Sen. Arlen Specter (D-PA) chaired a Senate Judiciary Committee hearing last week on his bill, S. 1551, the Liability for Aiding and Abetting Securities Violation Act. Specter’s legislation would return securities fraud litigation to the world before the Supreme Court’s ruling in Stoneridge v. Scientific Atlanta, that is, allow suits against third-party vendors (for example, manufacturers and suppliers) not directly involved in fraud schemes.
The National Association of Manufacturers regarded the Stoneridge case as one of the most important decided by the U.S. Supreme Court in 2008. The NAM had filed a brief in 2007 arguing that expanded liability was not provided for in the statute, and that such expansion would have chilled legitimate commerce, harmed the economy, encouraged frivolous claims, increased the costs of litigation, and encouraged coercive settlements. The arguments would obviously apply to Sen. Specter’s legislation, as well.
Hence we cite the prepared statement of Adam Pritchard, Frances and George Skestos Professor of Law at the University of Michigan Law School:
S. 1551 would tear down the safeguards that the Court adopted in Stoneridge and Central Bank, creating the potential for the securities laws to be injected into a wide range of ordinary commercial transactions. As Justice Kennedy recognized in Stoneridge, expanding liability to secondary actors would undermine the United State’s international competitiveness and raise the cost of capital because companies would be reluctant to do business with American issuers. Issuers might list their shares elsewhere to avoid these burdens, thereby further fueling the flight from America’s securities markets.
Commercial counterparties of the sort named as defendants in Stoneridge and Central Bank are just a sideshow to S. 1551’s real purpose. The goal of the bill is to rope in more “deep pocket” defendants to feed the plaintiffs’ bar’s lucrative class action machine. That class action machine generates enormous fees that support the “pay to play” political contributions that plaintiffs’ lawyers use to persuade state pension funds to bring the lawsuits that help keep the machine rolling.
By offering up additional targets to the class action bar, S. 1551 promises to worsen the fundamental problems that make America’s securities class action regime so dysfunctional and destructive of shareholder wealth. Securities class actions are already an enormous drain on America’s capital markets. S. 1551 would make a bad situation worse.
Consider the effects of a more litigious, expensive and capricious economic environment on manufacturers planning for expansion as the recession comes to a close and growth returns.
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