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August 24, 2007

Copland on Stoneridge v. Scientific-Atlanta

Jim Copland, the director of the Center for Legal Policy at the Manhattan Institute, provides this particularly lucid analysis of the important legal and public policy issues involved in the pending Supreme Court case of Stoneridge Investment v. Scientific-Atlanta, which could seriously erode the longstanding Central Bank rule against holding financial institutions secondarily liable for damages in providing financing for a company that defrauds its investors:

Nothing in the securities laws as written enables private investors to file lawsuits over alleged frauds. Courts have inferred such “private rights of action” stemming from section 10(b)(5) of the Securities Exchange Act of 1934, but the Supreme Court limited such private suits to “primary” violators in 1994 in a case called Central Bank of Denver v. First Interstate Bank of Denver. The court expressly declined to embrace liability for companies “aiding and abetting” frauds that injured shareholders.

After Central Bank, Congress quickly jumped in to clarify that the Securities and Exchange Commission itself had authority over an entity that “knowingly provides substantial assistance to another” in securities-related frauds. But Congress wisely decided not to extend such authority to private lawsuits.

If the Supreme Court decides to endorse such suits notwithstanding congressional inaction, the implications for U.S. competitiveness could be profound. Anyone doing business with a publicly listed American company would be subject to a potential lawsuit should that company’s stock price tank — and would thus have to hire extra auditors and take out insurance policies to protect against such lawsuits. The disadvantages for listing on American stock market, already significant, would be that much more substantial.

And if you want an example of the absurdity of what would happen if the Central Bank rule is overturned or eroded, read this.

Posted by Tom at August 24, 2007 12:15 AM

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Posted by: Rastus at August 28, 2007 5:10 PM

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