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

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JUL | b 2007 No. 06-43

Sn The

Supreme Court of the United States

®

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,

V.

SCIENTIFIC-ATLANTA, INC., et ai.,

Respondents.

S

On Writ Of Certiorari To The

United States Court Of Appeals

For The Eighth Circuit

o

MCTION FOR LEAVE TO FILE BRIEF

OUT OF TIME AND BRIEF AMICI CURIAE

OF FORMER SEC COMMISSIONERS

IN SUPPORT OF PETITIONER

¢

ARTHUR R. MILLER

Counsel of Record

Vanderbilt Hall

40 Washington Square South

New York, New York 10119

(212) 992-8147

MEYER EISENBERG

2000 Pennsylvania Avenue,

N.W. (8W)

Washington, D.C. 20006

(202) 974-1594

--—-—

eee

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

1

MOTION FOR LEAVE TO FILE BRIEF

OUT OF TIME OF AMICI CURIAE

FORMER SEC COMMISSIONERS

IN SUPPORT OF PETITIONER

Pursuant to Supreme Court Rule 37.3, William H.

“Donaldson and Arthur Levitt, Jr., former-Chairmen of the.

Securities and Exchange Commission, and Harvey J.

Goldschmid, former Commissioner of the SEC, respectfully

move for leave to file a brief amici curiae out of time, and

to file the accompanying brief in support of the petitioner.

Amici regret missing the deadline for filing. This is

one of the most important securities cases to be heard by

this Court in many years. As former Chairmen and Com-

missioners of the Securities and Exchange Commission,

amici have been involved extensively in securities law

policy and enforcement and respectfully believe they have

a perspective that might assist in the Supreme Court’s

consideration of the issue now pending before the Court.

Amici expected that the Solicitor General would

support the past and current position of the Securities and

Exchange Commission on the issue presented and file an

amicus curiae brief on behalf of the United States in

support of petitioner. Amici apologize for the late motion,

but saw no need to file this brief until after June 11, 2007,

when petitioner’s brief was filed and an amicus brief of the

United States supporting petitioner was not. Plainiiffs

consent to the filing of this amici brief; Defendants do not.

Since Defendants have been granted an extension of time

BEST AVAILABLE COPY

2

to file their brief until August 15, 2007, the granting of

this motion would not prejudice them.

Respectfully submitted,

ARTHUR R. MILLER

Counsel of Record

Vanderbilt Hall

40 Washington Square South

New York, New York 10119

(212) 992-8147

MEYER EISENBERG

2000 Pennsylvania Avenue,

N.W. (8W)

Washington, D.C. 20006

(202) 974-1594

TABLE OF CONTENTS

INTEREST OF AMICL.........ccccccssssssssesessessecsreeseseeeeees

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SUMMARY OF ARGUMENT....2.......:.csccsseeseeeseeeeeeees

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TABLE OF AUTHORITIES

Page

CASES

Affiliated Ute Citizens v. United States, 406 U.S.

SITET A TIITT sic icesicerinnhedinidinhngdibediniiiinktddicadiatsdainedediiniinbadiadaiaiadiidanadase 5

Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, 511 U.S. 164 (1994) oe eeeeeeeeeeeeeees 7

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336

SI ciiccsesnsninsdhiesdineobtiebicbennitnaiitehiainiitendbindabaiiaiiiabiiatiaidl stata 9

In re Enron Corp. Sec. Litig., 2006 U.S. Dist.

LEXIS 43146 (S.D. Tex. June 5, 2006), rev'd,

Regents of the Univ. of Cal. v. Credit Suisse First

Boston, 462 FBG STZ (BOOT) ..00ccscccosccccesescccccscoscsscesesees 2,6

J. I. Case Co. v. Borak, 377 U.S. 426 (1964).............cccee eee 9

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) .......... 5

SEC v. Dibella, 2005 U.S. Dist. LEXIS 31762 (D.

a; I Sa SI indict taccecinecininte datchtehitaredaiienicnedainideiniions 7

SEC v. Zandford, 535 U.S. 813 (2002) ...............esceeeceeeeeeees 5

Simpson v. AOL Time Warner Inc., 452 F.3d 1040

(9th Cir. 2006), petition for cert. filed sub nom.

