MARCH 26, 2007

The Supreme Court granted certiorari today in one case of interest to the business community:

Securities Fraud—Rule 10b-5—Liability of Third Parties When Issuer Knowingly Engages in Fraud. In Central Bank v. First Interstate Bank, the Supreme Court held that Section 10(b) of the 1934 Securities Exchange Act does not create liability for aiding and abetting securities fraud. 511 U.S. 164, 177 (1994). That case involved claims under Rule 10b-5(b), which bars misleading statements and omissions. The Court explained, however, that “secondary actors,” such as “a lawyer, accountant, or bank, * * * may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met.” Id. at 191. The Court granted certiorari in Stoneridge Investment v. Scientific-Atlanta, Inc., No. 06-43, to determine whether Central Bank also bars claims under Rule 10b-5(a) and (c) that a party, without itself making any misstatement, participated in a transaction that was used by a public corporation to manipulate its earnings.

In 2000, Charter Communications, a major cable television provider, agreed to pay an additional $20 for each set-top box purchased from two of its vendors, Scientific-Atlanta and Motorola, in exchange for the vendors’ agreement to return those funds by purchasing advertising from Charter. The effect of this scheme was to increase Charter’s advertising revenue and, because the set-top box expenses were capitalized, its short-run profits. Two of Charter’s officers were indicted for the scheme, which also resulted in an SEC Cease and Desist Order.

Stoneridge Investment Partners sued Scientific-Atlanta and Motorola, on behalf of purchasers of shares in Charter, alleging that the vendors’ knowing participation in this arrangement constituted “a scheme or artifice to defraud” under Rule 10b-5(a) or a “course of business which operates * * * as a fraud or deceit” under Rule 10b-5(c). The district court dismissed the claims against the vendors and the Eighth Circuit affirmed on the ground that Central Bank bars aiding and abetting liability “under § 10(b) or any subpart of Rule 10b-5.” 443 F.3d 987, 992-93 (8th Cir. 2006). The court explained that “[t]o impose [primary] liability for securities fraud on one party to an arm’s length business transaction in goods or services other than securities because that party knew * * * that the other party would use the transaction to mislead investors” would be a radical extension of § 10(b) that “should be made by Congress.” Id.

That decision arguably conflicts with the Ninth Circuit’s ruling in Simpson v. AOL Time Warner, 452 F.3d 1040 (9th Cir. 2006). In its petition for certiorari, Stoneridge also contends that the transactions at issue were not arm’s-length but “absolute sham transactions” and that the Eighth Circuit’s application of Central Bank to 10b-5(a) and (c) was inconsistent with the statutory text and with subsequent decisions of the Supreme Court and lower courts.

This case raises an important question regarding the scope of § 10(b) liability and should be of interest not only to public companies but also to vendors and service providers that do business with them. Absent an extension, which is likely, amicus briefs in support of the petitioner will be due on May 10, 2007; amicus briefs in support of the respondents will be due 35 days after petitioner's brief is filed. Any questions about this case should be directed to Tim Bishop (312-701-7829) in our Chicago office.

On March 19, 2007, and February 26, 2007, the Supreme Court invited the Solicitor General to file briefs expressing the views of the United States in the following cases of interest to the business community:

Joblove v. Barr Labs, Inc., No. 06-830. The question presented is whether it violates the antitrust laws for a brand-name pharmaceutical manufacturer (and patent holder) to share a portion of its future profits with a generic manufacturer (and alleged patent infringer), in exchange for the generic manufacturer’s agreement not to market its competing (and allegedly infringing) product.

LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856. The question presented is whether Section 502(a) of the Employee Retirement Income Security Act of 1974 (“ERISA”) permits a participant in a defined-contribution plan to recover money losses in his or her pension account caused by a fiduciary breach by plan managers or administrators.

The general editor of the Docket Report is David Gossett in our Washington, DC office, who can be reached at dgossett@mayerbrown.com or 202-263-3384.