Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.: The Political Economy of Securities Class Action Reform

Abstract

Stoneridge is the latest in a series of recent Supreme Court decisions restricting securities class actions. It is also the latest in a series of Court decisions (Affiliated Ute, Basic, and Central Bank) using the reliance element of the Rule 10b-5 cause of action to expand or restrict the reach of securities fraud class actions. In this essay I argue that the Court took a wrong turn in Basic when it failed to come to terms with the relation between reliance and damages in securities fraud. Central Bank held that the express causes of action in the securities laws should serve as a guide to the elements of implied cause of action in Rule 10b-5. A close reading of the express causes of action in the securities law suggests that damages should be limited to the defendant's benefit if the plaintiff cannot plead actual reliance on the fraudulent misstatement. Compensation should only be available in cases alleging actual reliance. Changing the damages measure to disgorgement in Rule 10b-5 actions based on Basic's fraud on the market presumption would substantially diminish the pocket shifting aspect of securities fraud class actions while maintaining their deterrent value. I analyze the institutions that might effect this needed change in the damages measure - the Court, Congress, the SEC, or shareholders. The available evidence suggests that the three governmental actors in this list are largely paralyzed from overhauling securities class actions in a meaningful way. I argue that shareholders, the parties who bear the costs of the current regime, must take matters into their own hands by amending the corporation's articles. The amendment proposed here would effect a limited waiver of compensatory damages in lawsuits relying on the fraud on the market presumption.

Keywords: Supreme Court, Stoneridge, class action reform

JEL Classification: K22, K41, P26