Cal. St. Teachers Ret. Sys. v. Homestore.com, Inc.,

75 U.S.L.W. 3236 (U.S. Oct. 19, 2006) (No. 06-

Sei icitittincstaticpasientdneiiienpssidindinaceenttininniisiieci iat ian ics ia tila etd aaa 2,6

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 2007

U.S. LEXIS 8270 (June 21, 2007)............:cccccceeeeeeees 5, 6,8

United States v. O'Hagan, 521 U.S. 642 (1997)............:0008 5

TABLE OF AUTHORITIES - Continued

Page

ADMINISTRATIVE CASES

In re Cady, Roberts & Co., 1961 SEC LEXIS 386, 40

- S.E.C.. 907. (Nov. 8, 1961)..........ccessossrseresscesccscsecssssscecscees 7

In re Robert W. Armstrong, III, 2005 SEC LEXIS

ES Annee 7

STATUTES

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RULES

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iv

TABLE OF AUTHORITIES -— Continued

Page

OTHER AUTHORITIES

Amicus Curiae Brief of the SEC filed April, 1998 in

Klein v. Boyd, No. 97-1142 (3d Cir.) ...........cccceeeeeeeeeeeenees 6

Amicus Curiae Brief of the SEC filed October 22,

2004 in Simpson v. AOL Time Warner, Inc. (Cal.

St. Teachers Ret. Sys. v. Homestore.com, Inc., “o.

ee ND crcecnnnscndntinntiateninteintnesiitnnttnce rian 2

http://www.sec.gov/divisions/enforce/claims/enron.htm........... 8

Petition for Writ of Certiorari, The Regents of the

Univ. of Cal. v. Merrill Lynch Pierce Fenner &

BT, Bic Seen I Dccccitnccnrtenevinnsrsenmiiinnieesannnbntnisintie 8

1

No. 06-43

¢

In The

Supreme Court of the United States

¢

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,

V.

SCIENTIFIC-ATLANTA, INC., et ai.,

Respondents.

¢

On Writ Of Certiorari To The

United States Court Of Appeals

For The Eighth Circuit

¢

BRIEF AMICI CURIAE OF FORMER SEC

COMMISSIONERS IN SUPPORT OF PETITIONER

INTEREST OF AMICI’

This amici curiae brief is submitted by William H.

Donaldson, former Chairman of the Securities and Exchange

Commission (2/18/03 — 6/30/05, appointed by President

George W. Bush), Arthur Levitt, Jr., former Chairman of the

* This brief was not authored in whole or in part by counsel for a

party, No person or entity other than amici curiae or their counsel made

a monetary contribution to the preparation or submission of this brief.

Plaintiffs’ blanket letter of consent to the filing of this brief is on file

with the Court. Defendants do not consent to the filing of this brief.

2

SEC (7/27/93 — 2/9/01, appointed by President William J.

Clinton), and Harvey J. Goldschmid, former Commissioner

of the SEC (7/31/02 — 7/31/05, appointed by President

George W. Bush) in support of Petitioner. Throughout our

tenure of service at the SEC, during Administrations of

both political parties, we have been involved in Commis-

sion policy and enforcement regarding so-called “fraudu-

lent scheme liability.” We believe the continued viability of

private actions based on such liability is essential for the

protection of the nation’s investors and the integrity of our

financial markets.

This is one of the most important securities cases to

be heard by this Court in many years. It is critical to the

antifraud purposes of the federal securities laws that

actors, other than issuers and their officers and directors,

who actively engage in deceptive conduct — for the purpose

and with the effect of creating a false statement of mate-

rial fact in the disclosure of a public corporation — continue

to be held liable in private actions.

