# Amicus Curiae Brief — Stoneridge Inv. Partners v. Scientific-Atl.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2008
- **Citation:** 552 U.S. 148

## Text

F 027 os
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OFFICE OF THE CLERK
In The SUPREME COURT. U.S.

Supreme Court of the Anited States

+

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,
v.

SCIENTIFIC-ATLANTA, INC. AND MOTOROLA, INC.,

Respondents.

¢

On Writ Of Certiorari To
The United States Court Of Appeals
For The Eighth Circuit

S

BRIEF OF AARP, CONSUMER FEDERATION OF
AMERICA, AND U.S. PIRG AS AMICI CURIAE
IN SUPPORT OF PETITIONER

*

JONATHAN W. CUNEO

ROBERT J. CYNKAR

MICHAEL G. LENETT

MATTHEW WIENER*

CUNEO GILBERT & LADUCA, LLP
507 C Street, NE

Washington, DC 20002

(202) 587-5068

Counsel for All Amici
*Counsel of Record

DEBORAH ZUCKERMAN
AARP

601 E Street, NW
Washington, DC 20049
(202) 434-6045

Counsel for AARP

TABLE OF CONTENTS

Page
ee Ce Far SI ccccccsecccecsccnensscrsccencssesences ii
INTEREST OF AMICI CURIAE .............cccesccsesseeeeees 1
SUMMARY OF ARGUMENT. .................cccceeecceseeeseees 3
EE extiiiceecnisntnnncseccsdicnnecinsennennciniilonnacenineun 4

Investors in Major Securities Fraud Cases Will
Often Be Denied a Remedy for Their Losses
When Outside Actors Are Not Held Liable for
Violating § 10(b) of the Exchange Act.................... 4

I. Major Frauds Cases Often Involve Insolvent
Stock Issuers from Which Defrauded Inves-
tors Cannot Obtain Any Recovery for Their
ID cccnnccnincicncinvitinindataitsianiiiiiniiesdmiintadnianens 6

II. Corporate Insiders Seldom Have Sufficient
Assets to Compensate Defrauded Investors

for Their Losses in Major Fraud Cases .......... 8
Ill. D&O Policies Usually Provide No Or Inade-
quate Coverage in Major Fraud Cases ........... 9

GEIS ORPAAEEIEE ccccccoccsorsecesseecesrevesennsvecnsvsoneonsnsooonnseses 13

ii

TABLE OF AUTHORITIES
Page
CASES:
In re: Am. Cont Corp./Lincoln Sav. and Local Sec.
Litig., 140 F.R.D. 425 (D. Ariz. 1992)..............ccccceeeeee: 5,7
In re Charter Communications, Inc. Sec. Litig., 443
ee I EE I hncsinicactinceenbnndenienmnesvenspiersennctinedin 12
In re Enron Corp. Sec., Derivative, & ERISA Litig.,
235 F. Supp. 2d 549 (S.D. Tex. 2002) .............. ce eeeeeeeeee 4,5
In re Equity Funding Corp. of Am. Sec. Litig., 375
4 EERE SENT ano veer en NN Oe 7
In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp.
ee i creretaseneteicnceiianetsiensssieressneanaitn 5
In re Global Crossing Sec. and ERISA Litig., 225
ee 7, 8,12
Hevesi v. Citigroup, Inc., 366 F.3d 70 (2d Cir. 2004)...... 6,7
Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
es ts Fe itiintccteestctimeinmtscennennnnn 5
In re Refco Sec. Litig., 05 Civ. 8626, 2007 U.S. Dist.
LEXIS 31969 (S.D.N.Y. Apr. 30, 2007).............:ccccccceseeees 7
Regents of the Univ. of California v. Credit Suisse First
Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) ....... 4,8,12
In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d
a ee i itctncicsntcetiiinniintsisianbiibtcnatinsisndinentinipiaiicans 11
In re WorldCom, Inc. Sec. Litig., 388 F. Supp. 2d
ee I TE siiciaiiceiinicildedeitiiriaiistiamcigiaieeiuntinecanennetaane 6
In re WorldCom Sec. Litig., 02 CV 3288, 2005 Dist.
LEXIS 1805 (S.D.N.Y. Feb. 10, 2005) .....................00 7,9

