Reading Stoneridge Carefully: A Duty-Based Approach to Third-Party Liability Under Rule 10b-5
This Faculty Working Paper has been updated and posted within the Georgetown Law Faculty Publications series in the Scholarly Commons. It is currently available at http://scholarship.law.georgetown.edu/facpub/421/
Abstract
In Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., the Supreme Court addressed whether third-party participants in a fraudulent scheme engineered by a corporate issuer face liability in a private securities lawsuit for harm caused by the issuer’s false and misleading corporate disclosures. Though this would seem to be a matter of determining whether their deceptive behind-the-scenes conduct by itself constituted a “primary” violation of the antifraud prohibition found in SEC Rule 10b-5, the Court answered by interpreting reliance element of plaintiffs’ cause of action. It says that there is no reliance, and hence no liability, when the link between the third party’s actions and the resulting misrepresentation is too remote or attenuated. This paper offers a novel reading of Stoneridge. The choice of reliance as the crucial element suggests the Court’s comfort with different liability outcomes in 10b-5 cases depending on whether the action is SEC or criminal enforcement (where reliance is not a required showing) or private litigation (where it is). Why might such a distinction make sense? One possible answer comes by looking at the extraordinary nature of the remedy granted in private fraud-on-the-market cases—the aggregate out of pocket claims of all those who bought or sold from the time of the alleged primary misrepresentations to the date of corrective disclosure, a figure that can be staggeringly large and disconnected from any meaningful requirement of reliance-in-fact. Especially when the particular defendant is a secondary actor, there can be a sense of severe disproportion, even if the underlying conduct was wrongful. My main argument is that in its emphasis on remoteness and attenuation applied solely in the context of private securities litigation, Stoneridge reinvigorates duty as a limitation on liability to open market investors in order to constrain the unique liability risk that defendants face. It shows how this applies to a wide range of cases, and often generates pro-plaintiff outcomes where liability is well-deserved. The paper concludes with a proposal for legislative reform that would restore aiding and abetting liability but with a better system of proportionate fault.