Risk & Compliance

DoJ Stifles SEC Message to High Court

The Bush administration let the deadline pass for filing an amicus brief that would have supported Enron shareholders in a Supreme Court case addre...
Sarah JohnsonJune 12, 2007

The Bush administration has decided not to file an amicus brief in support of shareholders in a Supreme Court case that could determine whether business partners of companies that commit fraud can also be held directly liable for securities violations.

The Securities and Exchange Commission reportedly asked the U.S. solicitor general — which files the government’s opinion on Supreme Court cases — to file an amicus brief in support of the shareholders in a case involving securities rules to be heard by the country’s highest court this fall. The deadline for filing a brief in support of the plaintiffs was Monday, June 11. A spokesman for the Department of Justice, which oversees the solicitor general’s office, confirmed to CFO.com that the solicitor general did not file a brief.

SEC spokesman John Nester declined to comment. According to published reports, the commissioners voted 3-2 to support investors’ point of view in Stoneridge v. Scientific-Atlanta, a case which looks at whether third parties can share direct responsibility for company fraud.

That question could be answered if the case is lumped together with another case involving scheme liability and some of the banks once associated with Enron.

The lead plaintiff’s attorney in the Enron case, William Lerach, has requested that the Supreme Court hear his client’s appeal for its suit against Merrill Lynch, Barclays, and Credit Suisse along with the Stoneridge case, which involves investors of Charter Communications. If that happens, legal experts believe the decision will answer the question of whether so-called secondary actors — such as banks, audit firms, or vendors — can be considered directly liable for securities fraud.

The court has yet to decide whether it will agree to combine the cases. The justices have also not decided whether to hear the Enron case. Lerach went to the Supreme Court when the class certification of the class-action suit against the three banks — set for trial this past spring — was overturned by a federal appeals court. The Fifth Circuit’s majority opinion said the banks did not have a direct responsibility to Enron’s investors.

SEC chairman Christopher Cox was pressured by investor advocates, the plaintiff’s lead attorney in an Enron-related case, and lawmakers to have his agency submit an opinion on the Stoneridge case. A recent Wall Street Journal article claimed the scheme-liability litigation was a litmus test for whether Cox favors business interests.

Pro-business groups worry about the effect the cases could have on the number of shareholder lawsuits. “The Stoneridge case and its theory of ‘scheme liability’ is a bold attempt by plaintiffs’ attorneys to drastically expand securities class actions at the same time prominent academics and others are questioning whether the existing system, which duplicates SEC enforcement actions, benefits investors,” said U.S. Chamber of Commerce’s Institute for Legal Reform President Lisa A. Rickard in a statement released in anticipation of the deadline for the amicus filings in support of the plaintiffs.

The Supreme Court has not given a deadline for when amicus briefs on behalf of the defending companies need to be filed in the Stoneridge case.

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