Section 10(b) of the Securities Exchange Act of 1934

and Rule 10b-5 thereunder, as the SEC explained recently,

include “conduct beyond the making of false statements or

misleading omissions, for facts effectively can be misrepre-

sented by action as well as words.” Amicus Curiae Brief of

the SEC filed October 22, 2004 in Simpson v. AOL Time

Warner, Inc. (Cal. St. Teachers Ret. Sys. v. Homestore.com,

Inc., No. 04-55665 (9th Cir.), at 8 (quoted in Jn re Enron

Corp. Sec. Litig., 2006 U.S. Dist. LEXIS 43146, at *165

(S.D. Tex. June 5, 2006), rev'd, Regents of the Univ. of Cal.

v. Credit Suisse First Boston, 482 F.3d 372 (2007)). We

believe that this Court’s resolution of the issue of fraudu-

lent scheme liability in the instant case will have a pro-

found effect on the continued deterrence of fraud, the

3

ability of defrauded investors to recover their losses, and

the overall fairness and effectiveness of our securities

markets. We urge this Court to reaffirm liability for actors

who actively engage in deceptive conduct as part of a

fraudulent scheme.

®

INTRODUCTION

The federal securities laws reflect Congress’ broad

purpose to protect investors and preserve the integrity of

the markets by deterring, punishing, and allowing civil

remedies for manipulative and deceptive conduct. In

particular, Section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. §78j(b), prohibits “any manipulative or

deceptive device or contrivance” and provides a broad

grant of authority to the Commission to enact rules “in the

public interest or for the protection of investors.” The

Commission promulgated Rule 10b-5, 17 C.F.R. §240.10b-

5, to deter and prevent fraud.

Together Section 10(b) and Rule 10b-5 are the chief

weapons in the SEC’s arsenal against securities fraud and

the principal means by which defrauded investors recover

their losses from those who perpetrate frauds. If allowed

to stand, the decision below would make virtually invul-

nerable those who actively, purposely, and with market

effect, engage in deceptive conduct and would cause grave

harm. The decision conflicts with the language and pur-

poses of Section 10(b), the historical position of the Com-

mission, and well-grounded judicial precedent.

The decision below immunizes non-issuers who

commit securities fraud from private liability merely

because they were cunning enough to avoid making a

4

public statement. Those who — with purpose and effect -

actively engage in fraudulent acts as part of a scheme with

the issuer to defraud investors should be held primarily

liable, regardless of whether they speak to the market,

assuming all the other requirements to plead and prove a

claim under Section 10(b) and Rule 10b-5 are met.

Fraudulent scheme liability neither results in undue

liability exposure for non-issuers, nor an undue burden

upon capital formation. Holding liable wrongdoers who

actively engage in fraudulent conduct that lacks a legiti-

mate business purpose does not hinder, but rather en-

hances, the integrity of our markets and our economy. We

believe that the integrity of our securities markets is their

strength. Investors, both domestic and foreign, trust that

fraud is not tolerated in our nation’s securities markets

and that strong remedies exist to deter and protect against

fraud and to recompense investors when it occurs. The

decision below, if left standing, would dramatically un-

dermine private enforcement of our securities laws and

investor confidence in our securities markets.

¢

SUMMARY OF ARGUMENT

Meritorious private actions to enforce the federal

antifraud securities laws are an essential supplement to

government actions. Private actions are the principal

means by which defrauded investors recover their losses

due to the Commission’s limited resources and powers.

The Commission’s traditional position has been that a

party commits a primary securities fraud violation for

which it may be held liable in a private action by actively

engaging in fraudulent conduct as part of a scheme to

5

defraud investors, even if it does not make a public state-

ment. Such “fraudulent scheme liability” is consistent with

the purposes of the federal *2curities laws and essential to

the protection of investors, the integrity of the securities

markets, and the ability of America to remain the world’s

‘leader in capital formation. The Court should reverse the

decision below and reaffirm the availability of fraudulent

scheme liability.

¢

ARGUMENT

The broad antifraud purposes of Section 10(b) of the

Securities Exchange Act of 1934, have long been fully

recognized by this Court. See, e.g., SEC v. Zandford, 535

U.S. 813, 821 (2002) (noting statute’s broad language and

interpretation); United States v. O’Hagan, 521 U.S. 642,

658 (1997) (noting Congress’ intention “to insure honest

securities markets and thereby promote investor confi-

dence”); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477

(1977) (“No doubt Congress meant to prohibit the full

range of ingenious devices that might be used to manipu-

late securities prices”); Affiliated Ute Citizens v. United

States, 406 U.S. 128, 152-53 (1972) (noting statute’s broad

language accords with Congress’ “fundamental purpose .. .

to achieve a high standard of business ethics in the securi-

ties industry”) (internal quotation marks omitted).

