Guest column by Christopher F. Robertson and Erik W. Weibust of the law firm Seyfarth Shaw LLP. Mr. Robertson is a partner and Mr. Weibust is an associate in Seyfarth Shaw’s Securities Litigation Practice Group.
With the recent collapse of the financial markets dominating the headlines, the plaintiffs’ bar is well on its way to casting blame. From corporate boardrooms to investment banks to the professional advisors to institutions, nobody seems off-limits. A critical question for these potential defendants, therefore, is what potential exposure they may have to such claims. At first blush, these arguably “secondary actors” gained substantial protection from liability with the recent decision of the United States Supreme Court in Stoneridge Investment Partners, LLC v. Scientific Atlantic, Inc. (“Stoneridge“). In that case, the Court held that only those defendants whose activities in connection with a securities transaction had been made public, such as signing a disclosure document, could be liable. With this decision, the Supreme Court effectively ended attempts by plaintiffs to reach so-called “secondary actors” by alleging that they were engaged in a “scheme” to defraud investors, even where investors had not relied upon any statements made by the secondary actors.
In light of Stoneridge, then, the question becomes what exposure do these “secondary actors,” such as law firms, auditors, and/or investment banks, in fact face in a securities transaction? From traditional securities class action claims, the answer is likely that they are shielded from liability. There are, however, a number of other claims that could be brought that would appear to fall outside of the protections of Stoneridge. One such claim would arise in a securities offering, where an investment bank or auditing firm certified some aspect of the transaction in the offering materials which were made public. In the Washington Mutual securities litigation, for example, the plaintiffs’ consolidated amended complaint added numerous investment banks as defendants solely in connection with their roles in a securities offering made during the class period. Because the class periods in many of the current cases are quite long, it is possible that many of the defendant companies will have conducted offerings during that period, thereby bringing the investment banks that facilitated those offerings into the sphere of potential defendants.
In addition to claims related to public offerings, plaintiffs may also seek to utilize state securities laws to reach defendants that would otherwise be protected under Stoneridge. In connection with the 2005 collapse of the Wood River Partners hedge fund, for example, the plaintiff investor brought claims under federal and Oregon securities laws against Wood River’s outside law firm. Refusing to dismiss the claims under state law, a federal court in New York held that the plaintiff’s state law claims were not preempted by federal law, and further held that Oregon law did allow for “aiding and abetting” claims against secondary actors, including law firms. While class claims under state law might be prohibited under the Securities Litigation Uniform Standards Act of 1998, large investors such as the plaintiff in the Wood River case may seek to reach secondary actors through state law causes of action.
Corporate bankruptcies may also increase the exposure for secondary actors. With the court-appointed trustee occupying the status of the bankrupt entity, he or she may bring direct claims against the corporation’s advisors, including the company’s investment bankers, auditors and counsel in order to maximize the estate’s recovery. While these claims may be subject to various defenses under state law, it is likely that trustees will conduct investigations to determine the liability of secondary actors, and seek to bring claims when their investigations warrants such (as was the case in the Enron litigation). Similarly, in the non-bankruptcy context, shareholders may bring derivative suits seeking to compel the corporation to bring claims against third parties. While it is ultimately the decision of the company’s board whether to bring such claims, it is possible that investigations undertaken in response to a shareholder demand might lead a company to bring claims against its advisors.
Stoneridge is clearly an important decision, and provides significant protection to secondary actors in securities transactions, such as investment bankers, lawyers and auditors. These entities, however, should be aware that Stoneridge is not all-encompassing, and does leave a number of alternative avenues for plaintiffs to seek recovery.