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…)

Sen. Arlen Specter today will take to the Senate floor to argue for his amendment to expand the liability for manufacturers for violations of securities law in which the companies played NO PART. The Senator claims the amendment — his previously introduced bill — would simply overturn the U.S. Supreme Court’s decision in Stoneridge Investment Partners v. Scientific-Atlanta, but in fact, it would simply throw open the courthouse doors for trial lawyers to go after businesses because they have deep pockets.

In 2007, the National Association of Manufacturers filed an amicus brief in Stoneridge Investment Partners v. Scientific-Atlanta, supporting the Eighth Circuit Court’s ruling that reaffirmed the long-held standards of liability in securities fraud litigation.

As Quentin Riegel, the NAM’s vice president for litigation, explained at the time:

The key issue in this case is primary liability. Without question, a company must give accurate information about its own stock. But the actions of third parties are not covered by this provision of the law. Plaintiffs’ attorneys are not empowered to sally forth beyond the law in an indiscriminate search for deep pockets.

Congress made clear its intent to keep Section 10(b) confined to market actors and market-directed activities, not to expand it to manufacturers or others who simply do business with a market actor. If the petitioner prevails in this case, it will open the floodgates for litigation and have a chilling effect throughout our economy.  It also will amount to a reversal of Central Bank, in which the High Court held that only the SEC could bring an action for aiding and abetting a primary securities violation.

Riegel’s description also fit Sen. Specter’s amendment. If it passes, it will open the floodgates for litigation and have a chilling effect throughout our economy. Who supports that?

Ah, Sen. Specter just came to the Senate floor describing his targets as “aiders and abettors” to fraud. No. Not by any normal understanding of the term.

From The Blog of the Legal Times:

[Sen. Arlen] Specter has proposed an amendment to the pending financial regulatory overhaul that would override the U.S. Supreme Court’s decision in Stoneridge Investment Partners v. Scientific-Atlanta. The amendment (PDF) would allow lawsuits, including class actions, against so-called “aiders and abettors” of securities fraud. Votes on amendments are possible this week.

Also, MattLewis.org:

Bloomberg recently reported that Sen. Arlen Specter (D-PA) “plans to revive a proposal to let investors sue law firms and accountants that help perpetrate fraud…”

This would essentially overturn Supreme Court decisions — Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. and Central Bank of Denver v. First Interstate Bank of Denver — which suing third parties who had an indirect role in a fraud.

More importantly, though, it’s also a top priority of the trial lobby, who stand to gain large sums of money.

Lewis points out the campaign contributions that have flowed from trial lawyers to Specter.

The National Association of Manufacturers filed an amicus brief that argued for the position eventually reached by the Supreme Court in the Stoneridge case. As Quentin Riegel, the NAM’s vice president for litigation, said in August 2007:

The petitioner in Stoneridge is trying to persuade the High Court to overturn decades of established law and greatly expand potential liability. The law makes clear, and the Supreme Court has affirmed, that one cannot be held liable under Section 10(b) for engaging in deceptive conduct without having breached a duty to investors.

The key issue in this case is primary liability. Without question, a company must give accurate information about its own stock. But the actions of third parties are not covered by this provision of the law. Plaintiffs’ attorneys are not empowered to sally forth beyond the law in an indiscriminate search for deep pockets.

An amendment to reverse (and actually go further in countermanding) the Supreme Court’s ruling in Stoneridge would empower plaintiffs’ attorneys to sally forth in an indiscriminate search for deep pockets. It’s financial regulation by litigation and a bad idea for everyone — except some special-interest lawyers.

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“