In re WorldCom, Inc. Sec. & ERISA Litig., No. 02
Civ. 3288, 2002 U.S. Dist. LEXIS 23172 (S.D.N_Y.
SI Sas IT ectiesbcihasiesiiecsiensaeiitiatisitbaadinniamenininieinnsiteimnninestpinnmneniis 7

ili

TABLE OF AUTHORITIES - Continued

Page

STATUTES AND REGULATIONS:
ITT nciicicsscehistetishieniuciaiisitnapiiapiiinianemminnnenesteniicnenntt 6
Employee Retirement Income Security Act (ER-

a Se ees OF Ne OE GU wininctecccsccpenccersnenpevesenesoonnns 10
Section 10(b) of the Securities Exchange Act of

Ry: See re 0 Pea tirercaninnincetsancnsnenecscnsnceconeees passim
Securities and Exchange Commission Rule 10b-5,

a eID ciiiicicsciceinisiirninscntvonmsiiaicnninnbionnes 6, 12
LEGISLATIVE MATERIALS:
Conference Report on Securities Litigation Reform,

H.R. Conf. Rpt. 104-369, 1995 U.S.C.C.A.N.

eee ivsessindesscnicicinieisincnicihiictieumnenitabncioasdiimisnbiudtinbeddaimauiatidnadionnness 5
ARTICLES:

Bernard Black, Brian Cheffins, & Michael Klaus-
ner, Outside Director Liability, 58 Stan. L. Rev.
ccc iaaiidea ce biadalealahialiiatsiiaicetaalaCiaatabin 8, 10, 11, 12

John C. Coffee, Jr., Reforming the Securities Class
Action: An Essay on Deterrence and Its Implemen-
tation, 106 Colum. L. Rev. 1534 (2006).......... 7, 8,9, 10, 11

John C. Coffee, Jr., Gatekeeper Failure and Reform:
The Challenge of Fashioning Relevant Reforms,

es Se ND Ce GM riciisiensestenndiendctionneninininccscnnsens 4,5
John C. Coffee, Jr., Guarding the Gatekeepers, N.Y.
Be ies Se ED cnctntirtsignecdensrnctmnicnmeseniesaneneee 5

Michael H. Diamond, D&O Insurance: Pitfalls in a
New World, Nat’) L. J., Aug. 26-Sept. 2, 2002, at
STE scsbibehsiesiciechpumeteeitiniapisiiiaguiniiianaiaieiaadianieenidiiatadannidionpaneens 10

iv

TABLE OF AUTHORITIES - Continued

Page
John R. Emshwiller & Gary McWilliams, What’s
Left of Lay and Skilling Wealth Is at Risk, Wall
i Bigs I Os A ITED cicnrcienctcnccsinebednddiseiunsccssscesssants 9
John R. Emshwiller, Enron Trial Highlights Issue
of Plea Bargain, Wall St. J., Oct. 11, 2004, at C-1.......... i)

Theo Francis, Directors’ Armor: Adelphia Ruling
Shows Legal Bills Must Be Covered, Wall St. J.,
ee ee He ae paneietcnenssicaceninninicmnestiicemmenntaseermenene 11

Jonathan D. Glater & Joseph B. Treaster, Insurers
Scale Back Corporate Liability Policies, N.Y.

eT i Sete Oe CD ericepentnsesncevesscntintsncncenconsnces 10
Robert W. Hamilton, The Crisis in Corporate
Governance, 40 Hous. L. Rev. 1 (2003)................06. 4, 6, 10

Joann S. Lublin, Theo Francis, & Jonathan Weil,
Directors Are Getting the Jitters - Recent Settle-
ments Tapping Executive’ Personal Assets Put
Boardroom on Edge, Wall St. J., Jan. 13, 2005, at

SO sicsinheihcsittcinteihnesseitdindeiiatiuidibieaiae dita didaitd tibiatiecetnimntagias 8
Geoffrey P. Miller, Catastrophic Financial Failu»s:

Enron and More, 89 Cornell L. Rev. 423 (2004) ............. 4
Two Insurers Seek Right to Challenge Claims from

Enron Lawsuits, Wall St. J., Feb. 22, 2002, at B-4........ 1)

David Wessel, What’s Wrong - Venal Sins: Why the
Bad Guys of the Boardroom Emerged En Masse,
| OU ee) 8 ES ee 4

MISCELLANEOUS:

Pet. Writ Cert., Regents of the Univ. of California v.
Merrill Lynch Pierce Fenner & Smith, Inc., No.
ue OUTTE sunsicitenieiciituiniinieinniuiiinpindaincietanniinaiinaiatisiaenituntiniseiniine we 5, 6