This Court and the SEC have also “long recognized

that meritorious private actions to enforce federal anti-

fraud securities laws are an essential supplement to

criminal prosecutions and civil enforcement actions

brought, respectively, by the Department of Justice and

the Securities and Exchange Commission (SEC).” Tellabs,

6

Inc. v. Makor Issues & Rights, Ltd., 2007 U.S. LEXIS

8270, *9 (June 21, 2007). “[P]rivate securities litigation [i]s

an indispensable tool with which defrauded investors can

recover their losses — a matter crucial to the integrity of

domestic capital markets.” Jd. at *24 n.4 (internal quota-

tion marks omitted).

The Commission’s traditional position has been that

a person may commit a “manipulative or deceptive” act

constituting a primary violation of Section 10(b) without

making a public statement. The SEC consistently

has expressed this position through rulemaking,’ amicus

briefs in private litigation,’ civil actions brought by the

* See, e.g., Rule 10b-5(a) and (¢), and many other rules promulgated

by the Commission under Section 10(b) prohibiting manipulative or

deceptive acts without requiring misstatements or omissions. Rule 10b-

1, 17 C.FR. §240.10b-1; Rule 10b-3, 17 C.F_R. §240.10b-3; Rule 10b-5-1,

17 C.F.R. §240.10b-5-1; Rule 10b-5-2, 17 C.F.R. §240.10b-5-2; Rule 10b-

10, 17 C.FR. §240.10b-10; Rule 10b-16, 17 C.F.R. §240.10b-16; Rule

10b-17, 17 C.F_R. §240.10b-17.

* See, e.g., Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1048

(9th Cir. 2006) (“We agree with the SEC that engaging in a transaction,

the principal purpose and effect of which is to create the false appear-

ance of fact, constitutes a ‘deceptive act’”), petition for cert. filed sub

nom. Cal. St. Teachers Ret. Sys. v. Homestore.com, Inc., 75 U.S.L.W.

3236 (U.S. Oct. 19, 2006) (No. 06-560); In re Enron Corp. Sec. Litig.,

2006 U.S. Dist. LEXIS 43146, at *165 (S.D. Tex. June 5, 2006) (noting

Commission’s argument “deceptive acts under Section 10(b) include

conduct beyond the making of false statements or misleading omissions,

for facts effectively can be misrepresented by action as well as words.

For example, if an investment bank falsely states that a client company

has sound credit, there is no dispute that it can be primarily liable. If

the bank creates an off-balance-sheet sham entity that has the purpose

and effect of hiding the company debt, it has achieved the same

deception, and liability should be equally available”), rev'd, Regents of

the Univ. of Cal. v. Credit Suisse First Boston, 482 F.3d 372 (2007),

Amicus Curiae Brief of the SEC filed April, 1998 in Klein v. Boyd, No.

97-1142 (3d Cir.).

7

Commission,’ and the Commission’s own administrative

adjudications.”

The SEC’s position is both reasonable and necessary

for the protection of investors. An intentional scheme to

engage in sham transactions for the purpose of artificially

inflating a public corporation’s financial statements, as

alleged in the instant case, is anathema to what Congress

sought to accomplish by enacting Section 10(b).

Although the Commission has the authority to pro-

ceed against aiders and abettors, 15 U.S.C. §78t(e), private

litigants do not. See Central Bank of Denver, N.A. v. First

Interstate Bank of Denver, 511 U.S. 164 (1994). Investors

must rely primarily on private actions to recover when

* See, e.g., SEC v. Dibella, 2005 U.S. Dist. LEXIS 31762, *11 (D.

Conn. Nov. 29, 2005) (noting Commission’s position subsections (a) and

(c) prohibit schemes to defraud regardless whether any material

statements or omissions were made).

