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The Significance of Stoneridge: What Is SEC Chairman Cox Doing?

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A key warning in my e-mail pile, which includes surprising news about SEC Chair Chris Cox:

On Friday’s Wall Street Journal editorial page, AEI scholar and legal blogger ( Ted Frank wrote about Stoneridge v. Scientific Atlanta, a case the Journal’s Law Blog has called “the most important securities case in a generation. Frank reports that, “The plaintiff’s bar is heavily lobbying the SEC to intervene … on the side of a gigantic expansion of private litigation.” Here’s the backstory:

If anything, Frank underplayed the implications of this case and the characters involve.  If proponents of expanding liability get their way (and, as Frank reports, they might), anytime a company is found guilty of violating the securities laws, everyone who did business with it will have to ask if they are a potential target of the resulting securities lawsuits. In tort law such “secondary” liability is called “joint and several” and has been a target of reformers. Because it is the legal equivalent of a daisy-cutter bomb-mowing down everything standing within a wide radius — Congress has repeatedly said no to applying it to in securities cases, most recently when it took up Sarbanes-Oxley in 2002. Still, thanks to divisions in the lower courts and some surprising turns within the Bush Administration, “secondary” liability is now up for grabs.

Here’s what’s at stake: Erasing the primary-secondary liability line would make the US unique in the global financial world — not in a good way. It would drive companies out of listing on US exchanges, either by going private or by listing overseas. Thanks in part to the already horrible litigation environment, both have started to happen. In the past year London has replaced the NYSE and NASDAQ as the preferred exchange for launching US IPOs, and everyone has heard about public US companies selling themselves to private equity firms. If the Supreme Court fumbles this one, look for the current rush to the door to become a stampede. Look also for the raising of capital in the US to become much more difficult and expensive, ending or at least diminishing one of our biggest global economic advantages.

The Court has asked the Solicitor General to submit a brief. In determining his position on a case like this, the SG looks first to the SEC. With Chris Cox sitting in the chairman’s chair, you’d think there would be no guesswork in where the Commission comes down. As a member of Congress, Cox authored the law that ended securities strike suit litigation. You’d be wrong.

Apparently the pro-expanding liability campaign has worked. Articles in major papers saying this case was a test of whether Cox was or was not “pro-investor,” hearings called for mid- June by Congressman Barney Frank and labor union agitation have done their work. The word around Washington is that, while the Commission’s two Republicans other than Cox have sided with honoring the clear and long-standing meaning of the law (not a surprise) and its two Democrats have (also no surprise) sided with expanding liability, Cox is going with the Democrats.

The other big player in the government is the Treasury Department. Treasury Secretary Henry Paulson has been vocal about the damage litigation is doing to the US economy and capital markets. Yet it isn’t clear that Treasury has weighed in at all….

Without a strong opinion from the SG, this case-and the position of the American securities exchanges in the world capital markets-is up for grabs. The almost unbelievable fact is that an administration committed to clipping the wings of the trial bar may hand some of our most predatory attorneys-the securities law equivalent of personal injury lawyers-one of their biggest victories every. Among the biggest losers: US investors, in whose name and from whose pockets the plaintiffs lawyers commonly pick their hundred-million-dollar-plus paydays.

This is deep, inside-baseball but the Bush Administration can’t really afford not to vigorously defend against this push by the trial lawyers.  Chairman Cox, what’s going on?  Send a reply, and I’ll post it.


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