INTEREST OF AMICI CURIAE*

AARP is a non-profit, non-partisan organization with
more than 38 million members, dedicated to addressing
the needs and interests of Americans aged 50 and older. As
the largest membership organization representing the
interests of older Americans, AARP has long been con-
cerned about fraudulent practices in the securities indus-
try. Older Americans are frequent targets of fraud because
they often have significant assets and look for investment
opportunities that will supplement Social Security and
other sources of retirement income. As a result, AARP has
made the need to combat securities fraud a high priority.
It has regularly commented on legislative and regulatory
proposals that address investment fraud, filed amicus
briefs in cases involving the federal securities laws, and
opposed legislative efforts to limit the remedies of de-
frauded investors.

AARP’s advocacy and consumer education activities
are informed by the many studies it has undertaken over
the years to understand investors’ knowledge, behaviors,
and concerns. See, e.g., AARP, Investor Perceptions and
Preferences Toward Selected Stock Market Conditions and
Practices: An AARP Survey of Stock Owners Ages 50 and
Older 21 (March 2004), available at http://www.assets.
aarp.org/rgcenter/econ/investor.pdf. These studies show
that individual investors often lack basic knowledge of
how the securities markets operate and are unaware of the
important features of their own investments. This problem

* No party’s counsel wrote this brief (in whole or in part), and no
person other than amici and their counsel contributed monetarily to
this brief’s preparation or submission. The parties’ letters consenting to
the filing of this brief have been lodged with the Clerk of the Court.

2

is of particular concern given the entry of many first-time
investors into the market and the responsibility for re-
tirement investing that pensioners have had to assume as
a result of the shift from defined benefit pension plans
(under which employers bear the risk of loss) to defined
contribution pension plans (under which plan participants
bear the risk of loss). Integrity in the securities markets
and the remediation of securities fraud is therefore more
important today than ever.

The Consumer Federation of America (CFA) is a
nonprofit association of 300 consumer groups, which in
turn represent more than 50 million Americans. It ad-
vances the consumer interest through research, education,
and advocacy. As increasing numbers of Americans have
come to rely on the nation’s financial markets to fund their
retirement and invest their savings, CFA has made en-
hancing investor protections a top legislative and regula-
tory priority. CFA’s policies in this area are based on a
fundamental belief that investors are entitled to a mar-
ketplace that provides them with a choice of appropriate
investments and service providers, the information neces-
sary to make informed choices, protection against fraud
and abuse, and effective remedies when they are de-
frauded. CFA has for nearly two decades been a leader in
efforts to promote investor protection legislation and
regulations, and to oppose efforts to weaken those protec-
tions, at both the state and federal levels. One of CFA’s
particular areas of concern has been the ability of inves-
tors to seek legal redress for their losses. Toward these
ends, CFA has testified before Congress, participated in
Securities and Exchange Commission (SEC) roundtables,
submitted amicus briefs on a range investor-protection

3

issues, and consulted with members of Congress, SEC
Commissioners, and state securities regulators.

U.S. PIRG is a national, non-profit advocacy group
with over one million members around the country. Its
mission is to protect the interests of consumers and
ordinary citizens using the tools of investigative research,
media reports, grassroots organizing, legislative and
public policy advocacy, and litigation. Investor protection
has been a long-standing area of concern to U.S. PIRG. It
has appeared as an amicus curiae in support of investor
rights in several of the important securities fraud cases
that have come before the Court during recent years.

+

SUMMARY OF ARGUMENT

The answer the Court gives to the question presented
in this case will have significant consequences for victims
of major corporate frauds of the sort that brought down
Enron, WorldCom, and other companies during the last
decade. Recent history shows that investors harmed by
these frauds all too often go uncompensated for their
losses when the accountants, bankers, lawyers, and others
who are not affiliated with the corporate issuer but who
actively scheme with the issuer to defraud investors —
amici call them “outside actors” here for ease of reference
— are not held to account for their violations of § 10(b) of
the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b).
Outside actors are often the only culpable defendants with
assets sufficient to satisfy a judgment or fund a settlement
that secures any real measure of relief for defrauded
investors. Of course, the Court should not fashion a § 10(b)
jurisprudence around an indiscriminate search for deep

4

pockets. But neither should it lose sight of the conse-
quences that would result if it were to adopt the Court of
Appeals’ unduly restrictive interpretation of § 10(b).

