Corporate Governance

Stoneridge Affirmed (Part 5)

By J. Robert Brown

The Supreme Court affirmed the 8th Circuit's decision in Stoneridge, concluding that the vendors in that case could not be sued in a private action under Rule 10b-5.  The opinion is here.

In the end, the case can be explained by the majority's dissatisfaction with the judicial creation of a private right of action under Rule 10b-5.  Were this issue before the Court today, there is no doubt that it would decline to create such an action.  Nonetheless, this opposition now forms a template for the interpretation of the provision. 

No longer will common law notions of fraud guide the interpretation of Rule 10b-5.  Stoneridge, at 11 ("Section 10(b) does not incorporate common-law fraud into federal law.").  Nor does the intent of Congress matter.  While Congress may not have intended to create a private right of action, it did intend to define the reach of the provision, something evident from the statutory language.  Yet the statutory language remains largely irrelevant to the majority. 

Instead, the guiding principal will be, irrespective of traditional notions of fraud or the language of the statute, to make certain that the private right is not "extended beyond its present boundaries."  Or, as Kennedy writes, the holding "is consistent with the narrow dimensions we must give to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisted the law."  It is, perhaps, the only consistency that can be found in the opinion. 

Full post as published by The Race to the Bottom on January 16, 2008 (boomark / email).