demonstrated itself captured by the special interest of the plaintiffs' bar, and will ask the Solicitor General to intervene in the Enron appeal on behalf of plaintiffs, contrary to good law and good public policy. (Carrie Johnson, "SEC to Side With Enron Plaintiffs", Washington Post, June 2). The reporting is appalling: the final decision rests with the Solicitor General, whose brief would have been due yesterday: did the SG file or not? The reporter also mistakenly states that the Court will "hear the case" when in fact the Court is only considering a petition for certiorari. And there's no mention of the full-court lobbying press done by the plaintiffs' bar, or the fact that the SEC's position contradicts sounds law, and thus reflects political pressure.

My WSJ op-ed has resulted in a lot of blogosphere commentary: Bainbridge; Ribstein; Kirkendall; and Roberts, who continues to round up links.

(Update, June 3: the AP reports today that the SEC "declined to comment" about the Washington Post story, but also fails to note that June 1 was the deadline to file, and doesn't say if a brief was actually filed. I wonder if the Washington Post story is a leak to provide political cover for the SEC, and that they'll pass the buck to the SG's office for why no brief was filed? If a government brief had been filed Friday, one would expect the SEC to admit it, and would also expect it to be floating around the blogosphere.)

(Update to the update, June 3, 4 PM. A reader suggests that the Washington Post article is actually talking about Stoneridge though the article does not mention that case by name. That is a plausible interpretation that would make the Washington Post article make more sense; the reporter may have been limited by the constraints of space and forced to leave out information such as the name of the case the SEC was planning to file a brief in, even as it mentions the larger Enron case. If the Solicitor General does not veto the SEC's politically-motivated recommendation, the Stoneridge amicus brief would be due June 11.)

Popeo on Lerach and Stoneridge - PointOfLaw Forum

Daniel J. Popeo of the Washington Legal Foundation has more to say on Bill Lerach and the Stoneridge case:

The U.S. Supreme Court recently agreed to review a novel interpretation of the federal securities laws. The case won�t be argued until this fall, but its outcome, and possibly the fate of America�s dynamic securities market, may be determined in the next several weeks.

During that time, the Securities and Exchange Commission (SEC) must decide whether to take a formal position in this case, Stoneridge v. Scientific-Atlanta. The SEC�s options: Support the securities laws as Congress intended, or endorse class action lawyers� efforts to drastically expand their litigation targets and reap millions more in fees.

The battle for the SEC�s support has been fierce, with the notorious Bill Lerach leading the public relations offensive for the plaintiffs� bar. Lerach has enlisted powerful politicians and activists in the effort, and he even penned a rare op-ed in an influential legal publication arguing that the stakes for securities fraud suits have never been higher.

Mr. Lerach is right, the stakes are high, but investors and America�s position in the global economy would not come out the winners if his view prevails.

Read the whole thing in today's Examiner, here.

Lerach to quit? - PointOfLaw Forum

The Washington Post is reporting that Bill Lerach is leaving his firm Lerach Coughlin, which he formed three years ago in a celebrated split from Milberg Weiss. The article by Carrie Johnson suggests that Lerach's departure might be linked to the reported decision by former Milberg partner David Bershad to explore possible cooperation agreements with prosecutors in the government's ongoing investigation of alleged improper payments to securities class action plaintiffs:

In May 2006, the Milberg Weiss law firm and partners Steven Schulman and David J. Bershad were indicted by the U.S. attorney in Los Angeles on multiple criminal charges stemming from what prosecutors called a more than 25-year-long scheme to pay people to serve as plaintiffs in large class-action lawsuits. At least one former client has been assisting the government with that case. The firm has been fighting the charges, and the individual partners, who held high-ranking positions and earned tens of millions of dollars in their heyday there, have presented a forceful defense.

Bershad may be interested in exploring settlement possibilities with the government, according to an article on the Wall Street Journal's Web site last night. The Journal reported that he may cooperate with prosecutors in exchange for leniency at sentencing.

Johnson also points to the link between Lerach and the pending Stoneridge case that Ted wrote about in today's Wall Street Journal:

As recently as last week, Lerach was prodding regulators. He published opinion pieces and joined with prominent union leaders to press the Securities and Exchange Commission to file court briefs that would make it easier for investors to collect money from investment banks and accounting firms that watched silently while their corporate clients engaged in misconduct.

