Protecting Big Business
The U.S. Supreme Court recently handed down a ruling that limits the ability of shareholders to sue third parties — such as bankers and auditors — who advise companies that engage in accounting fraud.
More specifically, the 5-3 decision in Stoneridge Investment Partners LLC. V. Scientific-Atlanta pertains to alleged investor losses with Charter Communications, a cable company where third parties agreed to overpay $20 for cable boxes and would return the overpayment by purchasing the advertising from Charter. As a result, revenues were inflated.
However, the court ruled that this arrangement did not directly mislead investors. Supreme Court Justice Anthony Kennedy, writing for the majority, said that holding third parties liable went beyond what Congress had intended in securities law.
He also cautioned that greater liability might harm U.S. companies and deter overseas firms from doing business here.
However, the dissenting opinion, written by Justice John Paul Stevens, argued that because Charter Communications inflated its revenues by $17 million in order to cover up a $15 to $20 million expected cash flow shortfall, it could not have done so without the help of defendants Scientific-Atlanta and Motorola.
Stevens maintained that investors relied on Charter’s fraudulent revenue statements and therefore “was itself a ‘deceptive device’ prohibited by §10(b) of the Securities Exchange Act of 1934.”
Stevens, joined by Justices David H. Souter and Ruth Bader Ginsburg, had it right. The companies that knowingly helped Charter Communications inflate its revenues should be held liable.
Stevens further argues that it doesn’t make sense that a company can be in violation of state law, but not subject to liability in a private action brought by injured investors.
The ruling has been characterized as a blow to shareholders and a victory for big business.
Regardless, no one really wins when advisors aren’t held accountable for helping companies defraud investors.
While legal experts will be watching how this ruling affects other cases, it is too soon to determine exactly how it will impact other shareholder suits. Some legal experts maintain that duped shareholders will still be able to get their day in court when advisors aid corporate fraud.
What is particularly troubling about the 5-3 Supreme Court ruling is that the majority ruling simply defies common sense and the basic tenants of personal accountability — forget about integrity and honesty and Congress’ intent when it enacted the Securities Exchange Act of 1934.
The ruling sends a signal that big business gets special treatment.
When students are caught cheating on an exam, not only do they fail the exam, but so does the kid sitting at the next desk who allowed the classmate to copy answers.
People who help others commit a crime, or help them cover it up, even after the fact, are legally held accountable. Prison is home to lots of getaway drivers and individuals who knew about a crime but did nothing to stop it or bring it to the authority’s attention.
So why wouldn’t a company that helped a corporation cook its books, inflate its revenues and blatantly deceive its investors, not be held liable by its investors for its role?
WBJ Web Partners
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