+

ARGUMENT

Investors in Major Securities Fraud Cases Will
Often Be Denied a Remedy for Their Losses When
Outside Actors Are Not Held Liable for Violating
§ 10(b) of the Exchange Act

This past decade has seen corporate fraud on an
unprecedented scale. See, e.g., In re Enron Corp. Sec.,
Derivative, & ERISA Litig., 235 F. Supp. 2d 549, 565, 593,
687 (S.D. Tex. 2002); John C. Coffee, Jr., Gatekeeper
Failure and Reform: The Challenge of Fashioning Relevant
Reforms, 84 B.U. L. Rev. 301, 302 (2004) [hereinafter
“Gatekeeper Failure”|; Geoffrey P. Miller, Catastrophic
Financial Failures: Enron and More, 89 Cornell L. Rev.
423, 423-24 (2004); Robert W. Hamilton, The Crisis in
Corporate Governance, 40 Hous. L. Rev. 1, 1-33 (2003);
David Wessel, What’s Wrong - Venal Sins: Why the Bad
Guys of the Boardroom Emerged En Masse, Wall St. J.,
June 20, 2002, at A-1. The costs of recent frauds to share-
holders — many of them individual investors and pension
funds — have been enormous. Investor losses in many
individual § 10(b) cases have run into the billions of
dollars. The Enron fraud alone resulted in claimed dam-
ages totaling $40 billion See, e.g., Regents of the Univ. of
California v. Credit Suisse First Boston (USA), Inc., 482
F.3d 372, 379 (5th Cir. 2007).

Few, if any, of the major corporate frauds of the last
decade have been perpetrated by corporate securities

5

issuers (including their officers, directors, managers, and
other insiders) acting alone. Outside actors have played
significant roles in nearly every one — in some instances by
making false statements calculated to deceive investors
about the issuer’s financial condition and in others by
participating in deceptive financial transactions calculated
to achieve the same result.’

If the Exchange Act is to serve as the “indispensable
tool with which defrauded investors can recover their
losses” that Congress intended, Conference Report on
Securities Litigation Reform, H.R. Conf. Rpt. 104-369, at
31, 1995 U.S.C.C.A.N. at 730 (1995); see Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Dabit, 126 S. Ct. 1503,
1510 (2006), then outside actors must be held accountable

' We anticipate that the plaintiffs in the Enron securities fraud
case (and perhaps others) will appear as an amicus curiae in this case
and detail the fraudulent misrepresentations that Enron’s banks made
to the investing public through their financial transactions with Enron.
See, e.g., In re Enron: 235 F. Supp. 2d at 637-57, 695-704; Pet. Writ
Cert., Regents of the Univ. of California v. Merrill Lynch Pierce Fenner
& Smith, Inc., No. 06-1341. Enron, though, is not the only example of a
notorious fraud case that arose in large part from the conduct of outside
actors. Other examples include the frauds involving Global Crossing,
see In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 335-37
(S.D.N.Y. 2004), and Lincoln Savings & Loan, see, e.g., In re: Am. Cont'l
Corp./Lincoln Sav. and Local Sec. Litig., 140 F.R.D. 425, 428 (D. Ariz.
1992).

Amici also anticipate that petitioner and other amici will point out
that outside actors are hardly blameless for many of recent history's
securities frauds Some distinguished commentators — not all of them
sympathetic to the securities plaintiffs’ bar - have assigned much of the
blame for these frauds to the accountants, bankers, lawyers, and other
professionals (called “gatekeepers” by one commentator) on whom the
investing public relies to ensure that our markets operate with integ-
rity. See, e.g., Coffee, Gatekeeper Failure, supra; John C. Coffee, Jr.,
Guarding the Gatekeepers, N.Y. Times, May 13, 2002, at A-2.

6

when (as alleged in this case) their conduct violates the
explicit language of § 10(b) and its companion SEC rule,
Rule 10b-5, 17 C.F.R. § 240.10b-5. The victims of several of
the most notorious recent frauds have achieved a substan-
tial measure of recovery (though in each case far from all
of their losses) only because courts allowed them to pro-
ceed against culpable outside actors. See, e.g., Jn re World-
Com, Inc. Sec. Litig., 388 F.Supp. 2d 319, 322, 325
(S.D.N.Y. 2005); Pet. Writ. Cert., Regents of the Univ. of
Calif. v. Merrill Lynch Pierce Fenner & Smith, Inc. (No. 06-
1341), at ii, 3 (Enron). be

As amici establish below, none of the other usual
sources of recovery in securities fraud cases - i.e., the
corporate issuer, the issuer’s officers, directors, and other
insiders, or the issuer’s directors’ and officers’ (D&O)
liability policies - can provide any meaningful relief for
the victims of most major frauds.

