protecting the innocent… corporations?

I didn’t realize the significance of this case until I read a blurb about it in the Economist this week. The US Supreme Court came down recently with the decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., — S. Ct. —, 2008 WL 123801 (2008). Kennedy wrote the opinion, joined by all the conservatives, and Stevens wrote a dissenting opinion, joined by Souter and Ginsburg. Breyer recused himself from the beginning because of stock he owns. Roberts initially did, but I guess he sold his stock so he could be part of the opinion. On to the opinion itself:

Investors (led by Stoneridge Investment Partners) sued a cable company (Charter Communications, Inc.), its executives, its independent auditor (Arthur Andersen, poor souls), and the company’s vendors and customers. The investors said the company made sham transactions that inflated its reported revenues and cash flow. The investors wanted the customers and suppliers to be liable for the sham transactions they agreed to. Scientific-Atlanta and Motorola were suppliers and then customers of Charter.

The Court assumed that Arthur Andersen had been misled, though it made no controlling decision on that point. Id. at *3. That’s good for Arthur Andersen, at least. Charter entered into a deal with both Scientific-Atlanta and Motorola to pay more for digital cable converters that it purchased from them, and they would then buy advertising (at higher prices) from Charter. Id. Charter drafted documents to mislead Arthur Andersen in its transactions with Motorola and Scientific-Atlanta and make it appear that the transactions were unrelated by backdating the purchase agreements to a month before the advertising agreements. Id. Charter showed an increase in revenue and cash flow of $17 million, which it reported to the SEC and the public. Id. The investors said Scientific-Atlanta and Motorola had a duty to disclose the transactions. Id. at *4.

The Court had previously held that, when suing for deceptive practices in the selling of securities, liability does not extend to aiders and abettors. Id. at *5 (citing Central Bank v. First Interstate Bank, 511 U.S. 164, 177 (1994)). The idea was that a company had to make statements or actions that the plaintiff directly relied upon before there could be any liability. Id. The Court decided in this case that, because “[n]o member of the investing public had knowledge, either actual or presumed, of [Scientific-Atlanta’s or Motorola’s] deceptive acts during the relevant times,” the investors “cannot show reliance upon any of [those] actions except in an indirect chain . . . too remote for liability.” Id. at *6. The Court did point out that secondary actors (including aiders and abettors) can be subject to criminal penalties and civil enforcement by the SEC, but that there is not always a private right of action against those secondary actors. Id. at *11.

In the dissent, the liberals were rather vehement about the majority being incorrect. Stevens wrote that the actions of Scientific-Atlanta and Motorola “had the foreseeable effect of causing [the investors] to engage in the relevant securities transactions.” Id. at *13. The majority, in stark contrast to this, requires an action that makes it “necessary or inevitable” for the issuer to deceive as it did. Id. at *7. This is the really interesting point of contention to me.

Should we hold people and companies to a high standard of morality in business practices? Every action has a foreseeable effect, usually many foreseeable effects, but being foreseeable does not make an effect inevitable. I’ve been analogizing a lot of situations to raising children lately, although I have no experience with that, so here’s another one: If your child asked for $10 to buy a birthday present for a friend, and you knew that what your child wanted to buy really cost $5, and you suspected your child wanted the $10 to spend the extra money on something you disapproved of, would you be at fault by giving your child $10? Giving a child more money than you suspect is necessary may have the foreseeable effect of your child spending it on something you disapprove of, but it’s not an inevitable effect. If children can choose what to do with their money, shouldn’t corporations be able to choose as well? We cannot be responsible for the bad things other people do unless we are directly involved. That may not apply to criminal law very well, but I do think that in this time where independence is valued more than most other things, we cannot treat people, or companies, as a community that is collectively responsible for the faults of one when it is convenient.

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