Two Critics, One Supporter of Stoneridge Decision

By January 15, 2008Briefly Legal

To add a little variety of commentary on the Stoneridge decision…Jay Brown at the University of Denver Law School, blogging at The Race to the Bottom, disagrees with the 5-3 decision in Stoneridge. Posts here, here and here.

This opinion, as we’ll talk about later, is nothing more than a policy decision designed to reduce the right of shareholders to bring actions against those who commit securities fraud. It is part of a general approach to reduce the rights of shareholders, with the Commission’s denial of access part of that.

Our lawyers would disagree, but it’s kind of interesting to have the “courts making policy” criticism thrown our direction. That’s our argument!

Elizabeth Nowicki of Tulane, blogging at Truth at the Market, makes numerous credible legal arguments and then spots the same Stevens quote we did, finding it not as congenial.

7. One more thing: Justice Kennedy writes in his opinion that, if the Court is too broad with its interpretation of Section 10(b), “[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here.” In the margin of the opinion next to that language, I wrote “huh?” For the love of all things good and holy, why would Kennedy include that kind of hyperbolic dicta needlessly into an opinion that is already anti-investor? I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years. The reality is that overseas firms aren’t going to be deterred from doing business here, because they KNOW that the sort of facts we see in Stoneridge usually don’t make it to court due to problems with the “in connection with” element of Section 10(b). Kennedy’s “overseas firms” comment strikes me as a bizarre attempt to get on the “capital is going overseas” band wagon some anti-regulation wonks have recently been driving around blindly. The “capital is going overseas” cry, even if we assume its truth, is not a reason to stop enforcing Section 10(b). Reading Justice Kennedy’s nod to the overseas market hysteria made me feel so… cheap and dirty. Trendy doomsday rhetoric from the Supreme Court is, in my mind, equivalent to the Justices ending an opinion with “woot” or something.

Why would he include it? Because it’s true?

Stephen Bainbridge, William D. Warren Professor of Law at the University of California at Los Angeles, who has written extensively about Stoneridge, said the case exemplifies European perceptions of capricious litigation risk when doing business in the United States.

“[The defendants] allegedly knew this was essentially a straw man transaction for accounting considerations, but they never lied to the investors and that is what the securities laws are designed to address,” Bainbridge said.

“It’s the kind of case that conveys the notion our law casts a very broad net and you face significant liability risks [in the United States] that are not present elsewhere,” he said. “Companies find they can raise capital from investors who will purchase their securities even in jurisdictions that seemingly offer fewer protections. Maybe the investors are making a big mistake, but the fact is investors are buying those securities, so the question is: Have we gone overboard here in the U.S.?”

Bainbridge blogs at BusinessAssociationsBlog.

Join the discussion One Comment

  • Joe Dragon says:

    (“[The defendants] allegedly knew this was essentially a straw man transaction for accounting considerations, but they never lied to the investors and that is what the securities laws are designed to address,” Bainbridge said.) Huh? Could you explain this a little better? They knew they were using a straw man transaction to boost profit perception but that’s not lying to investors? Then what is? And if this suit doesn’t belong in the courts where does it belong? Congress and the SEC are doing nothing so who is going to hold the “straw men” creators responsible?

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