Arkansas Law Review | 2008 | Articles

*453 SEE NO EVIL, HEAR NO EVIL, SPEAK NO EVIL: STONERIDGE INVESTMENT PARTNERS, LLC V. SCIENTIFIC-ATLANTA, INC. AND THE SUPREME COURT'S ATTEMPT TO DETERMINE THE ISSUE OF SCHEME LIABILITY

Seth S. Gomm [FNa1]

Copyright (c) 2008 Arkansas Law Review, Inc.; Seth S. Gomm

I. INTRODUCTION

In the spring of 2008, the United States Supreme Court handed down the much-anticipated Stoneridge In-vestment Partners, LLC v. Scientific-Atlanta, Inc. [FN1] decision, which addressed whether shareholder-plaintiffs can sue secondary actors who may have participated in a fraudulent transaction with the plaintiffs' company. This theory of so-called “scheme liability” would give shareholder-plaintiffs legal recourse under § 10(b) of the Securi-ties Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. [FN2] In this context, a “secondary actor” is a company or individual, other than the direct issuing company, that does not have a duty of disclosure to the issuing company's shareholders but who nonetheless aids the issuing company in defrauding its shareholders through schemes and fraudulent transactions. [FN3]

In Stoneridge, the Court held that there is not an implied private right of action for injured shareholder-plaintiffs under § 10(b) against secondary actors unless such plaintiffs relied on the secondary actors' deceptive acts. [FN4] In reaching its decision, the Court reasoned that to show adequate reliance, shareholder-*454 plaintiffs must at least rely on public representations made by the secondary actors, or the secondary actors must have some duty to disclose to the injured shareholder-plaintiffs. [FN5] In Stoneridge, the necessary reliance on the secondary actors' deceptive acts was too remote to justify a § 10(b) private action. [FN6] The Court explained its fear of potential backlash in United States markets if it allowed private plaintiffs to pursue secondary actors under a theory of scheme liability and concluded that Congress alone has authority to permit such private actions. [FN7]

Stoneridge, however, is not without its problems. The Court's opinion focused heavily on the theory of reli-ance and appeared to confuse precedent and statutory language as it worked to justify its holding. [FN8] Several cases, similar to Stoneridge, which involve petitions to hold secondary actors liable for their scheming conduct, worked their way through the circuit courts and created a circuit split. [FN9] Simpson v. AOL Time Warner Inc. [FN10] was vacated and remanded by the Supreme Court, [FN11] and Regents of the University of California v. Credit Suisse First Boston (USA), Inc. [FN12] was denied certiorari. [FN13] The plaintiffs in both cases, however, still have the slim chance of establishing a private § 10(b) cause of action. [FN14] Although the current Court is unlikely to allow private scheme-liability actions in the near future, Congress may act in favor of shareholder-plaintiffs when it sees the wisdom of allowing such § 10(b) actions. [FN15]

This article argues that while Stoneridge has further empowered the Securities and Exchange Commission (“SEC”) in its mandate to police the securities market, it has also left a *455 discouraging and confusing result for injured shareholders who want to seek private restitution for their losses. The result appears to be that, so long as companies do not disclose to the public the truth behind sham contracts and transactions in which they have partici-pated (thereby causing reliance), the companies probably will not be vulnerable to private actions from shareholders. Notwithstanding the Court's holding in Stoneridge, permitting shareholders to bring private § 10(b) actions against scheming secondary actors would improve the efficiency, transparency, and integrity of the United States securities market. Investors that are directly victimized by such schemes should be able to initiate private actions in order to seek redress for their losses without having to wait for the SEC to act.

Part II of this article discusses the transaction structures of alleged “schemes” that could be subject to a the-ory of scheme liability, as well as the necessary elements of a § 10(b), a Rule 10b-5, or a securities-fraud action. It also reviews past Supreme Court case law addressing the issue of secondary-actor liability. Part III details the split in authority that existed among the circuit courts of appeal on the topic of scheme liability and the various approach-es taken by those courts regarding scheme liability. Part IV reviews the Supreme Court's decision in Stoneridge. Part V analyzes that decision and discusses the possible unfortunate consequences of the Court's decision.

II. BACKGROUND

Scheming parties have traditionally used a variety of deceptive transactions to defraud investors and share-holders. [FN16] The primary and secondary actors in cases such as Stoneridge have used deceptive practices to cre-ate the false appearance of revenue, to misrepresent their solvency and viability to Wall Street analysts, and to inac-curately inflate the value of their stock price. [FN17] Certain provisions derived from securities-law legislation and common-law principles directly affect a plaintiff's ability to seek redress from primary and secondary *456 actors who have purposely used such deceptive transactions. [FN18] It is upon these principles that the Supreme Court determined that shareholder-plaintiffs should not have the opportunity to seek a private remedy from such scheming actors. [FN19]

A. Possible Scheme-Liability Transaction Structures

1. “Wash Sales” or “Matched Orders” Transactions A “wash sale” is a securities transaction in which the parties never intend a change in beneficial ownership of their securities. [FN20] The Internal Revenue Service notes that wash sales occur when parties “sell or trade stock or securities at a loss and within 30 days before or after the sale [they]: [b]uy substantially identical stock or securities, [a]cquire substantially identical stock or securities in a fully taxable trade, or [a]cquire a contract or option to buy substantially identical stock or securities.” [FN21] When an investor buys or sells stock at the same time through different brokers, he is able to create the illusion of trading activity without actually changing his position. [FN22] The investor is then able to receive a tax benefit for any loss on the transaction. [FN23] Wash-sales transactions that are intended to “creat[e] a false or misleading appearance of active trading in any security registered on a national securities exchange” violate the Exchange Act. [FN24]

“Matched orders” are simultaneous transactions in which an order for the purchase or sale of a security is matched to another order for a security of substantially the same size and price as the former order. [FN25] Except for the purpose of realizing a capital gain or achieving a tax-manipulation strategy, wash sales and matched orders are typically used for the purpose of *457 falsifying the market. [FN26] This can result in inaccurate stock prices and an illusion of a company's true value and viability.

In the 1930s, wash sales and matched orders were commonly used to manipulate the markets. [FN27] In 1934, Congress regarded wash sales and matched orders as “the most vicious practice of the stock exchanges,” even more reprehensible than the “use of loaded dice.” [FN28] Wash sales have been considered less of a modern threat, because market manipulators believe that the transactions are fairly crude and easy to detect by regulators and are difficult to defend on the basis that the transaction was for a legitimate business purpose. [FN29] Matched orders, however, are considered to have great potential as a modern threat to the market, especially in the futures markets, option exchanges, derivative instruments, and inter-market trading and hedging. [FN30]

2. “Barter” Transactions Barter transactions occur when Company A and Company B agree to trade ser-vices such as advertising under the guise of “web services” or “marketing services.” [FN31] Instead of actually trad-ing the services, however, Company A agrees to buy Company B's services at an inflated price, and vice versa. [FN32] Rather than recording the transaction with zero-revenue effect, one or both of the companies record the transaction as realized revenue. [FN33] This is the type of transaction used in the Simpson and Charter cases dis-cussed later in this article. [FN34]

3. “Triangular” (a.k.a. “Round-trip” or “Buying Revenue”) Transactions Triangular transactions occur when Company A and Company B enter into an advertising-reseller agreement or *458 revenue-sharing agreement in which Company A agrees to sell advertising for Company B for a commission well above market value. [FN35] Company B seeks out Company C (usually a thinly capitalized company in need of revenue) to act as a third party in the transaction. [FN36] Company B agrees to buy the shares of Company C for an inflated price or agrees to buy from Company C services that Company B does not really need. [FN37] Company B's agreement with Company C is contingent on Company C buying advertising from Company A for the same amount that Company B was paying for Company C's stock or services. [FN38]

The money obtained through Company B's agreement then flows to Company A, which takes a commission and splits the commission revenue with Company B. [FN39] Company B unlawfully records the shared commission proceeds as revenue. [FN40] This transaction is essentially considered to be an illegal stock-for-revenue type record-ing practice. [FN41] As a result, the revenue recorded by Company B artificially inflates Company B's stock price. [FN42] Deceitful triangular transactions like this were used in the Simpson case. [FN43]

B. Elements of Section 10(b), Rule 10b-5, and Securities-Fraud Causes of Action

Section 10(b) [FN44] was originally included as part of the Exchange Act. [FN45] The statute makes it un-lawful “[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe.” [FN46]

*459 Rule 10b-5 gives the SEC express authority over fraudulent sales and purchases of securities. [FN47] The rule is divided into three sections, which substantially follow the language contained in § 17(a) of the Securities Act of 1933. [FN48] Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. [FN49] To prevail on a secu-rities-fraud claim, a plaintiff must prove “(1) a material misrepresentation or omission by the defendant, (2) scienter [FN50] on the part of the defendant, (3) reliance, [FN51] and (4) due diligence by the plaintiff to pur-sue his or her own interest with care and good faith.” [FN52]

*460 C. The Supreme Court Limits Aiding-and-Abetting Liability For Secondary Actors: Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.

