US Government Sits On Its Hands Over Stonebridge

by Glen Shapiro, LawAndTax-News.com, Washington

20 June 2007

Last week saw two major developments in the closely watched StoneRidge Investment Partners LLC v. Charter Communications case before the US Supreme Court, which is set to decide whether third parties can be included as defendants in investor class actions even though their involvement may have been indirect or even involuntary.

In its brief filed last week, Stonebridge, the class action petitioner, represented by Pomerantz Haudek Block Grossman & Gross LLP, alleges that in 2000 Charter Communications agreed to overpay the Respondents (Scientific Atlanta) by a total of $17 million for set-top boxes that it had already agreed to purchase from them at lower prices if Respondents would use the overpayments to "purchase" unwanted advertising from Charter. The scheme was the subject of criminal proceedings by the United State Department of Justice as well as civil proceedings by the Securities and Exchange Commission. The Petitioner alleges that in order to create a false appearance that these transactions were legitimate, Respondents:

• issued documentation falsely stating that Respondents demanded the price increases because of higher costs;
• falsely backdated contracts; and
• agreed to "purchase" advertising at four to five times regular rates using Charter's funds.

That dog barked, but another one didn't: the Department of Justice had been pressured by the SEC to submit an amicus curia brief on behalf of the Petitioner, but failed to do so by the deadline on 12th June. It can still submit a brief on behalf of the defendants, within the next 30 days, or just say nothing.

Section 10(b) of the Securities Exchange Act of 1934 prohibits the use, "directly or indirectly," of "any manipulative or deceptive device or contrivance in contravention" of SEC rules promulgated pursuant to the section. SEC Rule 10b-5(a) prohibits the employment of "any device, scheme or artifice to defraud" and (c) making it unlawful to "engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person."

The Treasury Department is said to be worried that if the Supreme Court finds in favour of Stoneridge, then all types of 'secondary actor' involved in share issues or the general behaviour of public companies, such as banks, lawyers and accountants, could find themselves in the firing-line alongside their clients in fraud actions. Foreign companies, and even American ones, are already showing marked reluctance to list in the US as a result of the litigious atmosphere, and Sarbanes-Oxley.

The Court may also hear a similar case over Enron's failure, in which three banks are being accused of culpability. The case was sent to the Supreme Court after the class certification of the class-action suit against the three banks — set for trial this past spring — was overturned by a federal appeals court. The Fifth Circuit's majority opinion said the banks did not have a direct responsibility to Enron's investors. It is possible that the Court will decide to join the two cases.

"The Stoneridge case and its theory of 'scheme liability' is a bold attempt by plaintiffs' attorneys to drastically expand securities class actions at the same time prominent academics and others are questioning whether the existing system, which duplicates SEC enforcement actions, benefits investors," said US Chamber of Commerce's Institute for Legal Reform President Lisa A. Rickard.

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