Many Subprime Culprits Will Escape Private Liability Because of Stoneridge Decision
22 Corporate Crime Reporter 3, January 18, 2008

What does the Supreme Court’s decision in Stoneridge Investment Partners v. Scientific-Atlanta Inc. mean for many of the culprits in the subprime debacle?

It means that they too will escape private liability.

That’s the take of Columbia University Law Professor John Coffee.

Coffee said that the Supreme Court’s Stoneridge decision “means that private liability for persons who commit knowing and egregious fraud but make no public statement is over.”

“Although the plaintiffs' bar is trying to distinguish the case, they are clutching at straws,” Coffee told Corporate Crime Reporter. “In light of the subprime mortgage issue, this could be an election year issue, as the average citizen sees no reason to immunize fraudulent behavior just because it is silent. I would think that Barney Frank (D-Massachusetts) and others in Congress would begin to think next year about legislation to restore aiding and abetting liability.”

The decision in Stoneridge was a big victory for accounting firms and banks, who faced billions of dollars in liability for the corporate meltdowns over the past decade.

They argued that shareholders would have to show that they relied on deceptive communications in buying or holding stock.

If there is fraud but no communication, there is no reliance, the Court held. And if there is no reliance, there is no liability.

Justice Anthony Kennedy, writing for the majority, held that section 10(b) of the federal securities laws “does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.”

It does not “ incorporate common-law fraud into federal law.”

Justice John Paul Stevens, writing in dissent, said “the Court’s view of reliance is unduly stringent and unmoored from authority.”

“I respectfully dissent from the court’s continuing campaign to render the private cause of action under Section 10(b) toothless,” Stevens wrote.


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