In a landmark decision, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., [FN53] the Supreme Court upset nearly unanimous circuit-court precedent when it declared that a private plaintiff may not maintain an aiding-and-abetting claim under § 10(b) of the Exchange Act. [FN54] In its interpretation, the Court strictly adhered to the statutory language of § 10(b). [FN55] The Court declared that “Rule 10b-5 ‘prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act.”’ [FN56]

Before the Central Bank decision, parties had brought suits under § 10(b) or Rule 10b-5 against secondary actors who were deemed to have acted as aiders and abettors to the fraud perpetrated by the primary violator. [FN57] Section 10(b) and Rule 10b-5 do not contain the words “aiding and abetting.” Most circuit courts agreed, however, that aiding-and-abetting claims were an appropriate cause of action that could be extended to secondary actors. [FN58] In fact, aiding-and-abetting claims had been unanimously applied throughout the circuits. [FN59] Thus, the private aiding-and-abetting cause of action was one that was primarily nurtured and developed by the courts. Chief Justice Rehnquist observed that Rule 10b-5 is “a judicial oak which has grown from little more than a legislative acorn.” [FN60] When the Court took up the issue in Central Bank, the parties assumed that an aiding-and-abetting claim would be endorsed by the Court. [FN61]

In Central Bank, the Court had granted certiorari to a Tenth Circuit case in which the court held that First Interstate Bank of *461 Denver could bring suit against Central Bank of Denver for secondary liability because of Central Bank's conduct in aiding and abetting the fraud of another party. [FN62] Central Bank had served as an in-denture trustee for bonds that were issued to finance public improvements for a local public-building authority. [FN63] Central Bank discovered that the appraisals on the land securing the bonds may have been inflated; it or-dered an independent review of the appraisals but subsequently postponed it. [FN64] Soon thereafter, the building authority defaulted on the bonds, and First Interstate, which owned $2.1 million of the bonds, sued the building au-thority, Central Bank, and other parties in the transaction for violations of § 10(b) of the Exchange Act. [FN65] First Interstate claimed that Central Bank was “secondarily liable under § 10(b) for its conduct in aiding and abetting the fraud.” [FN66]

The Court may have surprised many in the business and legal communities when it decided that a private action against a secondary actor for aiding and abetting could not be justified under Rule 10b-5. [FN67] It ruled that only primary violators could be liable. [FN68] The Court stated that the text of § 10(b) controlled its decision in determining what acts were prohibited by the statute. [FN69] The Court concluded “that the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act.” [FN70] The Court explained that it did not question whether the limitations of § 10(b) were good public policy, as the issue was outside the scope of its *462 consideration. [FN71] The Court explained that it simply could not find anything in the statute that addressed a secondary actor giving aid to a person who commits a deceptive or manipulative act. [FN72]

The Court reasoned that Congress never intended to attach private aiding-and-abetting liability to § 10(b). [FN73] Congress did not attach aiding and abetting to any of the otherwise express causes of action provided by the securities Acts. [FN74] The Court stated that there is no justification in believing “that Congress would have at-tached aiding and abetting liability only to § 10(b) and not to any of the express private rights of actions in the Act.” [FN75] Congress chose to expressly impose some forms of secondary liability in some statutes and not others, which the Court believed “indicates a deliberate congressional choice with which the courts should not interfere.” [FN76]

The Court dealt a final death blow to aiding-and-abetting liability when it declared that “[a]iding and abet-ting is an ancient criminal law doctrine,” [FN77] and that although criminal aiding and abetting could apply to § 10(b), civil liability for such a claim was a strained fiction. [FN78] The Court warned of confusing criminal and civil actions and explained that if it allowed a criminal cause of action to turn into a civil cause of action in a § 10(b) claim, then it would have to allow such causes of action to apply to every provision of the Exchange Act. [FN79] In the final portion of its opinion, however, the Court left a door open to civil liability for secondary actors. [FN80] The Court stated:

The absence of § 10(b) aiding and abetting liability does not mean that secondary actors in the secu-rities markets are always free from liability under the securities Acts. Any person or entity, including a *463 lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omis-sion) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, as-suming all of the requirements for primary liability under Rule 10b-5 are met. [FN81] Relying upon the Court's allusion here to potential civil liability for secondary actors, the circuit courts began experimenting with the theory of scheme liability. [FN82] The circuits differed significantly, with regard to how, and even if, the theory of scheme liability could be applied to such secondary actors.

III. CIRCUIT SPLIT

A. Ninth Circuit: Simpson v. AOL Time Warner Inc.

In Simpson v. AOL Time Warner Inc., [FN83] the Ninth Circuit tried to define what the Central Bank Court meant when it explained that a secondary actor could still be liable as a primary violator. [FN84] The Ninth Circuit created what it called the “principal purpose and effect” test and offered examples of corporate conduct that could lead the court to find a secondary actor liable as a primary violator. [FN85] The Ninth Circuit stood alone against the other circuit courts that issued opinions addressing scheme liability. No other circuit court entertained the prospect of creating a means for plaintiffs to impute scheme liability on secondary actors based on the exception offered in Central Bank.

In Simpson, shareholder-plaintiffs claimed that Homestore.com committed securities fraud when it over-stated its reported revenues. [FN86] The plaintiffs alleged that Homestore used schemes such as barter or round-trip transactions with other companies with the intent to deceive shareholders. [FN87] In these transactions, Homestore allegedly purchased products and services that the company did not need and purchased shares in *464 other com-panies at inflated prices. [FN88] The companies that entered into these transactions with Homestore allegedly re-turned some of the money to Homestore in a different transaction that Homestore mischaracterized as revenue. [FN89]

Finally, the plaintiffs claimed that Homestore conducted triangular transactions, with the result that its audi-tors did not recognize that Homestore recorded revenue that was related to a prior transaction funded by Homestore. [FN90] In essence, Homestore allegedly “purchased revenue for itself and then recorded that revenue in violation of SEC accounting rules.” [FN91] The companies allegedly involved in these suspect transactions were AOL Time Warner, Cendant Corporation, and L90, Inc. [FN92]

Because of the ruling in Central Bank, the district court in Simpson dismissed the shareholder-plaintiffs' complaint against the companies allegedly involved in the suspect transactions. [FN93] This all but extinguished the previously established means of holding secondary actors liable for aiding and abetting. The Ninth Circuit granted certiorari in Simpson in an attempt to decide the issue of “what conduct constitutes a manipulative or deceptive act in the furtherance of a scheme to defraud sufficient to render the defendant a ‘primary violator’ of §10(b).” [FN94]

The Ninth Circuit agreed with the SEC, which proposed in its amicus brief that if the principal purpose and effect of the transaction is to create the false appearance of fact, then it constitutes a “deceptive act.” [FN95] The Ninth Circuit stated:

The SEC argues in its amicus brief that “Any person who directly or indirectly en-gages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator.” The SEC defines “a deceptive act” as “engaging in a transaction whose principal purpose and effect is to create a false appearance of revenues.” *465 We agree with the SEC that engaging in a transaction, the principal purpose and effect of which is to create the false appearance of fact, constitutes a “deceptive act.” [FN96] The Ninth Circuit, however, qualified the above statement with a nod to Central Bank when it stated in a footnote that “[t]o the extent that the SEC's proposed test purports to include aiding and abetting or coconspirator liability, we are constrained to reject it.” [FN97] The Ninth Circuit continued:

Participation in a fraudulent transaction by itself, however, is insufficient to qualify the defendant as a “primary violator” if the deceptive nature of the transaction or scheme was not an intended result, at least in part, of the defendant's own conduct. We hold that to be liable as a primary violator of § 10(b) for participation in a “scheme to defraud,” the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. It is not enough that a transaction in which a defendant was involved had a deceptive purpose and effect; the defend-ant's own conduct contributing to the transaction or overall scheme must have had a deceptive purpose and ef-fect. [FN98] The Ninth Circuit offered examples of conduct that it believed would or would not justify sec-ondary liability under the principal-purpose-and-effect test. [FN99] It explained that conduct in *466 which a defendant “does not have a principal legitimate business purpose, such as the invention of sham corporate en-tities to misrepresent the flow of income, may have a principal purpose of creating a false appearance.” [FN100] “Conduct that is consistent with the defendants' normal course of business,” or “[p]articipation in a legitimate transaction, which does not have a deceptive purpose or effect,” would not, however, justify a pri-mary violation “even if the defendant knew or intended that another party would manipulate the transaction to effectuate a fraud.” [FN101] The court clarified that when analyzing a suspect company's participation in a scheme, in order to meet the principal-purpose-and-effect test, “the conduct of each defendant, while evaluat-ed in its context, must be viewed alone for whether it had the purpose and effect of creating a false appear-ance of fact in the furtherance of an overall scheme to defraud.” [FN102] Finally, although in Simpson the court noted examples of transactions that had “suspect qualities,” the court concluded that the plaintiffs failed to sufficiently show that the defendant's conduct was taken with the necessary “purpose and effect of creating a false appearance in furtherance of an overall scheme to defraud.” [FN103]

B. Fifth Circuit: Regents of the University of California v. Credit Suisse First Boston (USA), Inc.

Although the Ninth Circuit in Simpson ruled that there are common circumstances in which a secondary actor can be held liable as a primary violator in a private § 10(b) action, [FN104] the Fifth Circuit adopted a more hard-line approach. The Fifth Circuit held that in light of the Supreme Court's decision in Central Bank, an affirma-tive duty of disclosure to shareholder-plaintiffs must exist for private liability to be established. [FN105] In Regents of the University of California v. Credit Suisse First *467 Boston (USA), Inc., [FN106] the Fifth Circuit heard a case in which Enron was involved in suspect transactions with banks including Credit Suisse First Boston, Merrill Lynch, and Barclays Bank (the “Banks”). [FN107] Credit Suisse appeared to go to the heart of the big-business, big-bank, and big-accounting-firm meltdown of 2000 in which billions of dollars were lost by investors both directly and indirectly connected to the culpable businesses. [FN108]

In Credit Suisse, shareholders of Enron sought total damages of $40 billion, subject to offset, from the Banks. [FN109] The plaintiffs claimed that the Banks had “entered into partnerships and transactions that allowed [Enron] to take liabilities off its books temporarily and to book revenue from the transactions when it was actually incurring debt.” [FN110] One example of such a transaction is when Enron wanted to sell its electricity-producing barges off the coast of Nigeria by the end of 1999 in order to meet stock analysts' estimates for the quarter but was unable to find a legitimate buyer. [FN111] Undeterred, Enron allegedly agreed with Merrill Lynch that if Merrill Lynch bought the barges, Enron would buy back the barges in six months at a premium. [FN112] The plaintiffs claimed that Merrill Lynch knew that Enron was proposing such a transaction so that Enron could artificially inflate its earnings with the “illusion of revenue.” [FN113]

The district court in Credit Suisse applied the principal-purpose-and-effect test as promulgated by the SEC and adopted by the Ninth Circuit in Simpson. [FN114] It found that the class of shareholder-plaintiffs in Credit Suisse was justified in relying on the fraud-on-the-market theory “because the market may not be presumed to rely on an omission or misrepresentation in a *468 disclosure to which it was not legally entitled.” [FN115] The district court appeared to stretch the Ninth Circuit's reasoning when it stated that if “a defendant knowingly engaged in a primary violation of the federal securities laws that was in furtherance of a larger scheme, it should be jointly and severally liable for the loss caused by the entire overarching scheme, including conduct of other scheme participants about which it knew nothing.” [FN116]

The Fifth Circuit ruled that the district court's interpretation of the definition of “deceptive act” was errone-ous and inconsistent with the Supreme Court's decision in Central Bank in that § 10(b) does not justify a claim of aiding-and-abetting liability to secondary actors. [FN117] Reviewing the Supreme Court's definition of deceptive acts, the Fifth Circuit ruled that in interpreting § 10(b), a scheme such as the one in which the banks allegedly partic-ipated is not deceptive unless it involves the breach of some duty of disclosure owed to the wronged party. [FN118] The court reasoned:

The district court's definition of “deceptive acts” thus sweeps too broadly; the trans-actions in which the banks were engaged were not encompassed within the proper meaning of that phrase. Enron had a duty to its shareholders, but the banks did not. The transactions in which the banks engaged at most aided and abetted Enron's deceit by making its misrepresentations more plausible. The banks' participa-tion in the transactions, regardless of the purpose or effect of those transactions, did not give rise to liability under § 10(b). [FN119] The Fifth Circuit concluded that because the district court could not have applied a fraud-on-the-market theory without its erroneously broad definition of deceptive acts, fraud-on-the market should not apply to Credit Suisse. [FN120] The court explained that the Supreme Court ruled that reliance on the *469 integrity of the price of a security in an efficient market was a necessary element in a fraud-on-the-market claim. [FN121] The court reasoned that “the banks' actions are not alleged to be the type of manipula-tive devices on which an efficient market may be legally presumed to rely because the banks did not act di-rectly in the market for Enron securities.” [FN122]

The Fifth Circuit declared that it primarily agreed with the reasoning of the Eighth Circuit in Charter (de-scribed below) rather than the Ninth Circuit in Simpson, and concluded that deception, or a failure to disclose when there is an obligation to disclose, is a better indication of when a court would find a secondary actor a primary viola-tor. [FN123] The Fifth Circuit recognized that its decision could have regrettable implications in allowing some de-fendants to “escape liability for alleged conduct that was hardly praiseworthy.” [FN124] The court, however, felt that it had to apply the Supreme Court's guidance in determining the limited scope of § 10(b), recognizing the “stat-ute as the result of Congress's balancing of competing desires to provide for some remedy for securities fraud with-out opening the floodgates for nearly unlimited and frequently unpredictable liability for secondary actors in the securities markets.” [FN125]

A concurring opinion by Judge Dennis summarized the court's ruling effectively:

[S]econdary actors (such as the investment banks involved in this case) who act in concert with issuers of publicly-traded securities in schemes to defraud the investing public cannot be held li-able as primary violators of Section 10(b) or Rule 10b-5 unless they (1) directly make public misrepresenta-tions; (2) owe the issuer's shareholders a duty to disclose; or (3) directly *470 “manipulate” the market for the issuer's securities through practices such as wash sales or matched orders. [FN126]

C. Eighth Circuit: In re: Charter Communications, Inc. Securities Litigation

On March 26, 2007, the Supreme Court granted certiorari in Stoneridge Investment Partners, LLC v. Scien-tific-Atlanta, Inc., [FN127] a case stemming directly from the Eighth Circuit case, In re: Charter Communications., Inc., Securities Litigation. [FN128] In Charter, the plaintiffs claimed that vendors of Charter, who provided Charter with set-top cable television boxes, violated § 10(b) of the Exchange Act. [FN129] The vendors agreed to charge Charter a premium over their regular market price and then to return the twenty-dollar premium to Charter in the form of advertising fees. [FN130] In order to meet Wall Street analysts' expectations, Charter misreported the twen-ty-dollar premium in an attempt to inflate the company's cash flow by $17 million in the fourth quarter of 2000. [FN131]

