Wrapping up loose ends in our blogging on the Senate financial regulation bill, we should note that the Senate did not consider Sen. Arlen Specter’s amendment to overturn the U.S. Supreme Court’s ruling in Stoneridge v. Scientific Atlanta, which would have expanded liability in securities fraud litigation to manufacturers and suppliers who took no part in the scheme. The NAM had “Key Voted” against the amendment, which would have empowered class-action attorneys to find more deep pockets they could dig into.

The reality is that with Sen. Specter’s defeat in the Pennsylvania Democratic Senate primary, he loses much of his ability to push unpopular legislation like the Stoneridge amendment.

Legislation from Sen. Herb Kohl (D-WI), on the other hand, definitely remains in play, even though his amendment, to overturn the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., was not considered. The amendment, S.Amdt. 3788 also known as the Discount Pricing Consumer Protection Act, would have made resale price maintenance agreements per se violations of federal antitrust laws. Passage would be disservice to consumers and invite more litigation. (See this Shopfloor post for an explanation.)

Unfortunately, the Senate bill — S. 3217, converted into H.R. 4173 — does include “proxy access” provisions to federalize corporate governance rules and allow outside groups — unions, activists, etc. — to force their way into corporate decisionmaking to the detriment of the shareholders.

McClatchy covers the story today, Senate financial overhaul could bring change to the boardroom”:

Many lawmakers weren’t even aware that the provision was in the bill, said Sen. Judd Gregg, R-N.H., blaming the size of the 1,400-plus page bill.

“It is an inappropriate idea, especially inappropriate for the federal government to bury it in this bill. This language applies to every publicly traded corporation in America, not just the financial institutions. Why is it buried in this bill? It should not be in there,” Gregg said.

Senate Majority Leader Harry Reid (D-NV) filed two cloture motions on Monday to bring to a close debate on S. 3217, the financial regulation bill, and the Dodd substitute bill, which will embrace all the changes made to the bill. The move means cloture votes on Wednesday.

Why now? So Senators can see what happens in tonight’s Democratic primaries in Pennsylvania and Arkansas. Two Senators with pending amendments will learn their political fates: Sen. Arlen Specter (D-PA) is supporting an amendment to overturn the U.S. Supreme Court’s ruling in Stoneridge v. Scientific Atlanta, inviting more securities lawsuits; Sen. Blanche Lincoln (D-AR) has pushed language to regulate derivatives.

In other speculation: Democrats may filibuster? Suppose it’s possible, maybe, probably not. Ezra Klein summarizes the issue:

Senate Democrats are threatening to filibuster financial reform unless their demands are met, report Meredith Shiner and Carrie Budoff Brown: “Sen. Byron Dorgan (D-N.D.) has said he will filibuster the bill unless the Senate votes on his amendment banning a speculative financial instrument known as a ‘naked’ credit default swap. Sen. Maria Cantwell (D-Wash.) has done the same, saying she needs a vote on her amendment separating commercial and investment banking operations.” Majority Whip Dick Durbin says he’s confident all Democrats will get on board.

And you know, it’s not as if the fait is accompli. Michael Grunwald at Time comments, “Financial Reform Inevitable? Don’t Bank on It.”

P.S. Ezra Klein’s Wonkbook news roundup at voices.WashingtonPost.com is nicely done. A new daily read.

While the National Association of Manufacturers has made the investment-discouraging derivatives provisions of the financial regulation bill its focus of attention, S. 3217, other sections of the bill would also add uncertainty and increase the costs of doing business in the United States. The Washington Post, among others, caught up on those provisions over the weekend. For example, there’s the corporate governance language, which would allow special-interest groups like organized labor and environmentalists to force their political agendas upon stockholders.

“CEOs from far and wide band against financial bill provision“:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.

“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”

The NAM and other business groups signed a joint letter to Congress last month sharply opposing the provisions.

The consumer protection provisions of the financial regulation bill also represent a major expansion of government control over the economy, directly through the federal government as well as indirectly — and potentially even more damaging — through state attorneys general and their political allies in the plaintiffs’ bar. The Post’s story, “Lawmakers, financial firms push to limit state power on consumer protection,” reports on the efforts by Sen. Tom Carper (D-DE) to rein in the most harmful elements in the bill.

Carper said he shares the White House’s goal of establishing a new consumer protection bureau to guard against fraud and deceptive practices.

“All my amendment says is that we should make that bureau do its job. This is the cop on the beat that we need,” Carper said. He warned that if state regulators are also allowed to pursue cases against national banks, this would cause confusion as consumer protection rules are interpreted differently by dozens of separate governments.

