Corporate Governance

Stoneridge Redux: The Enron Case (Part V)

By J. Robert Brown

We are discussing the significance of the Supreme Court's decision in Stoneridge.  As we have noted, the decision did not turn on common law principles or the language of Section 10(b).  It was an expedient designed to exonerate the particular vendors in the case.  As a result, it provided little guidance to lower courts seeking to implement the reasoning.  

The next shoe to drop in the area is likely to be the district court's decision in the Enron case (Newby v. Enron).  The case had gone to the Fifth Circuit on the issue of class certification. The Fifth Circuit reversed and while the decision was limited to the class certification issue, the panel's reasoning went to the merits. In effect, the court held that the investment banks were not liable as secondary actors. The court emphasized that they had not made any false statements (or were under a duty to disclose). The Supreme Court, in the aftermath of Stoneridge, denied certiorari.

Lead Plaintiff has filed a supplemental brief in connection with a pending motion for summary judgment (a copy is on the DU Corporate Governance web site) explaining the impact of Stoneridge.  Most interestingly, Lead Plaintiff took the muddled reasoning in Stoneridge and used it affirmatively.  Having differentiated between the realm of finance and ordinary business operations, the Lead Plaintiff took the position that the investment banks were involved in the capital markets and, as such, had a greater duty to the market.

• The defendant Banks, unlike the Stoneridge defendants, engaged and interacted with the Enron market on multiple levels, through a web of market-related activities.  Taken together (and in some instances taken singly) these multiple points of contact with the market created a duty to disclose the Banks' knowledge of the falsity of Enron's reported financials.

The contact points between the investment banks and the market included the trading in "common stock in transactions known as equity swaps or equity forwards," underwriting, marketing Enron securities, interacting with credit rating agencies in matters relating to Enron, transacting in "Enron credit-default derivatives" and issuing analyst reports discussing Enron's financial condition and recommending the purchase of Enron stock.  Or, as the brief noted:  "This is perhaps another way of saying that the Stoneridge defendants had little if any contact with the marketplace in which Charter Communications securities were traded; in contrast, these investment Banks sought out and nurtured extensive and ongoing contacts and relationships with the marketplace in which Enron securities were traded."

In other words, the Lead Plaintiff is trying to use the language intended to exonerate vendors as a means of increasing the duties of non-vendors.  Because vendors have never been routinely sued, even in the aiding and abetting era, a standard making it harder to reach them will result in little actual change.  On the other hand, the result oriented reasoning of the Supreme Court may, ironically, makes it easier to sue other classes of third parties, particularly banks and investment banks. 

Full post as published by The Race to the Bottom on April 11, 2008 (boomark / email).