I. Major Fraud Cases Often Involve Insolvent
Stock Issuers from Which Defrauded Inves-
tors Cannot Obtain Any Recovery for Their
Losses.

Nearly all of recent history's most notorious securities
fraud cases — including those involving Enron, Equity
Funding, Global Crossing, Lincoln Savings and Loan,
Refco, Sunbeam, U.S. Financial, and WorldCom — involved
securities issuers that were insolvent by the time (or soon
after) the filing of a § 10(b) case. See, e.g., Hevesi v. Citi-
group, Inc., 366 F.3d 70, 73 (2d Cir. 2004); Hamilton, The
Crisis in Corporate Governance, supra, at 20-26. The
result for investors defrauded by insolvent issuers is
usually the same: The issuer files for bankruptcy, and the
automatic stay provision of the bankruptcy code, 11 U.S.C.

7

§ 362(a), then shields the issuer from suit, leaving the
defrauded shareholder with a usually-worthless (pre-
petition) claim against the insolvent issuer that is not
worth pursuing and is seldom pursued.’ See, e.g., Hevesi,
366 F.3d at 74 n.1 (noting that WorldCom’s bankruptcy
filing “prevent(ed] litigation against WorldCom from going
forward”).

As a result, only culpable stock issuer’s officers and
managers, directors, and outside actors remain viable
defendants in these cases.’ See, e.g., id.; see also, e.g., In re
Refco Sec. Litig., 05 Civ. 8626, 2007 U.S. Dist. LEXIS
31969, at *11 (S.D.N.Y. Apr. 30, 2007); In re Global Cross-
ing Sec. and ERISA Litig., 225 F.R.D. 436, 441 (S.D.NLY.
2004); In re: Am. Cont’l Corp./Lincoln Sav. and Loan Sec.
Litig., 140 F.R.D. at 427; In re Equity Funding Corp. of
Am. Sec. Litig., 375 F. Supp. 1378, 1380 (1974). See gener-
ally Coffee, Reforming the Securities Class Action, supra,
at 1551 n.64 (noting that “insiders and secondary partici-
pants fi.e., outside actors] are the only parties that can be
sued once bankruptcy has been filed”).

* Criminal proceedings against individual defendants in civil cases
may also result in stays. In the WorldCom securities litigation, for
instance, the district court stayed all proceedings against the company’s
former CEO (Bernard Ebbers) pending the resolution of criminal
proceedings against him. See In re WorldCom Sec. Litig., 02 CV 3288,
2005 Dist. LEXIS 1805, at *5 n.1 (S.D.N_Y. Feb. 10, 2005); see also In re
WorldCom, Inc. Sec. & ERISA Litig., No. 02 Civ. 3288, 2002 U.S. Dist.
LEXIS 23172 (S.D.N.Y. Dec. 5, 2002) (staying litigation against other
executives).

* Securities class actions are actually seldom filed (against the
stock issuer or anyone else) if the stock issuer declares bankruptcy. See,
e.g., John C. Coffee, Jr., Reforming the Securities Class Action: An Essay
on Deterrence and Its Implementation, 106 Colum. L. Rev. 1534, 1551
n.64 (2006) [hereinafter “Reforming the Securities Class Action”).

8

II. Corporate Insiders Seldom Have Sufficient
Assets to Compensate Defrauded Investors
for Their Losses in Major Fraud Cases.

