A decision by high-level officials of the Bush Administration not to support investors’ claims in a major securities fraud case the Supreme Court is set to hear has stirred efforts by others to make sure that the Justices know that federal regulators have been on investors’ side up to now. The chairmen of two House committees and three former members of the Securities and Exchange Commission — including two who chaired the agency — have asked the Supreme Court to let them join in the case of Stoneridge Investment v. Scientific-Atlanta, et al. (06-43), due to be heard by the Court on Oct. 9. The case is one of the most important securities fraud cases in years, involving efforts to hold liable the business partners of those who commit fraud, when the partners have some role in the scheme.
The recently filed friend-of-court briefs on the investor side will not be passed along or considered by the Justices, however, unless the Court first grants permission to file. That’s because each of the briefs was filed late, after such documents had been due in the case — on June 11. Thus, each has filed a motion for leave to file the brief out of time. It is unclear when the Court will act on those motions.
The briefs were offered by Democratic Reps. John Conyers, Jr., of Michigan (Judiciary Committee) and Barney Frank of Massachusetts (Financial Services Committee) and by former SEC chairmen William H. Donaldson and Arthur Levitt Jr. and former SEC member Harvey J. Goldschmid. The former SEC members’ brief is opposed by the parties sued in the case — Scientific-Atlanta Inc. and Motorola Inc. Those two, however, did not oppose the entry of the House chairmen, saying they would leave that to the Court. The lawmakers’ brief is here, the former commissioners’ brief here, and the opposition to the ex-SEC members’ filing is here.
The Court was told in both briefs that the lawmakers and former regulators had expected U.S. Solicitor General Paul D. Clement to enter the case to support Stoneridge Investment and other investors, since Clement had been asked to do so by the current Securities and Exchange Commission. The SEC had voted 3-2 to submit a brief to the Solicitor General on behalf of investors, concluding that the SEC had taken this position for some time and that the government should adhere to it. But, after intervention by Treasury Secretary Henry Paulson — and, ultimately, by President Bush, according to White House aides — Clement did not file. The opposition was based upon expressed concerns about the impact on corporations’ ability to compete — a favorite theme of Paulson, a former investment banker.
(Clement still could being the government into the case, on the side of Scientific-Atlanta and Motorola, Inc. Amicus briefs on that side of the case are due on Aug. 15, a week from Wednesday. Supporters of Stoneridge have been pursuing efforts to head off government entry now; Senate Judiciary Committee ranking Republican Arlen Specter of Pennsylvania last week wrote to President Bush, arguing that the SEC should have been allowed to put its views before the Court, “independent from the Administration’s policy preferences.” He noted that the SEC could not represent itself at the Court, but must rely upon the SG. He noted, with apparent disapproval, reports that Clement “may actually file an amicus brief argung the opposite position recommended by the SEC.”)
Even though the SEC did not get its views formally presented to the Court, the two amicus briefs seek to make up for that. In fact, the House chairmen’s brief includes excerpts in congressional testimony by the current SEC chairman, Christopher Cox, discussing the vote to send a brief to the Solicitor General, describing the SEC majority’s view in favor of Stoneridge and other investors, and making reference to prior court briefs giving the SEC’s view on the underlying legal question under securities law.
Conyers and Frank said in their brief: “The Solicitor General’s decision to follow the political and policy directives of the President rather than to support the Commission’s legal position, coupled with testimony by Commission Chairman Cox at a June 26, 2007, oversight hearing before the Committee on Financial Services, has persuaded amici of the critical need to give voice to the points made in their brief.”
Challenging the Eighth Circuit Court’s decision against the Stoneridge lawsuit, the lawmakers said that ruling “ultimately rests on policy considerations at odds with the statutory text that should more appropriately be addressed to Congress than to this Court.” The SEC, they added, “has been consistent in its support for the proposition that, under appropriate circumstances,” there should be third party liability for securities fraud.
The former SEC members’ brief argued that “throughout our tenure of service at the SEC, during Administrations of both political parties, we have been involved in Commission policy and enforcement regarding so-called ‘fraudulent scheme liability.’ We believe the continued viability of private actions based on such liability is essential for the protection of the nation’s investors and the integrity of our financial markets….It is critical to the antifraud purposes of the federal securities laws that actors, other than issuers and their officers and directors, who actively engage in deceptive conduct — for the purpose and with the effect of creating a false statement of material fact in the disclosure of a public corporation — continue to be held liable in private actions.”
Opposing the acceptance of that brief, Scientific-Atlanta and Motorola told the Court that the case already “has been exhaustively briefed” by the parties and by amici who filed on time, and the ex-SEC members’ submission “adds nothing new on the issues.”
They ridiculed the excuse given for the late filing, saying that “erroneous, unconfirmed assumptions about what someone else may say cannot justify a late amicus filing, particularly one that is more than a month late.” (The former SEC members’ brief was filed July 16, the House chairmen’s brief July 30; amici briefs on that side were due June 11.) “If such late filings were allowed, the Court’s deadlines would be meaningless,” the two companies asserted. “This is especially true in this case, where extensive publicity made clear to anyone paying attention that there was considerable doubt about the government’s plans.”
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