Corporate Governance

Stoneridge Affirmed (Part 3)

By J. Robert Brown

This case is a loss for plaintiffs.  No dispute there.  But at least the Court unanimously disagreed with the 8th Circuit's reasoning. 

The lower court held that to fall within Section 10(b), some type of "misstatement or a failure to disclose by one who has a duty to disclose" was required.  This would have limited suits under the antifraud provisions to the company making the false statement or those with a duty to disclose.  Such a holding would have thrown into doubt even those who participated in the drafting process (officers, directors and accountants).  The majority (with the agreement of the dissent) put an end to that line of inquiry. 

• If this conclusion [by the 8th Circuit] were read to suggest there must be a specific oral or written statement before there could be liability under Sec. 10(b) or Rule 10b-5, it would be erroneous.  Conduct itself can be deceptive, as respondents concede.  In this case, moreover, respondents' course of conduct included both oral and written statements, such as the backdated contracts agreed to by Charter and respondents.

These cases will no longer turn on whether the deceptive behavior had to involve disclosure.  Falsifying documents and other actions can be deceptive.  Future issues will instead turn on whether the deceptive act was somehow communicated to the public. 

Full post as published by The Race to the Bottom on January 15, 2008 (boomark / email).