Bush Administration Opposes ‘Scheme Liability’ in Key Investor Lawsuit

The Bush Administration took the side of defendant companies in a Supreme Court case that could determine the fate of other investor lawsuits, including one linked to the Enron scandal.

At issue in the case before the United States’ highest court is whether third parties such as investment banks, accountants, lawyers or vendors can be found liable in shareholder lawsuits for scheming with companies accused of deceiving investors.

The brief filed by the Justice Department’s solicitor general, who represents the Bush administration before the court, maintains that allowing such liability would vastly overreach the securities laws against Congress’ intent.

It could potentially expose the third parties “far removed from the market to billions of dollars in liability when (public companies) make misstatements to the market,” the solicitor general, Paul Clement, argued in the brief. “Congress consciously struck a balance … by empowering the Securities and Exchange Commission alone to pursue cases of aiding and abetting” corporate fraud.

The importance of the case was underscored in mid-June when Bush personally weighed in, telling Clement that it is important to reduce unnecessary lawsuits and that the SEC, rather than shareholders, is in the best position to sue for damages.

The Supreme Court’s ruling in the case could determine whether shareholders can pursue suits to recover investment losses if they can prove collusion between Wall Street institutions and companies accused of defrauding investors.

“While I am certainly not surprised, I am disappointed that the federal government has once again decided to favor the interests of large corporations and investment banks over those of individual and institutional investors,” Ohio Attorney General Marc Dann said in a statement. Dann, a Democrat, was one of 30 state attorneys general who earlier sided with investors in the case and referenced the Enron scandal 55 times in their court filing.

As solicitor general, Clement’s view carries weight among the Supreme Court justices, even if the court ultimately rules against his position.

The controversy escalated in June when the administration, through Clement, rejected an SEC recommendation in the case and did not support the position of investors suing for damages. He did that by not filing a friend-of-the-court brief in favor of the plaintiff shareholders’ position.

The brief that Clement submitted on Wednesday met the court’s deadline for filings in support of the defendant companies’ position in the case, Stoneridge Investment v. Scientific-Atlanta. He did agree with the SEC on one point, saying that a federal appeals court erred by concluding that a deceptive act is limited to misstatements or omissions. He said in the brief that it “potentially reaches all conduct that is manipulative or deceptive.”

In recent weeks, several prominent lawmakers of both parties and former SEC officials have urged the administration not to support the defendants. On the other side, a bipartisan array of three former SEC chairmen, 13 other former SEC officials and 11 academic experts have urged the administration to take that position.

Although the court has not decided whether to hear arguments in the Enron case, justices have agreed to review the Stoneridge case, a similar suit brought by investors against suppliers to one of the nation’s largest cable TV companies. The court is expected to hear the Stoneridge case in October.

If the court rules against investors in the cable TV suit, it could mean that other cases — like the Enron shareholders’ suit — would not be able to go forward.

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On the Net:

Solicitor General’s office: http://usdoj.gov/osg

Securities and Exchange Commission: http://www.sec.gov

Supreme Court: http://www.supremecourtus.gov/