With one mystery solved in what could be the biggest securities case before the Supreme Court in decades, the next imponderable is this: how many justices will participate and rule in the case?
The answer could decide whether or not the Court adopts a broad theory of securities fraud liability that would put law firms and other "third parties" in the cross hairs of investor class actions. That daunting prospect has drawn dozens of investor and business groups and lobbyists to both sides of the case of Stoneridge Investment Partners v. Scientific-Atlanta and Motorola.
Last week, Solicitor General Paul Clement ended weeks of speculation and filed a brief in the case that warned against a "radical expansion" of liability for secondary actors in fraud cases. That stance ran counter to the position taken by the Securities and Exchange Commission, but conforms with the arguments urged by the Treasury Department and President George W. Bush.
The new round of speculation centers on the exact makeup of the Court, which back in March agreed to hear Stoneridge in the upcoming term. Chief Justice John Roberts Jr. and Justice Stephen Breyer initially recused in the case. According to their 2006 financial disclosure forms, both justices own between $50,001 and $100,000 of stock in Cisco Systems Inc., the parent company of Scientific-Atlanta, one of the respondents in the case.
But rumors have swept through the ranks of the lawyers involved that Roberts or Breyer or both might sell their stock and rejoin the case -- driven by the Court's deeply held desire to bring as full a bench as possible to bear in deciding its cases. Their decision might not be known until close to the time the case is argued on Oct. 9.
"Yes, I've heard that it is a possibility," said Stanley Grossman, the lawyer who will argue on behalf of Stoneridge investors in the case. Even though the re-entry of Roberts or Breyer might boost the chances of his opponent, Grossman, a partner in New York's Pomerantz Haudek Block Grossman & Gross, states diplomatically that, "Whatever the Court is, I hope they will see the light for us."
Ted Frank, head of the American Enterprise Institute's Liability Project, says, "There's a lot of suspense left in this case." Frank, who has followed the case and the recusals closely, says, for example, that if Roberts rejoins the case, a 4-4 tie could result, leaving in place an anti-investor ruling by the lower court.
In the case before the Court, Scientific-Atlanta and Motorola were vendors of cable boxes that played a role in an effort by Charter Communications, a cable TV provider, to fraudulently inflate its revenue. The 8th U.S. Circuit Court of Appeals said that as mere vendors, the two companies should not be sued by investors in the same way that Charter itself could be sued. The issue could be crucial to other cases in the legal pipeline as to whether bankers, lawyers, accountants and other "innocent bystanders," in the words of the U.S. Chamber of Commerce's Robin Conrad, can be sued. Currently, only the government itself can go after such parties, under a narrower "aiding and abetting" standard.
JUDICIAL LOSSES AND CAPITAL GAINS
The notion of justices "unrecusing" and re-entering a case strikes some as attempting to unring a bell, and it is causing discomfort among some judicial ethics experts. But a new -- and little-noticed -- federal law may be encouraging the practice.
Under the new law -- which Roberts urged Congress to pass in his capacity as head of the Judicial Conference -- judges can defer the capital gains taxes on stock they sell if they can demonstrate they made the sale to remove a conflict of interest. Executive branch officials have long had this ability, but judges were not allowed the same privilege until the change was included in a tax bill signed into law on Dec. 20.
Roberts may have made use of this new tax-deferral power already, when he recused from -- and then rejoined ¿ the antitrust case of Credit Suisse v. Billing last term. He first announced his recusal on Dec. 6, 2006, evidently because of holdings he had in investment firms involved in the case. Then on March 19, Justice Anthony Kennedy recused in the same case after apparently realizing, belatedly, that his son Gregory Kennedy's compensation as a managing director at Credit Suisse might be affected by the outcome.
Possibly to avoid a seven-member Court, Roberts suddenly rejoined the case on March 26, a day before oral argument. Under federal law, Roberts probably could not have rejoined the case without first curing the conflict -- most likely by selling stock. In Stoneridge, all it would take for Roberts and Breyer to participate is to sell their Cisco stock, which they can now do without tax consequences.
Without commenting on any specific case, judicial ethics expert Ronald Rotunda says he does not think judges should be allowed to recuse and unrecuse. "It looks funny; it seems manipulative," says Rotunda, a professor at George Mason University School of Law. Theoretically, he says, a judge could sell a company's stock to cure a conflict, then rule in the company's case, and then buy back the stock at a lower price. "Strategic recusals don't sound right."
Steven Lubet, a judicial ethics expert at Northwestern University School of Law, is less critical. Selling the stock cures the conflict, so there is no longer any bar against participation, he says. It might get into a gray area, Lubet adds, only if a judge or justice seems to be "selective" about which cases he rejoins, possibly showing favoritism or animus toward a particular company.
SIZING UP SEVEN OF NINE
New York University School of Law's judicial ethics guru Stephen Gillers agrees that at the lower federal court level, where it is easy to replace recused judges with other judges, it could be "unseemly" for a judge to go to great lengths to stay in or re-enter a case. "Traditionally, a judge who is assigned to a case is not supposed to rearrange his or her affairs to keep a case."
But at the Supreme Court level, where there is no replacement for a recused justice, Gillers thinks the benefit of having a full Court ruling in a case outweighs other concerns. "There may not be as thorough an airing of the issues with only seven justices as there would be with nine," Gillers says.
What difference would it make if one or more of the recused justices changed his mind and decided to participate?
Most handicappers are basing their Stoneridge predictions on the Court's lineup in a key 1994 precedent, Central Bank of Denver v. First Interstate Bank of Denver, which foreclosed private investor lawsuits for aiding and abetting. In that case three justices -- Antonin Scalia, Clarence Thomas and Kennedy -- voted to narrow liability. Three others could side with investor-litigators, based on their 1994 votes: John Paul Stevens, Ruth Bader Ginsburg and David Souter.
On a seven-member Court, that would leave newcomer Samuel Alito Jr. as the swing vote, though some analysts say Kennedy could also be up for grabs. If Roberts or Breyer or both return to the case, they could cancel out or bolster votes by Alito and Kennedy.
"The justices who recused are -- I don't want to use the term -- business-friendly," says Stephen Bainbridge, who participated in a brief that opposed the investors' broad liability theory.
But Bainbridge, a professor at UCLA School of Law, says the Court can be especially unpredictable in securities cases, because the justices and their law clerks are "institutionally incompetent" to resolve complex securities cases. "I would never count the chickens before they hatch."