Supreme Court Poised to Unleash Trial Lawyer Onslaught?

Adverse Decision in Stoneridge Investment Partners v. Scientific-Atlanta Would Expand the Reach of Class-Action Lawsuits and Resume Jackpot Justice Avalanche

The United States Supreme Court stands at the precipice of a decision that could unleash a trial lawyers' orgy of frivolous new securities litigation, and nothing short of America's economic competitiveness teeters on that precipice. 

In one of the most critical business-related cases in recent memory, the Court heard oral arguments this week in Stoneridge Investment Partners v. Scientific-Atlanta.  The issue presented is whether disgruntled shareholders and their trial lawyer shepherds will be allowed to sue not just the crime-committing company that actually defrauded them, but also third-party companies with whom that fraudulent company conducted business. 

In other words, trial lawyers would be able to target deep-pocketed companies that didn't mislead the public.  Even the threat of such lawsuits would cost America's economy billions in litigation and settlement costs. 

Current law, based largely upon a 1994 U.S. Supreme Court decision, holds that shareholders must sue the malfeasant company in which they hold stock and which actually defrauded them, not third-party companies who happened to interact with that company.  This rule makes perfect sense, since there would otherwise be no logical limiting principle to the number and types of companies and individuals whom plaintiffs' lawyers could sue.  For instance, could class-action lawyers haul television stations into court for running commercials of a company that had allegedly defrauded shareholders? 

It is important to keep in mind, moreover, that the Securities and Exchange Commission is empowered to prosecute companies that knowingly aid and abet another company's fraudulent transactions, so it's not as though deceptive conspirators can somehow escape justice.  Accordingly, the federal government can still punish third parties whose misconduct came in connection with a fraudulent securities transaction. 

But opening the floodgates to private class-action lawsuits is nothing more than a prescription for more jackpot justice and windfalls for the tort lawyers' lobby. 

In this particular instance, St. Louis-based cable provider Charter Communications Inc. allegedly committed accounting fraud by overpaying vendors Motorola, Inc. and Scientific-Atlanta for cable boxes, which Motorola and Scientific-Atlanta allegedly used to buy advertisements on Charter's cable system.  Charter did so in order to inflate its reported income, thereby deceiving shareholders and satisfying financial analysts' expectations. 

For their part, neither Motorola nor Scientific-Atlanta made any public statements about these business transactions, and thereby couldn't have misled anyone. 

Charter was subsequently sued for its accounting fraud by plaintiff Stoneridge Investment Partners.  However, Stoneridge also attempted to add Motorola, Inc. and Scientific-Atlanta to their target list, even though these two third-party vendors did nothing to actually deceive investors. 

Interestingly, the strategy behind plaintiff Stoneridge's litigation was concocted by none other than William Lerach, formerly of Milberg Weiss, who just pleaded guilty to conspiracy and feloniously providing plaintiff kickbacks in his securities class action lawsuits.  Consider this his parting gift to trial lawyers before he is hauled off to prison. 

If the Supreme Court chooses to rule in favor of the plaintiffs, it will disastrously expand the ability of shareholders, who now constitute over half of the American population, to bring securities class action lawsuits.  Unsurprisingly, the trial lawyers' lobby recognizes this is their greatest opportunity to wield even more power over American life and the economy. 

During oral arguments, pivotal Justice Anthony Kennedy expressed skepticism, saying, "I see no limitation to [plaintiff Stoneridge's] proposal for liability." 

An adverse decision, however, would be bitterly ironic in light of the recent slowdown of the runaway train that is the securities class-action lawsuit industry.  In the past ten years, the number of securities fraud lawsuits has fallen steadily, from 240 in 1998 to 116 in 2006. 

This is due to several beneficial factors, including a string of court victories for businesses, as well as Congress's Private Securities Litigation Reform Act of 1995.  Perhaps most importantly, however, has been the recent string of 225 Justice Department plaintiff kickback prosecutions, as illustrated by the aforementioned guilty plea from Milberg Weiss's notorious Mr. Lerach.  Milberg Weiss alone saw its securities fraud lawsuits drop from 102 to 59 just last year. 

Simply put, the recent decline in frivolous securities class action lawsuits has done much to improve America's business environment, and more progress is expected as the Roberts Court progresses. 

Hopefully, this case doesn't become a grave and poisonous exception to this positive trend.