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.