* See, e.g., In re Robert W. Armstrong, III, 2005 SEC LEXIS 1497,

*23 (June 24, 2005) (misstatement or omission not required for liability

under subsection (a) or (c) of Rule 10b-5: “A person’s conduct as part of a

scheme constitutes a primary violation when the person directly or

indirectly engages in a manipulative or deceptive act as part of the

scheme. ... Schemes used to artificially inflate the price of stocks by

creating phantom revenue fall squarely within both the language of

section 10(b) and its broad purpose, to prevent practices that impair the

function of stock markets in enabling people to buy and sell securities

at prices that reflect undistorted (though not necessarily accurate)

estimates of the underlying economic value of the securities traded, and

nothing in the language of Section 10(b) or Rule 10b-5 or in the case law

interpreting them shields a defendant from liability for direct participa-

tion in such a scheme”) (internal quotation marks omitted), In re Cady,

Roberts & Co., 1961 SEC LEXIS 386, *9, 40 S.E.C. 907, 911 (Nov. 8,

1961) (“These anti-fraud provisions are not intended as a specification

of specific acts or practices which constitute fraud, but rather are

designed to encompass the infinite variety of devices by which undue

advantage may be taken of investors and others”).

8

defrauded. The SEC’s disgorgement and civil money

penalty powers, although enhanced by the Sarbanes-Oxley

Act, are limited, and will generally cover only a fraction of

the damage done to investors by serious securities fraud.

Moreover, the SEC with limited resources cannot possibly

undertake to bring actions in every one or even most of the

financial fraud cases that have proliferated over the past

few years.

Thus, the elimination o* fraudulent scheme liability

would mean, in practical terins, that defrauded investors

would not be able to recover their losses from any party

other than the public company that issued the financial or

other public statements. But in many fraud cases, the

issuer becomes bankrupt or unable to satisfy a judgment

once the fraud is exposed. If the only party investors could

proceed against were the issuer (and its directors and

officers), defrauded investors would be unable to recover

much of their losses and public confidence in the markets

would surely suffer. Private cases, so long as they are well-

grounded, are an important enforcement mechanism

supplementing the SEC in the policing of our markets.’

Most often, the larger the frauds, the greater investors

must rely on private cases to recover their losses. In the

Enron case, for example, the Commission and the De-

partment of Justice were able to obtain only $440 million

for investors (see http://www.sec.gov/divisions/enforce/claims/

enron.htm) out of total claimed losses of approximately

$40 billion (see Petition for Writ of Certiorari at 5 n.8, The

* In enacting the Private Securities Litigation Reform Act of 1995,

109 Stat. 737, Congress “installed both substantive and procedural

controls” designed to ensure private cases are well-grounded. Te/labds,

2007 U.S. LEXIS, at *23.

9

Regents of the Univ. of Cal. v. Merrill Lynch Pierce Fenner

& Smith, Inc., (No. 06-1341)).

The most serious effect of the elimination of fraudu-

lent scheme liability would be on deterrence and the

cals, Inc. v. Broudo, 544 U.S. 336, 345 (2005) (“The

securities statutes seek to maintain public confidence in

the marketplace. ... by deterring fraud, in part, through

the availability of private securities fraud actions”); J. I.

Case Co. v. Borak, 377 U.S. 426, 432 (1964) (private

securities fraud actions provide “a most effective weapon

in the enforcement” of securities law and are “a necessary

supplement to Commission action”). What signal would it

send to banks, broker-dealers, accountants, and lawyers to

relieve them of all possibility of private liability so long as

they do not speak publicly about the transactions with

respect to which they perform their essential services?

What signal would it send to investors to deprive them of

the ability to recover significant parts of their losses in

cases where actors actively and purposefully engaged in a

fraudulent scheme?

The continuation of fraudulent scheme liability will

not harm American competitiveness; in fact, investor faith

in the safety and integrity of our markets is their strength.

The fact that our markets are the safest in the world has

helped make them the strongest in the world. Capital

formation through the United States securities markets

since the enactment of the federal securities laws has been

a resounding success.

10

CONCLUSION

We respectfully urge this Court to reverse the decision

of the court below and to reaffirm the availability of

fraudulent scheme liability under Section 10(b) and Rule

10b-5.

Respectfully submitted,

ARTHUR R. MILLER

Counsel of Record

Vanderbilt Hall

40 Washington Square South

New York, New York 10119

(212) 992-8147

MEYER EISENBERG

2000 Pennsylvania Avenue,

N.W. (8W)

Washington, D.C. 20006

(202) 974-1594