The plaintiffs in Charter claimed that the vendors were liable as primary violators in the alleged fraud under § 10(b). [FN132] Section 10(b) states that it is “unlawful for any person, directly or indirectly . . . (a) [t]o employ any device, scheme, or artifice to defraud, [or] (b) [t]o make any untrue statement of a material fact . . . .” [FN133] The district court in Charter found that the secondary actors could not be held liable when considered in light of the Central Bank decision. [FN134]

On appeal, the Eighth Circuit acknowledged the statement that the Court made in Central Bank when it warned that “[a]ny *471 person or entity, including a lawyer, accountant, or bank, who employs a manipulative de-vice or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5 . . . .” [FN135] The Charter court recognized the Central Bank statement as an “important caveat” and noted that the case before it “tested the boundaries of that caveat.” [FN136] The Eighth Cir-cuit, however, reminded the plaintiffs that the Supreme Court made it clear that Rule 10b-5 cannot be interpreted more broadly than § 10(b) itself--the provision under which the SEC gained the authority to promulgate Rule 10b-5. [FN137]

The Eighth Circuit agreed with the district court that the plaintiffs had no reasonable cause of action under Central Bank or § 10(b). [FN138] The district court granted the defendant's motion to dismiss, and the Eighth Cir-cuit affirmed the district court's ruling. [FN139] The Eighth Circuit rejected the plaintiff's application of Central Bank because of three governing principles: (1) the Supreme Court declared that a private plaintiff “may not bring a 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b)”; [FN140] (2) a device or contrivance is not “deceptive” unless there is a “misstatement or a failure to disclose by one who has a duty to disclose”; [FN141] and (3) “any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under § 10(b) or any subpart of Rule 10b-5.” [FN142]

The Eighth Circuit explained that the vendors were not accused of issuing any misstatement relied upon by the investing public and had no duty to disclose to Charter's shareholders any information about Charter's true finan-cial condition or *472 accounting practices. [FN143] The court stated that it “[was] aware of no case imposing § 10(b) or Rule 10b-5 liability on a business that entered into an arm's length non-securities transaction with an entity that then used the transaction to publish false and misleading statements to its investors and analysts.” [FN144] The court explained that such a finding “would introduce potentially far-reaching duties and uncertainties for those en-gaged in day-to-day business dealings.” [FN145] Though the Eighth Circuit suggested that the issue is of such mag-nitude that it should be addressed by Congress, the Supreme Court took up the issue in October 2007. [FN146]

IV. STONERIDGE INVESTMENT PARTNERS, LLC V. SCIENTIFIC-ATLANTA, INC.

Based on the facts of Charter, [FN147] the Supreme Court granted certiorari to determine the reach of an implied private right of action in § 10(b) of the Exchange Act. [FN148] The Court held that there is not an implied private right of action for injured shareholder-plaintiffs under § 10(b) against secondary actors unless such plaintiffs relied on the secondary actors' deceptive acts. [FN149] The majority opinion was written by Justice Kennedy, joined by Chief Justice Roberts, and Justices Scalia, Thomas and Alito; Justice Stevens wrote the dissenting opinion, joined by Justices Souter and Ginsburg; Justice Breyer took no part in the consideration or decision of the case. [FN150]

In reviewing the facts of Charter, the Court noted that the defendant companies drafted documents with Charter that were made to appear as if the transactions were part of the ordinary course of business. [FN151] Scien-tific-Atlanta even sent Charter documents that falsely reflected increased production costs on the set-top cable tele-vision boxes. [FN152] Finally, the defendant *473 companies backdated the documents that were prepared for the cable-box-for-advertising scheme so that it would appear that the cable-box agreements were negotiated a month before the advertising agreements were made. [FN153] Although these companies were quite active in helping Charter to perpetuate a fraud by providing sham contracts, the Court determined that the companies had no role in actually preparing or disseminating Charter's financial statements. [FN154]

The Court began its analysis by listing the critical elements in § 10(b) and Rule 10b-5. [FN155] The Court, however, couched its primary justification for declining to recognize secondary actors as primary violators in scheme liability based on the theory of reliance, a specific element in a § 10(b) private cause of action. [FN156] Comparing Stoneridge to Central Bank, the Court explained that allowing scheme liability, like the aiding-and-abetting claim raised in Central Bank, would cause secondary actors to be liable without showing that the injured party ever actually relied on the secondary actors' statements or actions. [FN157]

Instead of creating a bright-line definition of what reliance actually means in these circumstances, the Court stated that “[i]f this conclusion were read to suggest there must be a specific oral or written statement before there could be liability under §10(b) or Rule 10b-5, it would be erroneous. Conduct itself can be deceptive . . . .” [FN158] The Court went on to explain that in order to find reliance there must exist the “requisite causal connection between a defendant's misrepresentation and a plaintiff's injury.” [FN159] The Court did note, however, that it has ruled there can be a rebuttable presumption of reliance in two instances. “First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public.” [FN160] If such a public *474 statement is reflected in the market price of the security, then “it can be assumed that an inves-tor who buys or sells stock at the market price relies upon the statement.” [FN161] The Court concluded that neither presumption applied to the facts in Stoneridge because the secondary actors had no duty to disclose and because “their deceptive acts were not communicated to the public.” [FN162] The Court stated that the secondary actors' deceptive acts were simply “too remote to satisfy the requirement of reliance.” [FN163]

The Court tried to draw a distinction between applying a § 10(b) private cause of action to matters that con-cern “the realm of financing business” and those that deal with “the realm of ordinary business operations.” [FN164] It explained that matters of ordinary business operations are primarily governed by state law, and typically only those matters that touch the realm of financing business are appropriately subject to federal-enforcement power. [FN165] The Court concluded that it could not allow ordinary-business-operations matters, such as the backdated fraudulent contracts fabricated in Stoneridge, to “invite litigation beyond the immediate sphere of securities litiga-tion” into areas already governed by state law. [FN166] Allowing such private actions could turn § 10(b) private actions into a means of incorporating common-law fraud into federal law, unleashing such actions against the entire marketplace in which a company operates. [FN167]

The Court analyzed Congress's intent regarding such private actions and determined that Congress never meant for such actions against secondary actors to be pursued by private litigants but, rather, solely by the SEC. [FN168] The Court noted, however, that after its Central Bank decision, then-SEC Chairman Arthur Levitt recom-mended that Congress establish aiding-and-abetting liability in private claims. [FN169] The Court *475 determined that Congress ignored such recommendations and instead directed in the Private Securities Litigation Reform Act of 1995 (“PSLRA”) that only the SEC should have the power to pursue claims against alleged aiders and abettors. [FN170] The Court warned that secondary actors are still subject to potentially severe criminal penalties and civil enforcement by the SEC. [FN171]

In a list of policy considerations, the Court explained that allowing such § 10(b) private actions could ena-ble “plaintiffs with weak claims to extort settlements from innocent companies” through “extensive discovery and the potential for uncertainty and disruption in a lawsuit.” [FN172] Such actions could also compel businesses to raise the costs of doing business, and overseas firms with otherwise no exposure to securities laws could be deterred from doing business in the United States. [FN173] Finally, the loss of overseas investors could directly raise the costs of a company being publicly traded in the United States and “shift securities offerings away from domestic capital markets.” [FN174] The Court summarized that to allow investors to bring a private cause of action against scheming secondary actors would jeopardize the appropriate separation of powers and would overextend the au-thority of the Court to contradict congressional intent. [FN175] The Court concluded that “[t]he decision to extend the cause of action is for Congress, not for us.” [FN176]