Carper’s amendment, which would limit the ability of state attorneys general to enforce federal law against national banks, has more than a dozen sponsors on both sides of the aisle. It could come up for debate early next week.

Sen. Carper’s amendment is S.Amt. 3949, and the text is available here.

The NAM has also opposed Sen. Specter’s amendment to expand liability in securities fraud litigation to parties not involved in the fraud, i.e., his attempt to overturn the U.S. Supreme Court’s ruling in Stoneridge v. Scientific Atlanta. On Thursday, Sen. Specter (D-PA) urged his colleagues cosponsoring the amendment to come to the Senate floor in support of it, but according to the Congressional Record, none did. The Senate is expected to vote on amendments this evening, but it seems safe to say the Specter amendment will not be considered until after the results of the Pennsylvania primary election on Tuesday. If Senate Majority Leader Reid files cloture on the entire 1,400-page bill today, as reported, then the Stoneridge amendment may be stone dead. That would be good.

Sen. Mike Enzi (R-WY), the only accountant in the U.S. Senate, took to the Senate floor Thursday to explain why the amendment by Sen. Arlen Specter (D-PA) to expand liability in securities litigation would be so detrimental to investment. 

The National Association of Manufacturers opposes the Specter amendment (Key Vote letter) because it could render a manufacturer liable for some other company’s securities fraud, the only connection being that the other company sold the manufacturer’s products. Accounting firms, financial consultants and other third parties are also alarmed at the Specter amendment’s attempt to turn them into deep-pocket defendants.

As Sen. Enzi stated:

[The Specter amendment] standard only requires that one knows of the “improper conduct,’” not that he “knows that the conduct is improper.” This is a critical and unacceptable difference. To be clear, the standard does not even meet what is used by the SEC to prosecute criminal aiding and abetting charges. The SEC standard is significantly higher. Because the standard in this amendment is so flawed, we would be opening thousands of innocent small businesses to secondary charges of fraud.

Again, we are not talking about criminal charges. These charges would be strictly considered in a civil court. Keeping this standard would give profit-motivated trial lawyers a vague statutory standard to work from–not a good combination. They would be able to cast a wide net for defendants, and this opens professionals in their company to the costs of discovery and trial, in addition to potential liability for damages awarded in the rest of the criminal case.

Let’s not forget we are talking about accountants, tax preparers, and attorneys who aid everyday companies. This means these professionals would be faced with a standard of evidence they cannot refute or argue, and they could likely be facing unfounded charges. …

Their options under this standard would be pleading out for millions of dollars, even if innocent, or losing even more in the long process of discovery and trial in order to defend themselves and their work. All this for someone who may not even know the criminal or have known that the person’s actions were criminal. Is this how our country’s legal system is supposed to work? Are we going to incentivize frivolous lawsuits? The Specter amendment standard may even go so far as to hold these professionals liable for not finding fraud.

For another, non-manufacturing perspective on the dangers of the Specter legislation (first written as S. 1551) we commend analysis by Kevin LaCroix of the D&O Diary blog, who comments on issues related to directors and officers’ liability. In “Specter’s “Aiding and Abetting” Bill: Why it Could Pass and Why it Matters” last year, LaCroix wrote: (continue reading…)

The National Association of Manufacturers just sent a “Key Vote” letter to the Senate opposing the Specter amendment to S. 3217, the financial regulation bill. Gist of the letter:

Manufacturers strongly support the U.S. Supreme Court’s 2008 Stoneridge decision, which protects manufacturers from unfairly being held liable in securities litigation solely because they might have deeper pockets than the company that engaged in securities fraud. The decision also reaffirmed that defendants may not be sued for aiding and abetting another corporation’s violations; only the Securities and Exchange Commission or certain state prosecutors may bring such actions.

The Specter amendment overturns Stoneridge and re-opens the door to frivolous lawsuits. Specifically, it does not require defendants to have “actual knowledge” that their conduct is assisting a fraud; rather, it requires only that defendants have “actual knowledge of the improper conduct underlying the violation.”

Hence, despite recent modifications to the amendment, defendants could still be subject to liability claims even when they have no knowledge that the conduct of their business partners is unlawful.

Exposing manufacturers and other defendants to increased liability claims in securities litigation could chill legitimate commerce, harm the economy, encourage frivolous claims, increase the costs of litigation, encourage coercive settlements and cost jobs.

