NAM President John Engler on Stoneridge

By October 8, 2007Briefly Legal

IN USA TODAY, an op-ed on Stoneridge Investors v. Scientific Atlanta by NAM President John Engler. The U.S. Supreme Court hears oral arguments in the case Tuesday.

Since the first federal securities legislation in the 1930s, the law has drawn a line between those who commit fraud and everyone else. If you violate federal rules, you may be the target of a private lawsuit. Not your outside accountants or financial advisers. Not any company with which you did business. You. Without this clear line, unscrupulous lawyers would have a hunting license to stalk any company that did any business with any publicly traded firm found guilty of violating securities law, if the company could in any way be charged with knowing, sort of knowing or “recklessly” not knowing of the fraud. Now in the StoneRidge case, named for an investment company that is the lead plaintiff, the court is asked to erase this line.

The securities-strike-suit bar has waged a full-blown public relations campaign, with too little critical attention from the media. They stand for investors, they say, as if it helps investors to wrap businesses in unending securities lawsuits.

This amazing idea is almost the exact opposite of reality, as a long line of legal and financial scholars has found. One notes, “Nearly all the money paid out as compensation in the form of judgments and settlements comes, in one way or another, from investors themselves.” Another observes that settlements “often benefit former shareholders at the expense of current ones.” And a former chief economist for the Securities and Exchange Commission (SEC) says: “When a company pays a large (supposedly pro-investor) judgment, that money comes out of the hide of existing shareholders.”

Simply put, expanding private litigation will increase, not diminish, burdens on investors. For what purpose? The SEC has full enforcement authority against so-called secondary violators, can compensate investors and exercises prosecutorial discretion.

The NAM’s news release and amicus brief about Stoneridge are online here.

Join the discussion One Comment

  • Bill Hobbs says:

    It’s worth remembering that a ruling for the defendants in Stoneridge would leave current law unchanged, while a ruling for the plaintiffs would radically alter current law.

    The Court and every federal circuit court but one have made secondary liability (the plaintiffs call it “scheme” liability) off limits for private suits.

    However, neither the Court nor Congress have set prosecution of accomplices off bounds in securities cases – they have simply left that task solely to the SEC and the Justice Department.

    This balances the need for justice in such cases with the need to protect the economy from being hamstrung and hog-tied by an avalanche of lawsuits.

    The blog “10b-5 Daily” had an interesting post recently headlined “NERA Releases Study on Recent Trends In Shareholder Class Action Litigation.”

    The gist of it is that the NERA Economic Consulting study, included the following info:

    The number of such filings has increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.

    The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.

    Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco’s announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.

    Here’s the link:
    http://www.the10b-5daily.com/archives/000853.html

    If the Stoneridge case is decided for the plaintiffs, the number of such lawsuits would skyrocket, putting a huge “scheme liability” tax on the economy.

    And the economic costs of our out-of-control legal system are already huge:

    According to the Pacific Research Institute’s study Jackpot Justice: The True Cost of America’s Tort System , America’s out-of-control legal system imposes a staggering economic cost of over $865 billion every year calculated that the nation’s tort system imposes a yearly “tort tax” of $9,827 for a family of four and raises health care spending in the U.S. by $124 billion.

    In addition, according to the PRI study, the impact of America’s overly expensive liability system on the health care industry costs lives because it “increases the cost of many risk-reducing products and services and health care services, making them less accessible, and in some cases unavailable to consumers.

    From “Jackpot Justice”:


    PRI estimates that more than 114,000 people would be alive and working today, but are not due to inefficiencies in the tort system over the last two decades.

    The practice of “defensive medicine” by litigation-fearing physicians increases American health care costs by $124 billion per year and adds 3.4 million Americans to the rolls of the uninsured.

    PRI estimates that American companies suffer more than $367 billion per year in lost product sales because spending on litigation curtails investment in research and development, and lawsuits against American corporations generate an annual loss of $684 billion in shareholder value.

    (To find the PRI study, just Google “PRI Jackpot Justice”.)

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