V. ANALYSIS

A. The Court's Application of Central Bank to the Facts in Stoneridge

The Court tried to draw many parallels between Stoneridge and Central Bank in an effort to justify its deci-sion not to hold secondary actors liable for perpetrating deceptive acts in connection with the securities market. [FN177] The dissent in *476 Stoneridge pointed out that Central Bank was a poor case for the Court to use as foun-dational precedent for its reasoning. [FN178] Furthermore, the dissent argued that the Court's interpretation repre-sented a “significant departure” from Central Bank based upon an “overly broad reading” of the case. [FN179] The facts in Central Bank are not nearly as drastic as those in Stoneridge to suggest proper circumstances where a sec-ondary actor has acted so deceptively as to permit § 10(b) liability. In Central Bank, unlike in Stoneridge, the bank did not actually engage in any deceptive act, which suggests that the bank could at most be held liable for aiding and abetting. [FN180]

The dissent also made an apt factual comparison of the two cases and then determined that Central Bank should not have been an obstacle to the plaintiffs in Stoneridge:

The facts of this case would parallel those of Central Bank if respondents had, for ex-ample, merely delayed sending invoices for set-top boxes to Charter. Conversely, the facts in Central Bank would mirror those in the case before us today if the bank had knowingly purchased real estate in wash trans-actions at above-market prices in order to facilitate the appraiser's overvaluation of the security. [FN181]

B. Reliance and the Fraud-on-the-Market Doctrine

The Court in Stoneridge depended heavily on the element of reliance as a means of barring private litigants from pursuing claims against scheming secondary actors. Commentators suggest that the Court simply adopted the reliance argument from the Solicitor General's brief filed in the Stoneridge case. [FN182] The dissent in Stoneridge, written by Justice Stevens, stated that the Court had actually created some kind of “super-causation” *477 require-ment that is inconsistent with both the position of the SEC and Supreme Court precedent. [FN183]

The dissent explained that Basic Inc. v. Levinson, [FN184] a landmark case that introduced the fraud-on-the-market theory, is sufficient precedent to justify finding that deceptive acts by secondary parties can create ade-quate reliance. [FN185] The fraud-on-the-market theory provides a presumption of reliance when shareholders “rely on public material misstatements that affect the price of the company's stock.” [FN186] The dissent noted that “[t]his Court has not held that investors must be aware of the specific deceptive act which violates § 10(b) to demonstrate reliance.” [FN187] The dissent explained that the scheming actions taken by the secondary actors in Stoneridge “describe ‘deceptive devices' under any standard reading of the phrase.” [FN188] The Court's reasoning is even more perplexing after considering the Court's statement that “conduct itself can be deceptive,” and that a deceptive act need not be a “specific oral or written statement before there could be liability under § 10(b).” [FN189] If liability can be based on conduct, rather than just a material misstatement, then a presumption of reliance should be even easier to obtain than the Court determined in Stoneridge. [FN190]

In Stoneridge, the shareholder-plaintiffs argued that the secondary actors “knew their deceptive acts would be the basis for statements that would influence the market price of Charter stock on which shareholders would re-ly.” [FN191] Therefore, if this allegation were true, the secondary actor's actions “had the foreseeable effect of caus-ing [shareholders] to engage in the *478 relevant securities transactions.” [FN192] The dissent concluded that “[t]he sham transactions described in the complaint in this case had the same effect on Charter's profit and loss statement as a false entry directly on its books that included $17 million of gross revenues that had not been received.” [FN193] Further, “the Court's view of reliance is unduly stringent and unmoored from authority.” [FN194]

It is perplexing why the Court would try and delve into a murky analysis of state law versus federal com-mon law with regard to the difference between the realms of financing business and ordinary business operations. [FN195] It would also seem that after a period of sweeping legislation affecting company disclosure requirements, promulgated by laws such as Sarbanes-Oxley, the distinction between financing business and ordinary business op-erations would be less definitive or even irrelevant. The sole purpose of ordinary business operations, when these operations involve padding the books through sham sales transactions to satisfy Wall Street analysts, is for the actual purpose of financing business.

Company shareholders and potential investors are known to rely heavily on what Wall Street analysts say about a company. Shareholders typically lack the time and gumption to personally research every facet of a compa-ny. As such, they rely on analysts, financial statements, annual reports generated by the company, and the opinions of the financial community to help form their decision to buy or sell a company's stock. The notion that a sharehold-er simply could not have relied on the deceptive acts perpetuated by Charter and the actions of the secondary actors in Stoneridge is unrealistic, if not absurd. A loss by a company or a poor report by Wall Street analysts could quick-ly and directly affect a company's stock price in what is otherwise considered to be a fickle securities market.

Reliance could have been presumptively imputed in Stoneridge under the fraud-on-the-market doctrine. If the secondary actors in Stoneridge had not been willing to participate in the deceptive acts perpetrated by Charter, the *479 resulting negative consequences of failing to meet analysts' predictions would likely have caused Charter's stock price to fall as shareholders relied on Charter's financial statements and analysts' reports. While there may not have been direct financial evidence (such as financial kick-backs) to explain why the secondary actors in Stoneridge participated in the Charter schemes, they may have nonetheless indirectly profited. Entering into a scratch-my-back-and-I-will-scratch-yours relationship ensured that Charter would continue to buy their products in the future and that someday Charter may return the favor when the scheming companies needed to pad their own books in order to de-ceive shareholders.

C. Policy Considerations in Holding Secondary Actors Liable as Primary Violators

The Court's apparent backpedaling from momentum created by the lower circuit courts and previous Su-preme Court decisions suggesting that secondary actors could be held liable as primary violators seems to be justi-fied by the Court's uncertain and insufficiently established policy considerations. The Court warned of consequenc-es that would result if it allowed common-law fraud to incorporate into § 10(b). [FN196] The Court claimed that allowing such an action could be interpreted as “provid[ing] a private cause of action against the entire marketplace in which the issuing company operates” and that Congress only intended that the SEC, not private plaintiffs, be al-lowed to sue scheming secondary actors such as those in Stoneridge. [FN197] In fact, the Court warned that allow-ing such an action could “extort settlements from innocent companies” and would deter both domestic and overseas companies from doing business in American markets. [FN198]

The dissent rebutted the Court's claims by pointing out that allowing private litigation under § 10(b) actually “play[s] a vital role in protecting the integrity of securities markets.” [FN199] Even the SEC insisted that allowing liability for those who violate§ 10(b) “will not harm American competitiveness; in fact, *480 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.” [FN200] One commentator noted that the Court had scant evidence on which to base its reasoning for claiming that business would be lost to overseas markets and that “[o]ne could just as easily say that the failure to protect the integrity of the financial markets by ensuring accurate disclosure ‘could’ discour-age foreign investors from investing in US markets and ‘may’ cause a shift in offerings away from domestic mar-kets.” [FN201] Furthermore, the “harsh, anti-shareholder attitude” promulgated by the Supreme Court could ulti-mately cause long-term damage to United States markets. [FN202] Certainly the victimized state pension funds, employee stockholders, and other injured parties in the Stoneridge, Simpson, and Credit Suisse cases would agree with such a sentiment.

Because of legislation such as Sarbanes-Oxley and other proactive measures taken by Congress and prior courts, companies are generally discouraged from scheming and deceiving shareholders. Actions such as those il-lustrated in Stoneridge are most likely exceptional circumstances that are severe enough to justify private actions by harmed investors. The dissent explained that:

Because the kind of sham transactions alleged in this complaint are unquestionably isolated departures from the ordinary course of business in the American marketplace, it is hyperbolic for the Court to conclude that petitioner's concept of reliance would authorize actions “against the entire marketplace in which the issuing company operates.”