As for the issuer’s officers, directors, managers, and
other insiders, their personal assets can usually cover
only (at best) a small fraction of investor losses in any
sizable fraud. See, e.g., Coffee, Reforming the Securities
Class Action, supra, at 1554-55. The damages in major
securities fraud cases can and often do run into the bil-
lions of dollars. See, e.g., Regents of the Univ. of California,
482 F.3d at 379; In re Global Crossing, 225 F.R.D. at 460;
see also Coffee, Reforming the Securities Class Action,
supra, at 1555 (cataloguing settlement amounts in major
securities fraud cases). Few, if any, corporate officers and
directors have the kind of assets needed to make their
victims whole. See, e.g., In re Global Crossing, 225 F.R.D.
at 460 (noting that settlement was being funded by indi-
viduals “whose assets individually and collectively do not
come close to the tens of billions of dollars of liability
claimed”). The combined assets of Enron’s CEO (Jeffrey
Skilling) and board chairman (Kenneth Lay) just after
their convictions, for example, represented less than one

* While outside directors are often sued, they usually do not face
liability or contribute personally to settlements. See Bernard Black,
Brian Cheffins, & Michael Klausner, Outside Directors Liability, 58
Stan. L. Rev. 1055, 1063-64 (2006); Joann S. Lublin, Theo Francis, &
Jonathan Weil, Directors Are Getting the Jitters - Recent Settlements
Tapping Executive’ Personal Assets Put Boardroom on Edge, Wall St. J.,
Jan. 13, 2005, at B-1. A recent study found only 13 securities fraud
cases before Enron and WorldCom in which outside directors made out-
of-pocket payments to fund a settlement. See id. As for Enron’s and
WorldCom's outside directors, they contributed only $18 million and
$13 million out of pocket, respectively, to the Enron and WorldCom
settlements. See Black, Cheffins, & Klausner, Outside Directors Liability,
supra, at 1057.

9

percent of the total damages suffered by Enron’s de-
frauded investors. See, e.g., John R. Emshwiller & Gary
McWilliams, What’s Left of Lay and Skilling Wealth Is at
Risk, Wall St. J., May 27, 2006, at A-2; see also, e.g., In re
WorldCom, 2005 Dist. LEXIS 1805, at *5 (noting that the
outside directors’ $18 million contribution to the settle-
ment in WorldCom represented 20 percent of the directors’
total combined assets). It is telling that the largest payout
in a securities fraud settlement by a corporate insider
(Gary Winnick, the chairman of Global Crossing) was $55
million in a suit involving claimed damages in the billions
of dollars. See, e.g., Coffee, Reforming the Securities Class
Action, supra, at 1552.

Even the limited assets of insiders, though, are not
always available for recovery by defrauded investors.
Sometimes they are seized in connection with, or ex-
hausted on defense costs in, the related criniinal proceed-
ings that often accompany civil securities fraud cases. See,
e.g., Emshwiller & McWilliams, What’s Left of Lay and
Skilling Wealth Is At Risk, supra; John R. Emshwiller,
Enron Trial Highlights Issue of Plea Bargain, Wall St. J.,
Oct. 11, 2004, at C-1.

Ill. D&O Policies Usually Provide No or Inade-
quate Coverage in Major Fraud Cases.

While D&O policies fund much of the plaintiffs’ and
class members’ recovery in garden-variety fraud cases, see,
e.g., Coffee, Reforming the Securities Class Action, supra,
at 1551, they do the victims of major frauds involving

10

insolvent stock issuers little good in most cases. There are
four main reasons why:

First, nearly all D&O policies exclude from coverage
the kind of fraud that normally gives rise to § 10(b) liabil-
ity. Once the defendant is found liable for securities fraud,
the insurer may decline coverage. See, e.g., Black, Chef-
fins, & Klausner, Outside Directors Liability, supra, at
1086; Coffee, Reforming the Securities Class Action, supra,
at 1574. Matters are only likely to get worse in the future.
Insurers have begun to cut back on coverage, see, e.g.,
Jonathan D. Glater & Joseph B. Treaster, Insurers Scale
Back Corporate Liability Policies, N.Y. Times, Sept. 7,
2002, at C-1, and some insurers have even refused to issue
policies altogether in perceived “high-risk” industries, see,
e.g., Hamilton, The Crisis in Corporate Governance, supra,
at 38.

Second, a D&O policy may be impaired. The insurer of
an insolvent company embroiled in allegations of fraud
will often seek to rescind the company’s D&O policy on the
claimed ground that the company made misrepresenta-
tions (deliberately or negligently) when it purchased the
policy. See, e.g., Coffee, Reforming the Securities Class Action,
supra, at 1551, 1556, 1578-79; Michael H. Diamond, D&O
Insurance: Pitfalls in a New World, Nat'l L. J., Aug. 26-Sept.
2, 2002, at A-22. Oftentimes the misrepresentations that

* Amici exclude from consideration here fiduciary and other
insurance policies that may cover pension plan losses arising from the
investment of pension plan assets in the security issuer’s stock.
Recovery of those losses are not sought in § 10(b) actions but instead in
breach-of-fiduciary actions brought under the Employee Retirement
Income Security Act (ERISA), 29 U.S.C. § 1001 et seg. ERISA suits, of
course, benefit only pension plan participants, not stock purchasers
generally.

