This just in: Solicitor General Paul Clement filed a brief today at the Supreme Court in favor of corporate defendants and against plaintiff investors in a closely watched securities case, Stoneridge Investment Partners v. Scientific-Atlanta and Motorola. Stoneridge has been described by some as the biggest securities fraud case facing the high court in decades.
If Stoneridge wins the case, investor class actions could go after third parties -- including accountants and lawyers -- for the fraudulent acts of corporations and directors. Currently, only the government can sue such parties, under a more limited "aiding and abetting" standard. The Securities and Exchange Commission voted to support the broader theory of "scheme liability" as an added protection for investors, but Clement came under heavy pressure from the Treasury Department and President George W. Bush himself to take the other side.
Businesses fear this broad theory of liability would launch what the National Association of Manufacturers' Quentin Riegel said Wednesday will be "an indiscriminate search for deep pockets," as class action litigators sue everyone who had even a passing relationship with corporate wrongdoers. Such rampant litigation, businesses contend, would sour the economy and harm investors in the long run, even if they win bigger settlements in litigation.
Clement apparently agreed and filed on the side of Scientific-Atlanta and Motorola. Adopting the scheme liability theory, Clement said, would could expose "customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market.” Clement addedd, "Such a radical expansion of liaibility is a task for Congress, not the courts."
A slew of other business groups including NAM and the Chamber of Commerce also filed today, warning the Court of the danger of broad scheme liability. The American Institute of Certified Public Accountants, for example, filed a brief stating, "Because they are seen as having ‘deep Pockets’ and may be among the few solvent parties remaining after a corporate collapse, CPAs provide attractive targets for securities fraud plaintiffs." The case is set for argument Oct. 9.