Oct. 5, 2007
Law professor Sale contributes brief to important Supreme Court case
A University of Iowa law professor is participating in what observers call one of the most important business law cases to come before the U.S. Supreme Court in years.
Hillary Sale, professor of law in the UI College of Law, is a co-signer on a brief in the case Stoneridge Investment Partners v. Scientific-Atlanta. The court will hear oral arguments in the case on Tuesday.
"The case is important because it will determine who can be held legally liable for a fraudulent statement that causes investors to lose money," said Sale, an expert in securities law and corporate governance law issues. As the law is currently written, she said a person or company needs to make an intentionally deceptive misstatement or omission to be sued for fraud.
"The problem is that some persons participate in the making of a misstatement without actually 'speaking,' and that's the central issue in this case," Sale said.
In the case, Stoneridge wants to sue Scientific-Atlanta over an alleged fraud committed by Charter Communications, a cable television company. Allegedly, Charter purchased television set cable boxes from Scientific Atlanta at $20 over the agreed-upon price without reporting the additional expense on its financial statements.
Scientific Atlanta then used the additional money to buy advertising on Charter television channels, which Charter reported as income to increase its quarterly revenue and inflate its stock price.
Stoneridge, which invested in Charter stock, lost money when the company's actions fell apart and the stock price dropped. The firm wants to sue Scientific Atlanta for participating in what the partners consider a sham transaction while knowing that Charter was allegedly falsely reporting the revenues. Scientific-Atlanta denies it can be held liable, however, arguing it was under no legal responsibility to report the transaction and so it can't be held liable.
The Eighth Circuit Court of Appeals sided with Scientific-Atlanta that the company cannot be sued and Stoneridge is appealing to the Supreme Court.
Sale said the case turns on the issue of how far liability extends in a fraud case. In her brief, Sale and the other signers argue it should extend to include such third parties as Scientific-Atlanta, when it knew it was engaging in a fraud as part of a transaction that was otherwise legal.
"This is more than just aiding and abetting Charter Communication's liability, these were sham transactions that directly caused a financial misrepresentation to Charter investors," she said.
Sale and her co-signers worry that if the current appeals court decision stands, third-party companies might be more willing to participate in another company's fraud if they know they cannot be held liable by investors.
"We worry this could seriously impair the integrity of our securities markets by diminishing the deterrence value of securities litigation by prohibiting litigation against all of those responsible for fraudulent schemes," she said. "Under the Eighth Circuit's opinion, investors can recover against only one company engaged in a fraud, even though frauds are frequently committed by multiple actors."
Sale said the case could also have an effect on a separate case brought by former stockholders of Enron who are suing various third parties that helped the bankrupt energy company set up illegal accounting schemes.
Sale is one of six corporate law professors to sign the brief.
STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Iowa City, Iowa 52242-2500