The case arose out of a securities fraud action brought by shareholders of Charter, one of the nation’s largest cable television providers. In addition to claims against Charter, the plaintiffs also sued Motorola, Inc. and Scientific-Atlanta, Inc., both of whom supplied Charter with the cable boxes used in customer homes. The plaintiffs alleged that Charter artificially inflated its revenues by entering into so-called “wash” transactions with Motorola and Scientific-Atlanta. Under these agreements, both Motorola and Scientific-Atlanta agreed to purchase a certain amount of advertising from Charter in exchange for an equal price increase on the cable boxes. The transactions were essentially a wash for Charter, with Motorola and Scientific-Atlanta getting free advertising. Charter, however, was able to report additional revenues from the advertising sales and, thereby, meet analysts’ revenue expectations.
The district court dismissed the claims against Motorola and Scientific-Atlanta because it believed the claims were for merely aiding-and-abetting, which are not actionable under Section 10(b) and Rule 10b-5. The district court based its decision on the ruling in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In Central Bank, the Supreme Court stated that Section 10(b) and Rule 10b-5 claims could only proceed against direct violators and not those accused of merely aiding and abetting the alleged fraud. The district court in this case concluded that the claims against Motorola and Scientific-Atlanta could not proceed because neither defendant made any false and misleading statements or had any duty to disclose information to the defendants and, therefore, could at most be accused of aiding and abetting. The court of appeals agreed, leading to the current appeal before the Supreme Court.
The SEC sought to file an amicus brief criticizing the court of appeals’ decision. In an unusual move, however, the Solicitor General refused to file the SEC’s brief. Instead, he filed his own amicus brief supporting the dismissal of the claims against Motorola and Scientific-Atlanta. Like the SEC, the Solicitor General believes that the court of appeals was wrong in concluding that a claim under Section 10(b) and Rule 10b-5 must involve a misstatement, omission by a party with a duty to disclose or manipulative trading practice. The Solicitor General believes instead that all conduct that is manipulative or deceptive can be actionable under Section 10(b). This is true, according to the Solicitor General, even where the defendant itself did not make a false statement and had no duty to disclose information that was withheld from investors.
The Solicitor General, however, concludes that the the claims against Motorola and Scientific-Atlanta were properly dismissed because the plaintiffs never claimed that they relied upon – or even knew about – the transactions between Charter and these two defendants. In other words, although the Solicitor General agrees that claims can be maintained against a non-issuer, even if that non-issuer did not make a misstatement or have a duty to disclose information that was withheld, the Solicitor General argues that the plaintiffs must still show that they relied upon the alleged manipulative or deceptive acts of the non-issuer in order to sustain their claims under Section 10(b). The Solicitor General then concludes that the “causal connection between [the defendants’] conduct and [the plaintiffs’] stock transactions is simply too attenuated to satisfy the reliance requirement.” Solicitor Generals’ Amicus Brief, at 9. According to the Solicitor General, this is “particularly true because [the defendants’] alleged conduct relates to only one aspect of Charter’s fraudulent scheme, and has no connection with the publicly disseminated misstatements relating to numerous other, contemporaneous fraudulent acts in which Charter allegedly engaged.” Id.
The Solicitor General then warns that if the Supreme Court extends liability for primary violation under these circumstances, it would “constitute a sweeping expansion of the judicially inferred private right of action in Section 10(b) and Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market.” Id. This type of expansion, according to the Solicitor General, has been rejected by Congress, as evidenced by the fact that aiding-and-abetting claims are not actionable under Section 10(b) and Rule 10b-5. Id. Several commentators have expressed the same fear over expanding liability in a way that could expose accountants, lawyers, customers and vendors to liability for misstatements made by issuers.
A full copy of the Solicitor General’s Amicus Brief can be found here. The Supreme Court is scheduled to hear argument in this case on October 19, 2007. We will continue to monitor developments in this case and provide updates at InsureReinsure.com
