The Stoneridge case – much ado about
Purpose – The purpose of this paper is to explain the issues related to ‘‘scheme liability’’ that underlie
the current case before the United States Supreme Court, Stoneridge Investment Partners v.
Scientiﬁc-Atlanta and Motorola.
Design/methodology/approach – Explains the facts of the Stoneridge case; explains the legal
framework, including ongoing debates over the scope of liability under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, the Supreme Court’s decision in Central Bank, N.A. v.
First Interstate Bank, development of the ‘‘scheme liability’’ concept by various plaintiffs’ lawyers, and
three circuit court decisions related to scheme liability; and the philosophy that is likely to guide the
Supreme Court in Stoneridge.
Findings – The Stoneridge case provides the Supreme Court with the unique opportunity to clarify the
limits of liability under Section 10(b) and Rule 10b-5. It is the ﬁrst time since Central Bank that the
Supreme Court will grapple with the contours of liability for so-called secondary actors.
Originality/value – A clear explanation of the issues in a highly visible Supreme Court case by an
experienced commercial litigator.
Keywords Legislation, United States of America, Securities, Fraud, Liability
Paper type Technical paper
n the fall of 2007, the United States Supreme Court heard oral arguments in a case
billed by many as the most important business case to reach the high court in decades.
The case, Stoneridge Investment Partners v. Scientiﬁc-Atlanta and Motorola, certainly
has garnered much more attention than the ordinary case that reaches the Supreme Court.
Newspaper columnists, television anchors and legal pundits have camped out on the steps
of the Supreme Court building and given the case plenty of print space and airtime. But all
this attention just begs the real question: will the Supreme Court’s opinion, expected to be
released sometime during the ﬁrst half of 2007, really be a bellwether decision that
signiﬁcantly alters the future of class action securities litigation?
In simple terms, the issue the Supreme Court is grappling with in Stoneridge is whether
shareholders of companies that commit securities fraud should be able to sue investment
banks, accounting ﬁrms, lawyers and other third parties that allegedly participated in the
fraud, even if the entities never made fraudulent statements. This concept of expanding
liability to third parties is commonly referred to as ‘‘scheme liability.’’
Business groups have expressed concern that expanding the universe of players that can
be sued in a securities fraud case will unleash a ﬂood of new class action lawsuits, possibly
creating the next class action bonanza. Such expansive liability would certainly mean that
law ﬁrms, investment banks and accounting ﬁrms would become prime targets of abusive
securities lawsuits simply because of their deep pockets.
DOI 10.1108/15285810810859243 VOL. 9 NO. 1 2008, pp. 5-9, Q Emerald Group Publishing Limited, ISSN 1528-5812
JOURNAL OF INVESTMENT COMPLIANCE
Andrew Edison is a Partner
at Bracewell & Giuliani LLP,
Houston, Texas, USA.