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The U.S. Supreme Court recently issued its opinion in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. The court concluded that certain nonspeaking defendants were not liable under Section 10(b) of the Securities Exchange Act of 1934 because the investors at issue did not rely on anything these defendants said or did. The inability to plead reliance as to these defendants � which is one of the critical elements of a cause of action under Section 10(b) � required dismissal of the claims. Since this decision was released, some commentators have attempted to criticize the court’s straightforward analysis of the issues. These efforts, however, have been unsuccessful. As explained below, the court’s conclusions are legally sound and squarely grounded in its prior precedent. The focus on reliance in Stoneridge has provoked some comment, which is surprising given that the reliance requirement was important to the high court’s decision in Central Bank of Denver v. First Interstate Bank of Denver (1994), and was discussed at every stage of Stoneridge. Central Bank concerned whether a private cause of action could exist for “aiding and abetting” another party’s violation of the federal securities laws. The court held that no such claims were possible and did so largely based on the inability to establish reliance if such a cause of action were recognized. The court refused to allow a plaintiff “to circumvent the reliance requirement [and thereby] disregard the careful limits on 10b-5 recovery mandated by [the court's] earlier cases.” When faced for a second time in Stoneridge with claims based on a defendant’s purported assistance in a larger scheme to defraud, the court not surprisingly concluded that the absence of reliance resolved the appeal. Requiring a plaintiff to plead each element of a Section 10(b) claim as to each defendant is hardly a radical notion and entirely consistent with Central Bank and numerous other decisions that sought to protect defendants against abusive litigation practices. Some have criticized the court’s refusal in Stoneridge to apply a presumption of reliance, in an attempt to cure the plaintiffs’ pleading problems. Indeed, Justice John Paul Stevens in dissent argued that the majority had created a “super-causation” view of reliance, which he suggested was inconsistent with prior decisions. Once again, an examination of these opinions reveals that the most recent decision from the court is faithful to the basic principles articulated previously. Most discussion has focused on the presumption of reliance associated with the “fraud-on-the-market” theory from Basic Inc. v. Levinson (1988). In Basic, the Supreme Court was willing to presume reliance “[b]ecause most publicly available information is reflected in [the] market price [of a stock and, thus,] an investor’s reliance on any public material misrepresentations . . . may be presumed for purposes of a Rule 10b-5 action.” Basic made clear that the presumption applied only in the context of a defendant’s alleged misstatements and only to those statements that were made public. The defendants in Stoneridge made no public statements, and the conduct of which they were accused was likewise never made public. To apply Basic under these facts would have been an unprecedented expansion of that case and one that conflicts with the principles that led the court to adopt the presumption in the first place. The court correctly recognized that there was no support for such a reliance theory, which would have extended the cause of action under Section 10(b) to “reach the whole marketplace in which the issuing company does business.” Finally, some observers have sought to punch holes in Stoneridge by suggesting that it would not bar claims against nonspeaking defendants whose conduct may have a closer connection to the securities markets than the equipment supplier defendants in Stoneridge. It is, however, simply incorrect to suggest that Stoneridge is somehow limited to a particular class of defendants. The inability to plead reliance, not the particular industry in which the defendants operated, controlled the outcome. The court’s later disposition of two other cases based on similar issues conclusively resolved the question of whether any exceptions existed. For example, the court declined to consider an appeal from the Enron case in which “scheme liability” claims against certain banks had been rejected on reliance grounds. If the court thought there was any ambiguity about the impact of Stoneridge on claims against banks, it could have remanded the case for consideration in light of Stoneridge. Its failure to do so puts an end to any speculation that certain types of nonspeaking defendants are exempt from Stoneridge. Susan E. Hurd is a partner in the securities litigation group of Atlanta’s Alston & Bird. She was counsel of record for Scientific-Atlanta Inc., one of the defendants in the Stoneridge case, through all stages of the litigation, including the recent appeal before the U.S. Supreme Court.

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