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What Will it Take to Label Participation in a Deceptive Scheme to Defraud Buyers of Securities a Violation of Section 10(B)? The Disastrous Result and Reasoning of Stoneridge


Mark Klock


George Washington School of Business

November 20, 2009

Kansas Law Review, Volume 58, No. 2, 2009

Abstract:     
In 2008 the Supreme Court ruled in a 5 to 3 decision that participants to a sham transaction in the product market designed to fraudulently inflate revenue could not be liable in a private action to recover under Section 10(b) of the Securities and Exchange Act because the participants had not communicated directly with the shareholders and therefore the public could not have relied on the misrepresentations. Early commentary has been critical of the majority’s legal reasoning. I bring additional economic theory to the criticism of the majority in light of the subsequent financial sector and macroeconomic collapse and the recently discovered fifty billion dollar Ponzi scheme by Bernard Madoff. The Court’s ruling has created a new moral hazard where corporations are given pecuniary encouragement to engage in unethical behavior. The President and Congress should act now to remedy the majority’s ruling.

Number of Pages in PDF File: 46

Keywords: securities fraud, aiding and abetting, moral hazard

JEL Classification: G38, K22

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Date posted: March 6, 2010  

Suggested Citation

Klock, Mark, What Will it Take to Label Participation in a Deceptive Scheme to Defraud Buyers of Securities a Violation of Section 10(B)? The Disastrous Result and Reasoning of Stoneridge (November 20, 2009). Kansas Law Review, Volume 58, No. 2, 2009. Available at SSRN: http://ssrn.com/abstract=1563664

Contact Information

Mark Klock (Contact Author)
George Washington School of Business ( email )
2023 G Street
Washington, DC 20052
United States
202-994-8342 (Phone)
202-994-5014 (Fax)
HOME PAGE: http://savickas.net/cgi-bin/GWfinance/viewfaculty.cgi?fn=16
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