SCOTUS to review Eighth Circuit Court of Appeals’ refusal to recognize securities fraud cause of action for secondary actors’ “scheme liability.” Institutional Investor Blog the Supreme Court granted certiorari to consider whether secondary actors can be held liable to shareholders under a "scheme" liability theory. Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 549 U.S. ___ (U.S. 06-43 Mar. 26, 2007). The Fifth and Eighth Circuit Courts of Appeal have rejected scheme liability, and the Ninth Circuit (who else) has indicated that liability may be found under the theory for engaging in "schemes" to defraud. The Eighth Circuit held that under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) only those who (1) "make or affirmatively cause to be made a fraudulent misstatement or omission," or (2) "directly engage in manipulative securities trading practices" are liable. See In re: Charter Communications, Inc., *
Securities Litigation, Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 443 F. 3d 987 (Eastern District of Missouri--8th Cir. 2006){plaintiff’s shareholders accused company’s vendors of creating sham invoices to inflate cash flow.} The 5th Circuit likewise rejected scheme liability in Regents of The University of California v. Credit Suisse First Boston (USA), Inc., et al., No. 06-20856 (5th Cir. Mar. 19, 2007). Both followed the Supreme Court’s 1994 decision Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994) that rejected aiding and abetting liability in shareholder damages litigation. The Ninth Circuit opened the door for these lawsuits in Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006) for outside participants it found had been more actively involved in the alleged fraud.