In High Court Filing, It's U.S. vs. Investors
Thursday, August 16, 2007
The Bush administration yesterday sided with accountants, bankers and lawyers seeking to avoid liability in corporate fraud cases, arguing that investors must show they lost money after relying on deceptions by third parties in order to proceed with private lawsuits.
Ending weeks of speculation and intense lobbying, U.S. Solicitor General Paul D. Clement backed business interests in a multibillion-dollar dispute the Supreme Court will hear this fall. Allowing investors to move forward with their case, Clement wrote in a filing to the court, flies in the face of congressional intent and would amount to "a sweeping expansion" of the law.
The case is being closely watched because it could set a precedent for whether investors such as Enron retirees will be able to recover losses from business partners whom they say knowingly took part in fraud schemes. Often, legal experts say, accountants and bankers are the only remaining sources of money after a fraud unravels.
The lawsuit by Charter Communications investors against the company's former business partners -- Motorola and Scientific-Atlanta -- drew federal lawmakers, trade groups, investor protection activists and former regulators who lined up on opposite sides of the case. The Supreme Court is scheduled to hear oral argument in the dispute Oct. 9.
The five-member Securities and Exchange Commission voted earlier this year to support plaintiffs in the case, but the agency's brief was not filed with the court since the administration speaks with one voice, through Clement. The SEC did not sign the brief submitted yesterday.
In the filing, Clement mostly adopted concerns expressed by President Bush, Treasury Secretary Henry M. Paulson Jr. and major trade groups including the U.S. Chamber of Commerce and the National Association of Manufacturers.
Weighing in for plaintiffs, Clement argued, would expose third parties in the United States and overseas to billions of dollars in legal claims and "considerably widen the pool of deep-pocketed defendants that could be sued" for misrepresentations by their business partners.
At issue in the case is whether shareholders can sue banks, law firms, accounting firms and suppliers who engaged in fraud but did not make public statements about the scheme on which investors relied. Clement said that third parties who do not speak to the market still can trigger prohibitions on manipulative or deceptive conduct. But to prevail, he said, private plaintiffs must prove they relied on the third parties to make investment decisions and that they suffered losses as a result.
"Words or actions by a secondary actor that facilitate an issuer's misstatement but are not themselves communicated to investors, simply cannot give rise to reliance (and thus primary liability in a private action)," according to Clement's filing.
In a footnote, he rejected an argument advanced by securities regulators in a lawsuit involving AOL Time Warner only a few years ago. There, the SEC maintained that so long as the company and its partners intended to get false information into the marketplace as part of a scheme, plaintiffs could satisfy legal requirements and proceed.
Earlier this week, 16 former SEC officials, including onetime chairmen Harvey L. Pitt and Roderick M. Hills, filed court papers calling the plaintiff's theory "a semantic ploy" to get around a 1994 Supreme Court decision that made it impossible for investors to sue accountants, lawyers and bankers for aiding and abetting a client's fraud.
"The plaintiffs' bar has been searching for new ways to circumvent the law," said Robin Conrad, an executive vice president at the U.S. Chamber of Commerce, which filed its brief yesterday.
Business advocates pointed out that the SEC and Justice Department officials already can pursue cases against third parties. They warned that allowing such private lawsuits to proceed would have the practical effect of forcing businesses to settle cases rather than risk crippling jury awards.
"Litigation, transaction, and compliance costs would soar -- squeezing bottom lines for companies in the U.S. and deterring foreign investment -- at the expense of the American economy, its workers and investors," warned Marc Lackritz, chief executive of the Securities Industry and Financial Markets Association.
In recent weeks, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), House Financial Services Committee Chairman Barney Frank (D-Mass.) and House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) made court filings on behalf of investors in the case. Attorneys general from nearly three dozen states filed similar papers. And former Enron employees and investors held news conferences in Texas and Washington, among other cities, to press their case with lawmakers.