The financial regulatory legislation being debated by the Senate is attracting the usual sort of special-interest amendments you expect with major pieces of legislation. Attaching separate bills to major legislation is a tried-and-true maneuver that has, no doubt, helped legislation that manufacturers support, so we won’t pretend outrage. It’s the substance of these specific provisions that is objectionable.

Below, we noted Sen. Specter’s amendment to countermand the Supreme Court’s ruling in Stoneridge v. Scientific Atlanta, which would allow trial lawyers to throw their class-action lawsuit nets wider, suing manufacturers even if they had no role in investment fraud. A stand-alone bill, S. 1551, wasn’t moving, so the Senator now seeks to attach it to the financial reg bill.

Sen. Herb Kohl (D-WI) has now  transformed his S. 148, Discount Pricing Consumer Protection Act, into Senate Amendment 3788. The legislation would overturn the Supreme Court’s 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS. The decision held that resale price maintenance agreements between a manufacturer and a retailer are not per se a violation of federal anti-trust laws.

As Rosario Palmieri, the NAM’s vice president for infrastructure, legal and regulatory policy, wrote in a March 16th letter to the Senate Judiciary Committee:

Leegin requires courts to make decisions based on substance –- the effect of the restraint on competition in a market –- rather than on formalistic analysis of whether conduct shows an agreement between a manufacturer and a reseller. In addition, it will permit defendants to defend themselves in these cases by proving facts about competitive effects that they were precluded from using under the per se rule. Leegin does not give manufacturers the green light to enter into minimum resale price agreements without the possibility of challenge; resale price maintenance is not per se legal. Resale price maintenance imposed as a result of an agreement with competing suppliers will remain per se illegal.

Sen. Jon Kyl (R-AZ) also did an excellent job explaining the impact of the Supreme Court ruling — and refuting the misrepresentations of it — during the Judiciary Committee’s consideration of the bill.

To the debate, we add this now-relevant point: The proposed legislation has nothing to do with financial regulation.

The Wall Street Journal‘s editorial today, “Dodd’s Lawsuit Makeover“:

We like to think of the 1995 Private Securities Litigation Reform Act as Senator Chris Dodd’s finest hour. Joining with House Republican Chris Cox, Mr. Dodd led an override of a Bill Clinton veto to end the scourge of “strike suits.” Prior to the law, trial lawyers would wage legal biltzkrieg against companies guilty only of a falling stock price. Since its enactment, lawyers have had to present some evidence of actual fraud before launching fishing expeditions under the civil discovery process.

So imagine our surprise to find, buried on page 795 of Mr. Dodd’s new financial regulation bill, a gift for every member of the securities trial bar that opposed his earlier reforms. We’ll have more to say about the rest of Mr. Dodd’s legislative opus, but his about-face on securities litigation is among the most dismaying of the flaws within its 1,136 pages.

The Connecticut Democrat would create new civil liability for anyone “aiding and abetting” those who violate the securities laws, making these new defendants just as liable as people who actually commit a fraud.

The provision is akin to Sen. Arlen Specter’s S. 1551, to extend liability for securities fraud to third parties — such as suppliers and manufacturers — not directly involved with the fraud. This is an attempt to return to the more-litigious lay of the land that existed before the U.S. Supreme Court’s 2008 decision in Stoneridge v. Scientific-Atlanta. (ScotusWiki entry.) In casting as wide as net as possible through “scheme liability,” trial lawyers hoped to catch big settlements from non-culpable companies. (The NAM was involved as a friend of the court. See our Legal Beach entry for more.)

Enacting the provision would further discourage investment in U.S.-traded companies and do nothing to create jobs — except in the law offices that specialize in these sorts of shakedowns.

Earlier posts on Stoneridge.

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.