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A strong factual argument about consequences in the “real world” held as much weight as did points of law with the majority of justices in the most closely watched securities lawsuit argued before the U.S. Supreme Court in decades, according to the winning attorneys. The case began as a shareholder class action against Charter Communications Inc., a cable television company, after it was revealed that corporate executives had manipulated revenue reports. Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 128 S. Ct. 761 (2008). What transformed the run-of-the-mill securities fraud litigation was the inclusion of Motorola Inc. and Scientific-Atlanta Inc., which had agreed to a scheme proposed by Charter to increase by $20 the price of the cable boxes that they sold the company, and to use the proceeds to purchase advertising that Charter reported as revenue. The Supreme Court received 16 amicus briefs, filed by banking and finance interests and academics, arguing that expanding third-party liability in shareholder suits would ruin U.S. capital markets. The tactic was first devised by the late Supreme Court Justice Louis D. Brandeis while he was a litigator, in Muller v. Oregon, 208 U.S. 412 (1908). The first “Brandeis brief,” containing empirical data from hundreds of sources on the detrimental effect on women’s health of working long hours, was the first to persuade the Supreme Court with arguments beyond the strict confines of the law. “I love the idea of an amicus brief as a Brandeis brief that actually provides a little information about the policy concerns that surround the case,” said Kathleen Sullivan, a professor at Stanford Law School and an attorney at Los Angeles-based Quinn Emanuel Urquhart Oliver & Hedges. “The court is not an isolated think tank. It issues opinions that have real-world consequences,” said Sullivan, whose amicus brief on behalf of the New York Stock Exchange was cited in the majority opinion. Stephen Shapiro, of Chicago-based Mayer Brown, who argued the case for Motorola and Scientific-Atlanta, disputed the factual allegations against his clients. However, the core of his argument was that third-party shareholder suits would raise the overall litigation risk facing U.S. industry to levels that exist in no other country. That, he continued, ultimately would be counterproductive even for most of the aggrieved shareholders. About 75% of shares in the U.S. economy are owned by institutional investors that find themselves acting as plaintiffs about as often as they act as defendants in an endless round robin of shareholder litigation, Shapiro said. “The broader policy question is, ‘Who benefits from this whole category of suits?’ ” he said. “ When these suits get filed, there is a huge drop-off in the stock value of the company that is sued. The ma-and-pa investors who buy and hold are left out because they are not in the class period. The big institutional investors who buy and sell all the time are in the class but, on balance, the litigation makes no difference to them. This is just a deadweight loss with lawyers raking off huge fees on each side.” The New York Stock Exchange’s amicus brief drew heavily on the work of the Committee on Capital Markets Regulation, founded by Hal Scott, director of international financial systems at Harvard Law School. The committee took 13 measures of competitive vitality and concluded, in two reports issued since late 2006, that American public equity markets are weak in 12. The committee found that in the first 10 months of 2007, a record 56 foreign companies delisted from U.S. exchanges, compared with 30 in 2006 and 12 a decade ago. Of the 20 largest global initial public offerings (IPOs) in 2006, just one was listed on a U.S. exchange. There were none during the first 10 months of 2007, compared with eight of 20 in 1996. Kennedy listens The majority opinion, by Justice Anthony M. Kennedy, noted that the approach taken by the Charter Communications shareholders would “expose a new class of defendants” to third-party securities litigation. “Overseas firms with no other exposure to our securities laws could be deterred from doing business here,” Kennedy wrote. “This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.” “We had one real point of great value to the court, which is that companies can go offshore to list in Singapore or London,” Sullivan said. “The number of IPOs offshore exceed the number in New York. That is an astonishing fact. I suspect the court didn’t focus on this until the brief.” One immediate follow-up to the Stoneridge decision was the Supreme Court’s refusal to hear a shareholder suit claiming more than $40 billion from commercial and investments banks that lent money and entered into contracts with Enron Corp. In re Enron Corp. Securities, Derivative & ERISA Litigation, 439 F. Supp. 2d 692 (S.D. Texas 2006). Stan Grossman of Pomerantz Haudek Block Grossman & Gross in New York, who argued the shareholders’ case, said the decision actually expanded liable conduct to include any deceptive conduct, not limited to a misstatement or omission. “There are certainly people who will be exonerated by this decision, but the announcement that scheme liability has been knocked out is a bit premature,” Grossman said. “The internal memos that defense firms put out are saying this decision is not the end of this area of litigation.”

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