We'd previously reported Lerach's lobbying of the SEC here, and his sniping at SEC Chairman Chris Cox here.

Does the solicitor general's office really want to follow a guy like Lerach in its approach to Stoneridge? One would only hope that his sudden departure might cause the government, at a minimum, to discount his heavy-handed tactics.

Ted on the SEC and Stoneridge - PointOfLaw Forum

Our own Ted Frank has an op-ed in today's Wall Street Journal. Excerpt:

...The plaintiffs' bar is heavily lobbying the SEC to intervene in a pending Supreme Court case, Stoneridge v. Scientific-Atlanta, on the side of a gigantic expansion of private litigation.

The case's facts are straightforward: Charter Communications purchased set-top cable boxes but got back some of the money in the form of advertising bought by the vendors. Charter executives recorded the outgoing money as a "capital expenditure" (to be depreciated over several years) but the incoming money as revenue recorded within a single year, thus falsely inflating operating cash flow. Three Charter executives went to prison over the shenanigans. Plaintiffs' attorneys sued Charter and the executives, of course, but named as codefendants two of the vendors, Motorola and Scientific-Atlanta.

The suit makes little sense. The vendors had no say in how Charter accounted for or reported its transactions. Worse is the precedent it represents: How can a business function if it is potentially liable for hundreds of millions because those whom they trade with misreport a day-to-day transaction?...

Indeed, a 1994 Supreme Court decision on its face cuts off such "secondary liability" claims, but hope of reviving them springs eternal in the plaintiff's bar -- one reason for the P.R. campaign aimed at putting pressure on officials like SEC Chairman Chris Cox. (Ted Frank, "'Arbitrary and Unfair'", Wall Street Journal, May 31)(sub-only). Plus: here's the free AEI version.

We earlier discussed the significance of Stoneridge (Mar. 27; see also the related discussion over the Enron-related Regents v. CSFB case, where the Supreme Court is considering a petition for certiorari Apr. 5, Mar. 19, and May 17), which could lead to a tremendous unlegislated expansion in secondary liability in securities-fraud cases. Lyle Denniston reports that Justices Roberts and Breyer have recused themselves from the case, leaving a seven-justice panel. Six of those justices previously participated in Central Bank v. First Interstate Bank, a 5-4 decision that spoke of the importance of firmly circumscribed liability rules in the securities context. Justice Kennedy wrote the majority opinion, joined by Rehnquist, O'Connor, Scalia, and Thomas; the dissent was authored by Stevens, with Blackmun, Souter and Ginsburg joining. That leaves the current makeup of the court 3-3, with only Alito's vote unknown—assuming that the senior six justices honor their earlier stated positions, and that none of the dissenters recognize the importance of stare decisis. The petitioners will also presumably seek to ask Justice Kennedy to distinguish Central Bank and claim that the secondary liability they seek to impose here is really primary liability.

If the SEC decides to support Stoneridge, its brief is due June 11; if it decides to support Lerach's certiorari petition, its brief is due June 1. The SEC's position will not be dispositive by any stretch of the imagination; after all, it was on the losing side in Central Bank.

Update: Lyle Roberts reminds us that the Washington Post reported in April on Lerach's lobbying of the SEC over the issue.

Cert petition in Regents v. CSFB - PointOfLaw Forum

Lerach Coughlin quickly filed a cert petition in Regents v. CSFB (Mar. 19), presumably to maximize the chances that it gets considered at the same time as Stoneridge Investment Partners v. Scientific-Atlanta (Mar. 27). Peter Lattman has details, including the cert petition.

Scientific-Atlanta entered into a deal with Charter Communications that permitted Charter to inflate their revenues; Charter stockholders sued S-A, and the Eighth Circuit upheld a dismissal, noting that the Supreme Court has strictly circumscribed the scope of civil securities-law enforcement. The Supreme Court has granted certiorari. The case has significance because of the similar Fifth Circuit decision in the Enron litigation, which we discussed Mar. 19. [AP/Law.com]

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