11

forms the basis of the rescission reside in the very SEC
filing that forms the basis of the securities fraud claim.
See, e.g., In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d
455, 462 (S.D.N.Y. 2005). Disputes over rescission have
become common. See, e.g., id. at 455, 456-66; Two Insurers
Seek Right to Challenge Claims From Enron Lawsuits,
Wall St. J., Feb. 22, 2002, at B4. Insurers have responded
by writing policies that expand their rights of rescission in
cases of alleged fraud. See, e.g., Theo Francis, Directors’
Armor: Adelphia Ruling Shows Legal Bills Must Be
Covered, Wall St. J., Mar. 24, 2004, at C-5.

Third, even an unimpaired D&O policy will cover only
a modest fraction of the total damages. Losses in major
securities fraud cases dwarf coverage limits. See, e.g.,
Black, Cheffins, & Klausner, Outside Directors Liability,
supra, at 1119, 1125; Coffee, Reforming the Securities
Class Action, supra, at 1555-56, 1577-78. Most large U.S.
companies carry D&O policies with coverage limits of
between $100 and $200 million, see, e.g., Coffee, Reforming
the Securities Class Action, supra, at 1577-78, and not
even the largest corporations can afford to insure against
losses on the order of those suffered by the investors of
issuers like WorldCom, see id. at 1556. (Few insurers even
sell policies with coverage exceeding $300 million. See id.
at 1578.) All of Enron’s D&O policies together provided
only $350 million in coverage. See, e.g., Two Insurers Seek
Right to Challenge Claims from Enron Lawsuits, Wall St.
J., Feb. 22, 2002, at B-4. WorldCom, whose fraud likewise
caused billions gf dollars in investors losses, had only $100
million in D&O coverage. See In re WorldCom, 354
F. Supp. 2d at 460.

Fourth, defense costs in securities fraud cases often
quickly exhaust whatever limited D&O coverage may

12

exist. See, e.g., Black, Cheffins, & Klausner, Outside
Directors Liability, supra, at 1125. Securities fraud cases
are complex, protracted, and expensive to defend. The
longer a suit’s life, the less insurance money there will be
to fund a settlement or satisfy a judgment. For example,
by the time of the ‘partial) settlement in the Enron securi-
ties fraud case, $150 million of Enron’s $350 million
(combined) policies had been spent on defense costs, see,
e.g., Black, Cheffins, & Klausner, Outside Directors Liabil-
ity, supra, at 1125; in the WorldCom securities case, $15
million of a $100 million policy had been spent on defense
costs, id. at 1119; and in the Global Crossing securities
fraud case, to give a last example, $40 million of a $50
million policy had been spent on defense costs. See Global
Crossing, 225 F.R.D. at 443, 445, 460.

* * *

Several of the lower courts (including the Court of
Appeals in this case) that have interpreted § 10(b) to
exclude so-called “scheme liability” from its reach have
justified their interpretation by indulging dubious policy
considerations of one sort or another. See, e.g., Credit
Suisse First Boston, 482 F.3d at 391-92; In re Charter
Communications, Inc. Sec. Litig., 443 F.3d 987, 992-93 (8th
Cir. 2006). There are, however, important countervailing
policy considerations that support the plain-meaning
reading of § 10(b) (and its companion SEC regulation, Rule
10b-5) urged by the petitioner in this case. None of them is
more important, to be sure, than the ability of defrauded
investors to recover their losses in the sort of major fraud
cases addressed in this brief.

+

13

CONCLUSION

The Court should reverse the judgment of the Court of
Appeals.

Respectfully submitted,

JONATHAN W. CUNEO DEBORAH ZUCKERMAN
ROBERT J. CYNKAR AARP

MICHAEL G. LENETT 601 E Street, NW
MATTHEW WIENER* Washington, DC 20049

CUNEO GILBERT & LADucA, LLP (202) 434-6045
507 C Street, NE

Washington, DC 20002

(202) 587-5068

Counsel for All Amici Counsel for AARP
*Counsel of Record
June 11, 2007

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0280%3A12. Public record. Not legal advice.