Member Article

The United States Supreme Court's recent decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et al. is one of the most important securities law decisions handed down by the Supreme Court in many years. It establishes new guidelines in cases where investors seek to hold third parties (such as vendors, as well as attorneys or accountants) liable for participating in securities fraud. 

Stoneridge does not put an end to third party liability altogether, particularly where the third parties make public statements that mislead or omit material facts. However, it does put an end to "scheme liability" as a viable theory of liability in securities fraud cases against third parties who, though they may take actions that contribute to a company's misstatement of its financials, do not make public statements that do so. The Stoneridge decision notes that a third party may still be liable if plaintiffs can establish all of the elements of a Section 10(b) violation against that party, as may be the case where the third party makes misleading statements publicly. (A Section 10(b) violation may be established by proof of (1) a material misrepresentation or omission by the defendant, (2) scienter (knowing the misrepresentation or omission will mislead), (3) in connection with the purchase or sale of a security, (4) plaintiff relied on the misrepresentation or omission, (5) plaintiff suffered economic loss, and (6) plaintiff's loss was caused by the misrepresentation or omission.) Therefore, even after Stoneridge, a third party may still face liability if, for example, it makes a material public statement about a company knowing that the statement is false and will mislead investors. 

Third parties are also still subject to criminal penalties and civil enforcement by the U.S. Securities and Exchange Commission. As Stoneridge states, the government's "enforcement power is not toothless."  Federal law also allows for a private right of action in some circumstances, such as the making of untrue statements or omitting of material facts by those who sign or prepare registration statements. Beyond liability under federal law, some states allow state authorities to pursue aiders and abettors of securities fraud for fines and restitution.Delaware, for example, expressly authorizes its Securities Commissioner to seek fines, assess costs, impose special reporting requirements, or seek restitution from violators of its securities laws, including any person "who aids and abets any person who willfully violates" its Securities Act.