Bernstein Liebhard LLP Files Amicus Brief in U.S. Supreme Court on Behalf of Three States and Four Public Pension Funds in Stoneridge Case
On June 11, 2007, the Attorneys General of Arkansas, New Jersey, and Rhode Island, as well as the New York State Common Retirement Fund, the Pennsylvania Public School Employees’ Retirement System, the Pennsylvania State Employees’ Retirement System, and the Municipal Employees’ Retirement System of Michigan, filed an amici curiae (friend of the court) brief in the United States Supreme Court in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et al., the most critical investor-protection case to reach the Court in a decade. The Amici were represented pro bono by Bernstein Liebhard LLP of New York.
Combined, the Amici states and public pension funds manage an aggregate $360 billion invested in public markets and manage the retirement plans for more than 2.7 million active and retired public servants.
In Stoneridge, the Supreme Court will consider whether third parties – such as investment banks, insurers, and accountants – may be held liable when they intentionally engage in sham transactions for the purpose of enabling their clients to commit accounting fraud. The issue is of great importance to investors because many of the recent accounting scandals could never have been accomplished without the active participation of outside companies that willingly marketed and sold misleading accounting structures, or became counterparties to fictional transactions.
The issue dates back to 1994, when, in a decision called Central Bank, N.A. v. First Interstate Bank, N.A., the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 did not allow private plaintiffs to sue companies that did not engage in fraud themselves, but instead only aided and abetted those who committed fraud. However, the Court emphasized that Section 10(b) did forbid anyone from “indirectly” committing fraud. In the wake of that decision, courts struggled to distinguish “aiding and abetting” a fraud from “indirectly” participating in one.
After the implosions of companies like Enron, Global Crossing, and Parmalat, a number of courts concluded that organizations that intentionally engaged in deceptive conduct – such as engaging in sham transactions or backdating documents – for the purpose of allowing other companies to falsify their financial statements could be held liable for fraud.
In Stoneridge, the Eighth Circuit rejected these courts’ views. The plaintiff (and the SEC) alleged that a cable company, Charter Communications, agreed to “overpay” vendors for cable boxes, in exchange for having the vendors funnel the money back to Charter in the form of sham “purchases” of unwanted advertising. As a result, Charter was able to report higher advertising revenues to the public. Although the plaintiff alleged that the vendors fully understood the nature of the scheme – even going so far as to backdate contracts to allow Charter to fool its accountants – the Eighth Circuit nonetheless held that the vendors had done no more than “aid and abet” Charter’s scheme and thus would not be liable to injured investors.
The Supreme Court granted certiorari to decide whether third parties who purposefully engage in sham transactions to enable another company to falsify its financial statements may be held liable for fraud. If the Court rules in favor of the plaintiff, the threat of liability may be a critical factor in deterring similar frauds in the future.