WASHINGTON, D.C. - State Attorney General Darrell McGraw is one of several state attorneys general who say they were standing up for the rights of investors when they filed a friend of the court brief Monday in a U.S. Supreme Court case.
Attorneys general Marc Dann of Ohio and Greg Abbott of Texas led in filing the brief, which they will gain importance because Solicitor General Paul Clement did not file a brief supporting investors in the case, though the Securities and Exchange Commission recommended it.
The case will determine if third parties (i.e. investment banks, accountants and law firms) can be held accountable for being a part of a company's fraud.
More specifically, the case, Stoneridge Investment Partners v. Scientific-Atlanta, Inc., presents the question, "Whether this Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation's financial statements, but where Respondents themselves made no public statements concerning those transactions."
The attorneys general feel the case will determine if the law will provide "a remedy for the wrongs suffered as the result of fraudulent corporate schemes," they wrote.
According to The Associated Press, President Bush's chief economic advisor described Bush's feelings on the case by saying, "We think the SEC is the right entity to bring those lawsuits and make sure investors are protected," Al Hubbard said. "We are in a society that is overly litigious and it's very harmful to society, very harmful to investors.
"The President believes that it's important to make certain that we reduce the unnecessary lawsuits because that's a very big burden to the economy, which adversely impacts investors."
Meanwhile, the state attorneys general feel they play a role in all this. They noted that they have several reasons for wanting to see all wrongdoers held accountable because of the states' roles as large institutional investors, the investors left in the states left with nothing and their desire to deter all types of fraud in the securities marketplace in order to ensure competitiveness.
In addition to West Virginia, Ohio and Texas, the states and commonwealths represented on the brief include Alaska, Arizona, the District of Columbia, Connecticut, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, New York, North Dakota, Oklahoma, Oregon, Puerto Rico, South Carolina, Tennessee, Utah, Vermont, and Wisconsin.
The three major arguments made by the attorneys general are:
-Eliminating scheme liability for "non-speaking" actors will improperly exempt culpable banks, lawyers, accountants, vendors, and other non-issuing entities who all must be deterred for the securities regulation system to function properly;
-Eliminating scheme liability for "non-speaking" actors will significantly diminish victims' right to compensation under the securities laws; and
-Liability for "non-speaking" actors in a securities fraud scheme should turn on the principal purpose and effect of those actors' own conduct and their culpability, not whether those actors personally made (or successfully avoided public attribution of) a false statement or omission.
The case, which charges vendors that did business with Charter Communications are liable for allegedly helping Charter misrepresent its financial results, is on the docket for the Supreme Court's next term.