D. Potential Future Consequences for the United States Securities Market After Stoneridge

Despite the early fears and criticisms that were promulgated about the strict disclosure requirements of *481 Sarbanes-Oxley, [FN203] the Act has proven a powerful tool in combating corporate misbehavior. Since Congress's enactment of the Sarbanes-Oxley disclosure measures, the SEC has been able to ban numerous individuals from serving as officers and directors of public companies and has been able to collect billions in disgorgement and pen-alties. [FN204] The Court in Stoneridge felt that fully empowering the SEC, rather than private parties, to bring aid-ing-and-abetting actions was the most permissible way to combat corporate scheming. [FN205]

One commentator noted that the Court may have actually granted the SEC a somewhat unbridled power to charge scheming secondary actors. He explained that the SEC need not trouble itself with an aiding-and-abetting charge because the agency can instead ignore the element of reliance and charge secondary actors as primary viola-tors. [FN206] The SEC need not show reliance in order to bring a Rule 10b-5 cause of action. [FN207] Conversely, the SEC must show actual misconduct, not just reckless behavior, to bring a Rule 10b-5 aiding-and-abetting claim. [FN208] The Court's decision in Stoneridge, coupled with statutory language and prior precedents, means that the SEC “may, therefore, circumvent both the holding in Stoneridge and the limits on aiding and abetting by charging vendors as primary violators.” [FN209] Ironically, although the Stoneridge Court was “determined to stop the ‘ex-pansion’ of antifraud liability,” the Court actually acted contrary to such a determination and it threw “all other [le-gal] guiding principles . . . out the window.” [FN210]

*482 Therefore, the United States markets are left with an SEC that has even more power than previously anticipated and shareholders with diminished chances of individually pursuing those that allegedly lied and stole from them. The confidence that investors may have derived from an expectation of disclosure set by Sarbanes-Oxley has been given a dangerous caveat. So long as companies do not disclose the truth behind sham contracts and trans-actions in which they have participated (thereby causing reliance), they probably will not be vulnerable to private actions.

While the SEC should have the tools it needs to combat corporate misbehavior and theft from shareholders, allowing private actions is a more efficient means to regulate publicly traded companies. Contrary to the Court's fear that the marketplace would be inundated with extortionist private actions, [FN211] private plaintiffs would help to efficiently regulate the market. Allowing § 10(b) private actions would decrease the burden on the SEC to pursue, with its limited resources, every corporate scheme that is discovered. The evidence of reliance should be determined from the facts by district courts, which are quite capable of weeding out extortionists who may bring a frivolous lawsuit against a wrongly accused company.

The expectation of disclosure, coupled with the ability of shareholders to sue on their own behalf, is what has helped make United States markets an attractive option for foreign and domestic investors. Faced with a loom-ing recession and a dismal housing market, Americans have even more cause to be apprehensive about investing their money in publicly traded companies. The Stoneridge decision does not appear to engender an increased confi-dence in the safety and transparency of United States markets. Ben Stein, a well-known actor, author, lawyer, and economist, commenting on the Court's refusal of certiorari for the Credit Suisse case and the Solicitor General's brief that the Court seemed to wholly adopt in Stoneridge, pled for the White House to “reconsider this embarrassment. There is no justice in this refusal to aid the Enron shareholders. There is no political gain from slapping the *483 little guy in the face . . . . The basic building block of capitalism is trust, and it is crumbling.” [FN212]

While the Court denied certiorari in the Credit Suisse case, only the class-certification issue that came up on interlocutory appeal is technically resolved. [FN213] Because the case is still pending on its merits in the district court in Houston, the parties may be able to litigate the case as single plaintiffs, or instead, again seek class certifica-tion within the direction outlined in Stoneridge. [FN214] Based on the Court's determination in Stoneridge, howev-er, another probable certiorari petition to the Supreme Court will likely meet an unfavorable result. [FN215]

In Simpson, the Court granted certiorari but then immediately remanded the case for reconsideration in light of the Stoneridge decision. [FN216] The Simpson case was the only case among the previously discussed circuit-court opinions that held that secondary actors could be found liable under a Rule 10b-5 cause of action. [FN217] The Ninth Circuit ruled that scheming conduct could be a deceptive act and that the fraud-on-the-market doctrine was adequate to meet the element of reliance. [FN218] Upon remand, the Ninth Circuit will have to determine if Simpson has sufficient facts to show that the plaintiffs had adequately and directly relied on the conduct of the sec-ondary actors. [FN219] Like in Simpson, the Court should have remanded the Stoneridge case to the circuit court to determine whether, based on the facts, there was adequate reliance to justify a § 10(b) private cause of action. [FN220]

Because the Court is unlikely to find a permissible § 10(b) private cause of action from the Credit Suisse and Simpson *484 cases, Congress should take up the issue. In Stoneridge, the Court indicated that it is hesitant to take affirmative steps in allowing shareholder-plaintiffs to seek private redress from scheming secondary actors be-cause of its fear of potential negative consequences to the securities market and the chance that there may be an in-crease of frivolous lawsuits. [FN221] The Court failed to protect investors and shareholders with a permissible in-terpretation of statutes already created by Congress and common law previously established by the Court. The Court has created an unclear element of reliance and has taken shelter under the canopy of “no authority.” [FN222]

Both domestic and foreign confidence in the securities market will continue to decline, despite recent trans-parency-encouraging legislation such as Sarbanes-Oxley, already promulgated by Congress. [FN223] Congress should clearly demonstrate to the Court that it intended to allow shareholder-plaintiffs to pursue § 10(b) private ac-tions by amending the current statute or by drafting additional legislation to conspicuously indicate such. Congress should recognize that private investors, along with the SEC, should be able to obtain redress from entities that have intentionally defrauded shareholder-plaintiffs.

VI. CONCLUSION

In its Stoneridge decision, the Supreme Court appeared to ignore judicial precedent and inappropriately inflate the burden of meeting the reliance element in a § 10(b) private cause of action. Additionally, the Court's poli-cy justifications for its holding appear to be weak and speculative and could, in reality, further dampen economic growth in United States domestic markets. Though Simpson and Credit Suisse could still potentially modify or fur-ther clarify the decision in Stoneridge, they are unlikely to convince the current Court to allow private litigants to pursue claims against secondary actors perpetrating schemes that harm investors. The thirty-one amicus curiae briefs filed with the Court in the Stoneridge case indicated an *485 approximately evenly divided split for those parties in support of and opposed to allowing private § 10(b) actions against scheming secondary actors. [FN224] The divided opinions of outside parties filing such briefs and the circuit split in the remaining Simpson and Credit Suisse cases indicate that the question of scheme liability is far from settled.

[FNa1]. J.D., M.B.A./Finance, Associate in the Corporate and Securities practice area of Kamlet, Shepherd and Reichert, LLP. I would like to thank Professor Maclyn Clouse, Ph.D., M.B.A., Finance Professor, University of Denver Daniels College of Business, and Jeffrey S. Hurd, J.D., for their assistance in the development of this article. I would also like to thank Nicail, Aeyan and Ryeden for their patience during this process.

[FN1]. 128 S. Ct. 761 (2008).

[FN2]. Id. at 766, 770.

[FN3]. Id. at 764, 766.

[FN4]. Id. at 774.

[FN5]. See infra notes 156-60 and accompanying text.

[FN6]. Stoneridge, 128 S. Ct. at 769.

[FN7]. Id. at 772-73.

[FN8]. See discussion infra Part V.B.

[FN9]. See discussion infra Parts III.A-B.

[FN10]. 452 F.3d 1040 (9th Cir. 2006).

[FN11]. Avis Budget Group, Inc. v. Cal. State Teacher's Ret. Sys., 128 S. Ct. 1119 (2008).

[FN12]. 482 F.3d 372 (5th Cir. 2007).

[FN13]. Regents of the Univ. of Cal. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 128 S. Ct. 1120 (2008).

[FN14]. See discussion infra Parts III.A-B.

[FN15]. See infra notes 222-24 and accompanying text.

[FN16]. See infra notes 20-43 and accompanying text.

[FN17]. Id.

[FN18]. See discussion infra Part II.B.

[FN19]. Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 764 (2008).

[FN20]. 3 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg and Lowenfels on Securities Fraud & Com-modities Fraud § 6:58 (2d ed. 2008).

[FN21]. I.R.S. Publ'n 550, Investment Income and Expenses 55 (2007), http:// www.irs.gov/pub/irs-pdf/p550.pdf.

