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WASHINGTON � Should lawyers, accountants, investment bankers and others rest easy after the U.S. Supreme Court’s most recent securities decision? Yes and no. In Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., No. 06-43, investors sought to hold liable two vendors who, acting as customers and suppliers, agreed to contracts that they knew would allow the investors’ company � Charter Communications � to issue a misleading financial statement that affected Charter’s stock price. The high court, in a 5-3 decision on Jan. 15, held that the implied private right of action in Section 10(b) of the Securities Exchange Act of 1934 did not reach the two vendors because investors did not rely upon their statements or representations, only upon Charter’s. Although the two sides in what has been called the most important securities case to come to the high court in more than a decade agreed on virtually nothing in the case itself, they do agree the decision is a definite loss for those pushing a “scheme” theory of liability for “secondary actors” in securities fraud, such as lawyers, bankers or accountants. But whether the decision is a total shutout depends on which of three main aspects is viewed as most critical, they said. The high court specifically reiterated in Stoneridge that secondary actors could be held liable under Section 10(b) in private actions if the conduct of a secondary actor satisfies each of the elements or preconditions for liability under Section 10(b). The problem, according to scholars and litigators, is that the majority said virtually nothing about what kind of conduct can get secondary actors into trouble. First, the decision actually turned on reliance: whether the investors had relied on misrepresentations or representations by the defendants. Second, the court said these defendants � customers/suppliers � operated in the marketplace for goods and services, not in the investment sphere. They were, in effect, too remote or too far down the chain of fraud. And finally, the majority made crystal clear its absolute hostility to implied private rights of action and any expansion of this particular one. Focusing on the reliance holding, securities scholar Jill Fisch of Fordham University School of Law said the decision is a “relief” for lawyers, accountants and others because they do not face serious risk of liability. “The idea that investors have to rely directly on defendants’ statements and conduct means there is no way, other than in the offering context or a lawyer writing an opinion letter on file with the [U.S. Securities and Exchange Commission], that these cases are going to remain,” she said. Whether that’s “relief” depends on one’s perspective, added Fisch, who wrote an amicus brief supporting the Stoneridge investors. “I think there’s some value in being able to say to your client, ‘I can’t do this because I face liability for putting together this sham transaction,’ ” she said. “ That’s not necessarily a bad thing, as we learned in the tax shelter area.” If one of those parties actually makes a misstatement, there will be a securities remedy as long as all other elements under the law are met, said securities scholar Larry E. Ribstein of the University of Illinois College of Law. “If a lawyer is involved in structuring the transaction, you might say the lawyer is a little bit closer to being a conventional target of securities laws than the suppliers in Stoneridge,” added Ribstein, who signed onto an amicus brief supporting the vendors in the case. “But liability for merely structuring transactions is unconventional enough, I think, that it would fall within the danger area where court was concerned about being too aggressive with securities remedies.” There are two main reasons why Stoneridge cannot be read so broadly as to say that secondary actors, such as lawyers and underwriters, can sleep easier now than they did before, said Elizabeth Nowicki of Tulane University Law School. The factual relationship between the investors and defendants in Stoneridge was “one-off” from the normal secondary-actor relationship, she said. Scientific-Atlanta and Motorola were customers/suppliers for Charter, not “advisers” for Charter in the way lawyers and bankers would be, she said. “In my mind, an accountant certifying a corporation’s financial statements or a lawyer drafting an opinion letter in connection with a securities offering is indeed acting ‘in the investment sphere,’ ” she said, quoting the majority’s phrase. Second, the vendor-defendants were on the “other side,” of a transaction with Charter, noted Nowicki. Lawyers and bankers are normally on “the same side” of a transaction as an issuer, since they are hired to help the issuer. “It makes sense, then, to consider more seriously tying lawyers and bankers to investors given that, by way of being employed by and paid by the issuer, such as Enron, the lawyers and bankers should be serving the investors,” she said. Last week, both sides in a multibillion-dollar class action over the Enron fiasco filed briefs addressing Stoneridge in a pending high court petition. Investment bankers, arguing there was no legal difference between the two cases, urged the court to deny review of a decision dismissing the Enron case. But investors, arguing the cases were different and Stoneridge was a narrow ruling, urged review or a return to the lower court.

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