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In a much anticipated decision by those in the securities industry, the United States Supreme Court yesterday reaffirmed its stance that no private cause of action exists under Rule 10b-5 against those who aided and abetted a securities law violation.

In the class action case of Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et al., a group of investors in Charter Communications, Inc. accused two of Charter's suppliers of deliberately entering into backdated contracts with Charter that allowed Charter to issue misleading financial statements. The suppliers did not, however, play any role in preparing or disseminating the misleading financial statements. Nor did the suppliers make any misstatements relied upon by the public or violate a duty to disclose.

The suppliers prevailed on a motion to dismiss at the district court level, on the theory that no private cause of action exists under Rule 10b-5 for aiding and abetting a securities law violation. (See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994)). The Eighth Circuit affirmed the district court's decision on the strength of the Supreme Court's decision in Central Bank. The Supreme Court granted certiorari to resolve conflicts within the courts of appeals concerning the breadth and application of its Central Bank decision.

The Supreme Court, in a 5-3 majority opinion written by Justice Kennedy, affirmed the Eighth Circuit's decision. Justice Kennedy's opinion placed great emphasis on the fact that Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA) due in part to the backlash stemming from the Central Bank decision. Simply stated, cries were heard from around the country after the Central Bank decision that a private cause of action should exist for aiding and abetting a securities law violation. Nevertheless, Congress enacted the PSLRA without including any express or implied language that a private cause of action exists under Rule 10b-5 for aiding and abetting. Instead, Section 104 of the PSLRA directed the SEC to prosecute aiders and abettors.

Inasmuch as the legislative landscape of pursuing a private cause of action under Rule 10b-5 for aiding and abetting has not changed since the court's decision in Central Bank nearly 14 years ago, the court found no reason to deviate from its Central Bank holding. Thus, the ball is now, once again, in Congress' court to determine whether legislation should be passed creating a private cause of action under Rule 10b-5 for aiding and abetting.

In conclusion, the Supreme Court's decision in Stoneridge Investment strikes yet another blow to plaintiffs in securities fraud class actions and builds upon the court's recent pro-business decisions in cases such as Tellabs, Inc. v. Makor and Dura Pharmaceuticals v. Broudo. There is also no doubt that the Stoneridge Investment decision will allow accountants, lawyers and bankers to breathe a little easier in their day-to-day dealings with clients. Regardless, professionals from all walks of life should not mistake the Stoneridge Investment decision as a free pass to engage in aiding and abetting activities, since the SEC still has the power to prosecute them vis-a-vis the PSLRA.

About Buchanan's Securities Litigation Practice Group

The attorneys in our group have wide experience in representing corporations, their officers and directors in SEC enforcement proceedings, hostile takeover litigation, shareholder class and derivative actions, and SEC and FINRA investigations. We have represented professional service firms, including commercial banks, underwriters, accounting firms and brokerages, in actions related to the federal securities acts, broker/dealer consumer actions, insider trading allegations, and all manner of securities arbitrations overseen by FINRA and other SROs.


Stanley Yorsz
Buchanan Ingersoll & Rooney PC

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