[FN22]. Investopedia.com, Wash Sale, http:// www.investopedia.com/terms/w/washsale.asp (last visited Apr. 12, 2008).

[FN23]. Id.

[FN24]. 15 U.S.C. § 78i(a)(1) (2006).

[FN25]. Bromberg & Lowenfels, supra note 20, § 6:58.

[FN26]. Id.

[FN27]. Id.

[FN28]. Id. (quoting 78 Cong. Rec. 7717 (1934)).

[FN29]. Id.

[FN30]. Bromberg & Lowenfels, supra note 20, § 6:58.

[FN31]. Id. at § 6:54.520.

[FN32]. Id.

[FN33]. Id.

[FN34]. See infra notes 86-89, 129-32 and accompanying text.

[FN35]. Bromberg & Lowenfels, supra note 20, at § 6.54.520.

[FN36]. Id.

[FN37]. Id.

[FN38]. Id.

[FN39]. Id.

[FN40]. Bromberg & Lowenfels, supra note 20, at § 6:54.520.

[FN41]. Id.

[FN42]. Id.

[FN43]. See infra notes 90-92 and accompanying text.

[FN44]. 15 U.S.C. § 78j(b) (Supp. 2008).

[FN45]. Daniel A. McLaughlin, Liability Under Rules 10b-5(a) & (c), 31 Del. J. Corp. L. 631, 632 (2006).

[FN46]. 15 U.S.C. § 78j(b) (2005) (emphasis added).

[FN47]. McLaughlin, supra note 45, at 632.

[FN48]. Id. at 632-33.

[FN49]. 17 C.F.R. § 240.10b-5 (2005) (emphases added).

[FN50]. Scienter is defined as: “A mental state consisting in an intent to deceive, manipulate, or defraud.” Black's Law Dictionary 1373 (8th ed. 2004).

[FN51]. The Stoneridge Court primarily emphasized the reliance element in its decision. See generally Ston-eridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).

[FN52]. Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 382 (5th Cir. 2007) (quoting Unger v. Amedisys Inc., 401 F.3d 316, 322 n.2 (5th Cir. 2005)).

[FN53]. 511 U.S. 164 (1994).

[FN54]. Id. at 192-94 (Stevens, J., dissenting); Koji F. Fukumura & Aaron F. Olsen, Recent Developments in Securities Litigation, in Advanced Securities Law Workshop 2007, at 313, 315 (PLI Corp. Law & Practice, Course Handbook Series No. 1617, 2007).

[FN55]. Nicholas Fortune Schanbaum, Scheme Liability: Rule 10b-5(a) and Secondary Actor Liability After Central Bank, 26 Rev. Litig. 183, 184 (2007).

[FN56]. Fukumura & Olsen, supra note 54, at 315 (quoting Cent. Bank, 511 U.S. at 177) (emphasis add-ed).

[FN57]. Schanbaum, supra note 55, at 190.

[FN58]. Id. at 190-91.

[FN59]. Id. at 192.

[FN60]. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).

[FN61]. Schanbaum, supra note 55, at 192.

[FN62]. Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 168-69 (1993).

[FN63]. Id. at 167.

[FN64]. Id. at 167-68.

[FN65]. Id. at 168.

[FN66]. Id.

[FN67]. See generally Gregory A. Markel & Gregory G. Ballard, In re Charter Communications, Inc. Securities Litigation and Simpson v. AOL Time Warner Inc.: Circuits Split Over the Validity of “Scheme” Liability Under Section 10(b), 34 Sec. Reg. L.J. 246, 250 (2006).

[FN68]. Id.

[FN69]. Cent. Bank, 511 U.S. at 177.

[FN69]. Id.

[FN70]. Id. The Stoneridge Court appeared to expand on this statement when the Court explained that conduct could also be a manipulative act. See infra note 158 and accompanying text.

[FN71]. Cent. Bank, 511 U.S. at 177. The Stoneridge Court was unafraid, however, to discuss the public policy implications of permitting a private § 10(b) action in reaching its decision. See infra notes 172-76 and accompany-ing text.

[FN72]. Cent. Bank, 511 U.S. at 177-78.

[FN73]. Id. at 179.

[FN74]. Id.

[FN75]. Id. at 180.

[FN76]. Id. at 184.

[FN77]. Cent. Bank, 511 U.S. at 181.

[FN78]. Id. at 190.

[FN79]. Id.

[FN80]. See Markel & Ballard, supra note 67, at 250.

[FN81]. Cent. Bank, 511 U.S. at 191 (emphases added).

[FN82]. See discussion infra Part III.

[FN83]. 452 F.3d 1040 (9th Cir. 2006).

[FN84]. See id. at 1042-43.

[FN85]. Id. at 1050-51; see also Markel & Ballard, supra note 67, at 250.

[FN86]. Simpson, 452 F.3d at 1042.

[FN87]. Id. at 1043.

[FN88]. Id.

[FN89]. Id.

[FN90]. Id.

[FN91]. Simpson, 452 F.3d at 1042.

[FN92]. Id.

[FN93]. Id.

[FN94]. Id. at 1048. This question was unfortunately left mostly unanswered in Stoneridge. The Court was will-ing to conclude that conduct alone could be enough to equate to a deceptive act, but the Court failed to explain or give sufficient examples to answer the question. See infra note 158 and accompanying text.

[FN95]. Simpson, 452 F.3d at 1048.

[FN96]. Id. (emphases added).

[FN97]. Id. at 1048 n.3.

[FN98]. Id. at 1048. The Court differentiated the principal-purpose-and-effect test from the element of scienter normally required in a § 10(b) cause of action: The Court seems to draw a distinction between scienter, which focuses on the defendant's state of mind, and the purpose and effect test, which focuses on the defendant's conduct: “‘In applying the ‘scienter’ element, we look at whether a defendant's state of mind was sufficiently culpable for § 10(b) liability. By contrast, we may ex-amine the ‘principal purpose and effect’ of the defendant's challenged conduct in a fraudulent scheme as an aid to assessing whether the defendant's conduct was sufficiently deceptive for § 10(b) liability.” Markel & Ballard, supra note 67, at 268 n.57 (citing Simpson, 452 F.3d at 1049 n.5).

[FN99]. Simpson, 452 F.3d at 1050.

[FN100]. Id. It appears that the actions of the secondary actors in Stoneridge would have been sufficient with-out “a principal legitimate business purpose” so as to fail the standard of the principal-purpose-and-effect test advo-cated by the Ninth Circuit.

[FN101]. Id.

[FN102]. Id.

[FN103]. Id.

[FN104]. See supra notes 95-98.

[FN105]. See infra notes 117-18.

[FN106]. 482 F.3d 372 (5th Cir. 2007).

[FN107]. Id. at 377.

[FN108]. See Editorial, Supreme Court Missed a Chance to Protect Pension Funds, Investors, The Morning Call, Jan. 24, 2008 at A8, available at 2008 WLNR 1430637.

[FN109]. Credit Suisse, 482 F.3d at 379.

[FN110]. Id. at 377.

[FN111]. Id.

[FN112]. Id. It is difficult to understand how these fraudulent transactions, which resulted in fraudulent finan-cial statements held out to the public and which seriously misled analysts, could not be found to be adequate reli-ance, even under the Stroneridge standard.

[FN113]. Id.

[FN114]. Credit Suisse, 482 F.3d at 382.

[FN115]. Id.

[FN116]. Id. at 378.

[FN117]. Id. at 390.

[FN118]. Id.

[FN119]. Credit Suisse, 482 F.3d at 382; see also Fukumura & Olsen, supra note 54, at 321. The Stoneridge Court specifically analyzed this statement that duty was a critical element that had to be present to find there had been a deceptive act. The fraud-on-the-market doctrine is sufficient to circumvent duty in order to find reliance. See infra notes 160-61 and accompanying text.

[FN120]. Credit Suisse, 482 F.3d at 393-94.

[FN121]. Id. at 385. The Fifth Circuit's reasoning for not analyzing reliance under the fraud-on-the-market principle was because there was an absence of duty leading to a deceptive act. But because the Stoneridge Court ruled that there was no duty requirement, the Fifth Circuit should now determine, on remand, whether in Credit Suisse there was a fraud-on-the-market type of reliance.

