- The Washington Times - Monday, June 4, 2007

The Supreme Court has accepted what promises to be, in the words of one legal blogger, “the most important securities case in a generation.” We hope the Bush administration will file a strong brief in this matter, one that says no to trial lawyers and yes to capital formation and capital markets in the United States.

The case, Stoneridge v. Scientific-Atlanta, is a challenge to the well-established precedent that, when the securities laws are violated, only those who actually broke the law, not outside advisers or others who did business with the company, may be sued. This sharp distinction is known in the law as the line between “primary” and “secondary” liability. The reason for it is easy to see in Stoneridge.

Charter Communications, a cable television company, bought set-top boxes from Scientific-Atlantic and Motorola. In a joint promotion deal, the two companies put the money from the sale into a common advertising fund that Charter ran. Charter’s top brass reported the transaction in a way that inflated the company’s earnings and that ultimately landed three executives in jail. Under current law, that would have been the end of it. But the trial lawyers who ginned up Stoneridge — including the recently indicted securities strike suit firm Milberg Weiss — wanted a piece of this rock.

They developed a way around the primary-secondary distinction and went after the two electronics companies. The Supreme Court will decide if their legal ploy passes the laugh test enough to allow Stoneridge to go to trial.

Think of what a decision for the plaintiffs would mean. Imagine you run a company doing business with a publicly traded American corporation. Now imagine if any sale to or purchase from that corporation could land you in a securities lawsuit, should the corporation report it wrongly to the SEC. By the way, securities suits rarely go to trial. The potential damages involved in movements of stock prices are so massive that almost everyone settles. Few will take the risk of a jury doing something erratic, as juries occasionally do. So wouldn’t you think twice about conducting business with that publicly traded corporation? Wouldn’t you need a deal that was just a little bit better, to offset your risk of being hit with an unforeseeable securities suit? And over the full range of business with companies like yours, wouldn’t those demands for deals that were just a little better, to cover risk, make the corporation less competitive in the global marketplace? And understanding this, wouldn’t investors shy away, making it harder for that publicly traded corporation to raise the capital for growth, whether by selling stock or borrowing?

In fact, increased securities litigation exposure is one reason three separate commissions of scholars, financial industry experts and political leaders have, in recent months, all cited for the rush of so many U.S. companies to go private and for the move of the initial public offering market from the New York Stock Exchange and NASDAQ to the London Stock Exchange. As New York Sen. Charles Schumer and Mayor Michael Bloomberg warned in a January report, “the prevalence of meritless lawsuits and settlements in the U.S. has driven up the apparent and actual cost of business — and driven away potential investors” from U.S. markets.

Briefs in the Stoneridge case are due by June 11. Solicitor General Paul D. Clement is now deciding where the administration will come down. One place he’ll look for guidance will be the Securities and Exchange Commission. Amazingly, under its previous chairman, the SEC sided in a similar case with plaintiffs. We hope current SEC Chairman Chris Cox will show he understands the global marketplace better. We hope that White House and the Treasury Department will, too.

The Bush administration should tell the Court loudly and clearly that America’s publicly traded corporations have enough challenges. Dealing them another legal wild card is the last thing our economy needs.

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