The NAM uses “key votes” to assess a member of Congress’ voting record on manufacturing issues. The selection of votes is determined by a committee of representatives from member companies.

Earlier posts.

UPDATE (12:15 p.m.): The NAM joined other business associations in this separate letter opposing the Specter amendment. It notes the Senator’s efforts to gain support by modifying the language, but change does not mean improvement, in this case.

SA 3776, as modified, represents the third version of Senator Specter’s attempt to expand private liability under the securities laws. This version of his amendment requires “actual
knowledge of the improper conduct underlying the violation” and of “the role of the person in
assisting in such conduct.” But this formulation does not correct the flaws in his earlier versions.
It continues to require that the defendant have actual knowledge only of the primary violator’s
conduct—the “improper conduct” in the words of the amendment—and does not require that the
defendant know that this conduct was unlawful. This language continues to reflect a superficial
change from the original Specter legislation, which was met with heavy criticism because it
would have extended private liability even to those who provide such assistance “recklessly.”

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.

As noted here and here, Senator Arlen Specter (D-PA) is sponsoring a $1.6 billion tax break for trial lawyers, allowing them early deductions for loans to finance contingency fee lawsuits.

The Senator has now introduced another bill that benefits the litigation industry, in this case, the class-action securities lawyers. (Remember “King of Torts” William Lerach, who went to federal prison for his schemes.) The bill, S. 1551, is called the Liability for Aiding and Abetting Securities Violations Act and is is meant to overturn the U.S. Supreme Court’s 2008 decision in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc.

The Wall Street Journal’s opinion page today describes what that means. From “The Specter of Unlimited Liability“:

In 2000, Scientific-Atlanta and Motorola agreed to sell cable boxes to Charter Communications, which was creative in booking these deals and had to restate its financial results. Scientific-Atlanta and Motorola had done nothing more than enter into contracts with its customer, Charter, on terms requested by that customer, and had accounted for the deals properly. Nonetheless, the Stoneridge investment firm sued the two suppliers, alleging a “scheme” against Charter investors.

In striking down this suit, the High Court called the case “a private cause of action against the entire marketplace in which the issuing company operates.” It also pointed out that Congress decided not to provide a private cause of action against secondary parties when it passed the Private Securities Litigation Reform Act in 1995 and Sarbanes-Oxley in 2002. The Securities and Exchange Commission already has the authority to punish fraud and distribute fines to victims. Private lawsuits are about trying to use expansive liability claims that distort justice and harm the shareholders of innocent but deep-pocketed companies.

And private lawsuits are what the bill from Senator Specter and Senator Jack Reed (D-RI) would encourage.

The NAM filed an amicus brief in the Stoneridge case. More …

• Am Law Litigation Daily, “There He Goes Again: Arlen Specter Now Wants to Roll Back Stoneridge, Too
• WSJ Law Blog, “Specter, Other Dems, Looking to Reverse Huge Securities DecisionSpecter Law Would Let Investors Sue Fraud Accomplices
• Bloomberg, “Specter Law Would Let Investors Sue Fraud Accomplices“

All in the tongue of the beslurper…

Anyway, last week ended with the usual wrap-up stories about the just-completed term for the U.S. Supreme Court. Dow Jones especially had a good review: “Supreme Court Term Is Mixed For Business, But Wins Were Big“: “The U.S. Supreme Court handed the business sector a mix of wins and losses in the 2007-2008 term ending Friday, but when business did win, it won big.” The opinions Dow-Jones highlights are Stoneridge, Riegel v. Medtronic and the Exxon Valdez case. More…

• Associated Press: Long quiet, justices end their term with a growl
• Associated Press: Summaries of leading Supreme Court cases
• USA Today: Paradox marks Supreme Court term
• Los Angeles Times editorial: The evolving Supreme Court
• New York Times, Linda Greenhouse: On Court That Defied Labeling, Kennedy Made the Boldest Mark
• Legal Times, Tony Mauro: Despite June Fireworks, a Calmer Supreme Court Term
• Christian Science Monitor: A Less Deferential High Court

Meanwhile, Akin Gump Strauss Hauer & Feld LLP and SCOTUSblog.com issued their annual end-of-term statistical summary of the U.S. Supreme Court’s decisions. A few highlights:

• The Justices issued 67 merits opinions after argument this term, the lowest number since the 1953-54 Term
• The Justices decided 71 cases in total this term, the lowest number of decisions in recent memory.
• Five-to-four rulings represented 17 percent of the term’s opinions; last year’s percentage was 33 percent.

 Crossposted from Point of Law.com.