We’ve seen many, many articles about the excesses of Sarbanes-Oxley driving international corporations away from U.S. stock exchanges into more welcoming, less expensive, more reasonable regulatory environments. If a company goes public, odds are it will happen via London, not New York. (See also here and here and an opposing point of view here.)
You can now add to that investment stifling the threat of Stoneridge, as the Economist explains, “the most important securities-litigation clash in a generation.”
The case involves a cable company, Charter Communications, which used a transaction with two suppliers of set-top boxes to inflate its revenues. Shareholders sued not only the company but the vendors too, claiming that they participated in the fraud, even though they may not have been aware of the misreporting. Led by the legendary Bill Lerach, plaintiff lawyers have lobbied ferociously for the principle of going after third parties, known as “scheme liability”.
Manufacturers would be targets, too, of the rapacious, economy-killing trial bar.
The case is drawing international attention, as today’s article in The Telegraph of London demonstrates:
British companies that conduct business in the United States or do deals with American companies could find themselves sued for billions of dollars as the result of a landmark case before the Supreme Court.
Boyden Gray, the US ambassador to the European Union, told The Sunday Telegraph that the case, described as the most important business law battle in America for 20 years, could severely damage transatlantic trade.
Under current law, any company that issues shares in the US is liable for big class-action compensation pay-outs if they file false accounts or mislead their shareholders.
But the Supreme Court has announced it will consider whether any other third-party supplier, legal firm, accountant or bank that works with the offending company could also face claims from defrauded investors and shareholders.
That means a British company could find itself dragged into court if a business registered in the US to which it sold goods or services made misleading financial statements – even if it knew nothing of the fraud.
Seen from the perspective of across the pond, it must appear as more of the United States as a nation of, by and for the lawyers, and certainly not an invitation to do more business here. Well, we should be worried ourselves. As Boyden Gray observes:
If there’s a choice between doing business with a company that is listed in New York or one that is not, you would go with the one that was not. It’s just not healthy for the transatlantic investment climate.
There could be benefits to London over New York but that’s short-sighted: all investors would lose. The liabilities involved would be so great that you can’t afford to lose a case like this.
Why do we keep shooting ourselves in the foot?
The story also cites NAM President John Engler, who wrote a Washington Post column on the case here, and the American Enterprise Institute’s Peter Wallison, a legal and financial expert, who provides a clear summary of the stakes in “Contagious Liability Would Sicken Our Capital Markets.”
UPDATE The “why are we shooting ourselves in the foot?” question should be more accurately phrased, “Why is the trial bar shooting us?” Meant metaphorically. Here’s a column from the group formerly known as the American Trial Lawyers Association.
As the Supreme Court considers this issue, the Court will have before it AAJ’s brief in support of those whose savings and retirement plans may be wiped out by stock manipulation. We argue that the scope of the private cause of action under [section] 10(b) should encompass those who knowingly participate in a manipulative scheme that foreseeably would defraud investors.
Sure you do.
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