[FN122]. Id. at 392.

[FN123]. Id. at 388-89.

[FN124]. Id. at 392.

[FN125]. Credit Suisse, 482 F.3d at 393. This is the same type of possibly over-speculative policy considera-tions offered by the Stoneridge Court. See infra notes 172-76 and accompanying text.

[FN126]. Credit Suisse, 482 F.3d at 394 (Dennis, J., concurring).

[FN127]. 128 S. Ct. 761 (2008). Portions of this case description were excerpted from: Posting by Seth Gomm, Primary Liability and In re Charter Communications, to TheRacetotheBottom.org, http:// www.theracetothebottom.org/securities-issues/primary-liability-and-in-re-charter-communications.html (June 7, 2007, 06:10 MDT).

[FN128]. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc. (In re Charter Comm'ns Inc., Sec. Litig.), 443 F.3d 987 (8th Cir. 2006).

[FN129]. Id. at 989.

[FN130]. Id.

[FN131]. Id. at 990.

[FN132]. Id. at 991.

[FN133]. Charter, 443 F.3d at 990.

[FN134]. Id. at 992.

[FN135]. Id. at 990-91.

[FN136]. Id. at 991.

[FN137]. Id. at 992.

[FN138]. Charter, 443 F.3d at 992.

[FN139]. Id. at 992-93.

[FN140]. Id. at 992.

[FN141]. Id. Again, the principle that duty to disclose is a required element in order to find a sufficient decep-tive act was overturned in this case by the Stoneridge Court because the fraud-on-the-market doctrine does not re-quire such a duty. See infra notes 162-63 and accompanying text.

[FN142]. Charter, 443 F.3d at 992.

[FN143]. Id. at 992.

[FN144]. Id.

[FN145]. Id. at 993.

[FN146]. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).

[FN147]. See discussion supra Part III.C.

[FN148]. Stoneridge, 128 S. Ct. at 766.

[FN149]. Id. at 774.

[FN150]. Id. at 765.

[FN151]. Id.

[FN152]. Id.

[FN153]. Stoneridge, 128 S. Ct. at 767.

[FN154]. Id.

[FN155]. See discussion supra Part II.B.

[FN156]. See supra note 51.

[FN157]. Stoneridge, 128 S. Ct. at 768.

[FN158]. Id. at 769 (emphasis added).

[FN159]. Id. (quoting Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988)).

[FN160]. Id.

[FN161]. Id. (citing Basic Inc., 485 U.S. at 247).

[FN162]. Stoneridge, 128 S. Ct. at 769.

[FN163]. Id. at 770.

[FN164]. Id. at 770-71.

[FN165]. Id.

[FN166]. Id. at 771.

[FN167]. Stoneridge, 128 S. Ct. at 771.

[FN168]. Id.

[FN169]. Id. at 768-69.

[FN170]. Id. at 769.

[FN171]. Id. at 773.

[FN172]. Stoneridge, 128 S. Ct. at 772.

[FN173]. Id. at 772.

[FN174]. Id.

[FN175]. Id. at 772-73.

[FN176]. Id. at 773.

[FN177]. See supra note 157 and accompanying text.

[FN178]. Stoneridge, 128 S. Ct. at 774, (Stevens, J., dissenting).

[FN179]. Id.

[FN180]. Id. at 775.

[FN181]. Id.

[FN182]. Posting of J. Robert Brown, Stoneridge Affirmed (Part 2), to TheRacetotheBottom.org, http://www.theracetothebottom.org/securities-issues/stoneridge-affirmed-part-2.html, (Jan. 15, 2008, 10:00 MDT); Ben Stein, Where is Washington's Love for Shareholders?, N.Y. Times, June 24, 2007, at 6.

[FN183]. Stoneridge, 128 S. Ct. at 774-75 (Stevens, J., dissenting). In its Simpson amicus brief, the SEC stated that “[t]he reliance requirement is satisfied where a plaintiff relies on a material deception flowing from a defend-ant's deceptive act, even though the conduct of other participants in the fraudulent scheme may have been a subse-quent link in the causal chain leading to the plaintiff's securities transaction.” Id. at 775 n.2.

[FN184]. 485 U.S. 224 (1988).

[FN185]. Stoneridge, 128 S. Ct. at 776 (Stevens, J., dissenting).

[FN186]. Id.; see supra notes 160-61 and accompanying text.

[FN187]. Stoneridge, 128 S. Ct. at 776 (Stevens, J., dissenting) (emphases added).

[FN188]. Id. at 775.

[FN189]. See supra note 158 and accompanying text (emphases added).

[FN190]. Posting of J. Robert Brown, Stoneridge and the Rule of Unintended Consequences, to TheRace-totheBottom.org, http://www.theracetothebottom.org/securities-issues/stoneridge-and-the-rule-of-unintended-consequences.html (Jan. 22, 2008, 06:15 MDT) (quoting Larry Ribstein).

[FN191]. Stoneridge, 128 S. Ct. at 777 (Stevens, J., dissenting).

[FN192]. Id. at 777.

[FN193]. Id.

[FN194]. Id.

[FN195]. See supra notes 165-67 and accompanying text.

[FN196]. Stoneridge, 128 S. Ct. at 771.

[FN197]. Id.

[FN198]. Id. at 772.

[FN199]. Id. at 778 (Stevens, J., dissenting).

[FN200]. Id. at 779.

[FN201]. Posting of J. Robert Brown, Friday Editorial: SOX, Stoneridge and the Assault on Shareholder Rights, to TheRacetotheBottom.org, http:// www.theracetothebottom.org/securities-issues (Jan. 18, 2008, 06:15 MDT).

[FN202]. Id.

[FN203]. See generally Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. Corp. L. 1 (2002).

[FN204]. Stoneridge, 128 S. Ct. at 773; Scott Sorrels et al., SEC Enforcement Update: Recent Cases and Priori-ties, in Corporate Governance 2008: Counseling Your Clients for the 2008 Proxy Season, at 243, 249 (PLI Corp. Law & Practice, Course Handbook Series No. 1652, 2008).

[FN205]. Stoneridge, 128 S. Ct. at 771.

[FN206]. Posting of J. Robert Brown, Stoneridge and the Rule of Unintended Consequences, to TheRace-totheBottom.org, http:// www.theracetothebottom.org/securities-issues (Jan. 22, 2008 06:15 MDT).

[FN207]. Id.

[FN208]. Id.

[FN209]. Id.

[FN210]. Id.

[FN211]. See supra note 172 and accompanying text.

[FN212]. Stein, supra note 182, at 6.

[FN213]. Posting of J. Robert Brown, Enron and Justice Delayed, to TheRacetotheBottom.org, http://www.theracetothebottom.org/securities-issues/enron-and-justice-delayed.html (Jan. 23, 2008, 08:15 MDT).

[FN214]. Id.

[FN215]. Id.

[FN216]. Avis Budget Group, Inc. v. Cal. State Teacher's Ret. Sys., 128 S. Ct. 1119 (mem.) (Jan. 22, 2008)

[FN217]. Posting of J. Robert Brown, Enron, AOL, and Stoneridge, to TheRacetotheBottom.org, http://www.theracetothebottom.org/securities-issues/enron-aol-and-stoneridge.html (Jan. 23, 2008, 06:15 MDT).

[FN218]. Id.

[FN219]. Id.

[FN220]. Id.; Stoneridge Inv. Partners LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 776 (2008) (Stevens, J., dissenting).

[FN221]. See supra notes 172-74 and accompanying text.

[FN222]. See discussion supra Part V.B. and notes 175-76 and accompanying text.

[FN223]. See discussion supra Part V.D.

[FN224]. David W. Wiltenburg, ‘Stoneridge’: Supreme Setback for the ‘Scheme’ Theory?, 239 N.Y.L.J., at 6, col. 5 (Jan. 25, 2008).

61 Ark. L. Rev. 453

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