1/15. The Supreme Court of the United States (SCUS) issued its opinion [33 pages in PDF] in Stoneridge Investment v. Scientific-Atlanta, a securities fraud case involving stock in Charter Communications, a cable television provider. At issue is the liability of secondary actors Scientific Atlanta and Motorola, which sold set top boxes to Charter.

Introduction. Stoneridge's complaint alleges fraudulent financial statements by Charter. But, it alleges no public fraudulent statements by Scientific Atlanta or Motorola. The complaint merely alleges conduct by the two in the form of contracts to sell set top boxes to, and to buy advertising from, Charter. These contracts were not made public, and Scientific Atlanta's or Motorola's own financial statements were not fraudulent.

The SCUS held that "the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations."

This opinion limits the circumstances under which equipment vendors and other third parties who do business with parties who do engage in securities fraud can be held liable for securities fraud under Section 10b.

However, it does not exonerate all third parties who deal with those accused of securities fraud. Scientific Atlanta and Motorola signed contracts with Charter, and these were seen by Charter and its auditors. But, they were not made public. Third party vendors, purchasers, and others might still be held liable under Section 10b when they have made public fraudulent statements, when they have breached a duty to disclose a material fact, and in other circumstances addressed by the opinion of the SCUS.

Also, there are statutory sections other than 10b that might be applied to third parties, such as accountants and underwriters.

There is also the matter of aiding and abetting liability. The SCUS held in its 1994 opinion in Central Bank of Denver v. First Interstate Bank of Denver, reported at 511 U.S. 164, that there is no private right of action under Section 10b for aiding and abetting securities fraud.

Then, in 1995, the Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). It did not add aiding and abetting liability under Section 10b in the PSLRA. Rather, the Congress amended the statute to it direct the Securities and Exchange Commission (SEC) to take action against aiders and abettors.

The just released opinion does nothing to limit the liability of third parties who have aided and abetted securities fraud, but not committed securities fraud themselves, in civil actions brought by the SEC.

This opinion is a defeat for class action securities lawyers.

Background. The plaintiff in the District Court and petitioner to the SCUS is Stoneridge Investment Partners.

Charter Communications issued securities, and financial statements regarding those securities, which actions give rise to the present litigation. It is a defendant in the District Court. However, its liability is not at issue in the present SCUS proceeding.

Scientific Atlanta and Motorola did not issue the securities at issue. Rather, they were equipment suppliers and then customers of Charter. Nevertheless, Charter named them as defendants below. They are the respondents before the SCUS.

The SCUS offered a summary of the allegations in Stoneridge's complaint regarding these two equipment suppliers. (Since the District Court disposed of this issue on a Rule 12(b)(6) motion, the SCUS assumed the allegations in the complaint to be true for the purposes of this certiorari proceeding.)

The SCUS wrote that "Charter arranged to overpay respondents $20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers. Respondents agreed to the arrangement." Moreover, "the companies drafted documents to make it appear the transactions were unrelated and conducted in the ordinary course of business" and they "signed contracts with Charter to purchase advertising time for a price higher than fair value", which contracts were backdated to make the two transactions look unrelated". And all of this, Stoneridge alleged, enabled Charter to report inflated revenue and operating cash flow in filings with the SEC, which filings were also available to the public.

Scientific Atlanta and Motorola had no role in the preparation of Charter's SEC filings. They properly reported the transactions in their own SEC filings.

District Court. Stoneridge filed a complaint in U.S. District Court (EDMo) against Charter, Scientific-Atlanta, Inc., Motorola, Inc., and others alleging securities fraud in violation of Section 10b of the Securities and Exchange Act of 1034, and rule 10b5 thereunder. Section 10b is codified at 15 U.S.C. § 78j(b).

Stoneridge alleged that Charter engaged in a pervasive and continuous fraudulent scheme intended to artificially boost its reported financial results by deliberately delaying the disconnecting of customers no longer paying their bills, improperly capitalizing labor costs, and entering into sham transactions with the two equipment vendors that improperly inflated Charter's reported operating revenues and cash flow. Stoneridge alleged that the two equipment vendors conduct amounted securities fraud in connection with transactions in Charter's securities.

The District Court dismissed the Section 10b claims against Scientific Atlanta and Motorola pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. It relied on the 1994 SCUS opinion in Central Bank of Denver. It reasoned that the complaint did not allege that the equipment vendors made misstatements relied upon by the public, or that they violated a duty to disclose.

Court of Appeals. The U.S. Court of Appeals (8thCir) affirmed the judgment of the District Court. See, April 11, 2006, opinion [PDF], which is also reported at 443 F3d 987.

The Supreme Court granted certiorari on March 26, 2007.

Statute. Section 10b provides in part that it is "unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Section 10b does not expressly create a private right of action. However, the federal courts have long held that there is a private right of action. (And, the SCUS wrote in this opinion that in the PSLRA the "Congress thus ratified the implied right of action".)

Supreme Court. The question presented [PDF] to the SCUS is "Whether this Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation’s financial statements, but where Respondents themselves made no public statements concerning those transactions."

The Supreme Court affirmed the judgment of the Court of Appeals. That is, Scientific Atlanta and Motorola avoid liability in this securities fraud case.

Justice Antonin Kennedy wrote the opinion of the Court, in which Justices Roberts, Scalia, Thomas, and Alito joined. Justice Stevens wrote a dissent, in which Justices Ginsburg and Souter joined. Justice Breyer did not participate in either this opinion, or the decision to grant certiorari.

Justice Kennedy wrote that "Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the §10(b) private cause of action."

He continued that "We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. ... Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement."

Kennedy wrote that "Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of respondents’ deceptive acts during the relevant times."

He also rejected the theory of scheme liability. Kennedy characterized this as follows: "in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect". He reasoned that there is no authority for this, and that were the SCUS to adopt this theory, then it "would reach the whole marketplace in which the issuing company does business".

He also rejected any theory based upon common law fraud. "Section 10(b) does not incorporate common-law fraud into federal law."

He concluded, in light of the language of 10b, the SCUS's interpretation of it in Central Bank of Denver, and the Congress's reaction in the PSLRA, that if 10b liability is to be extended to aiders and abettors, this is a job for the Congress, not the SCUS.

He wrote: "Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the §10(b) private right should not be extended beyond its present boundaries."

Dissent. Justice Stevens wrote in his dissent that "Investors relied on Charter's revenue statements in deciding whether to invest in Charter and in doing so relied on respondents’ fraud, which was itself a ``deceptive device´´ prohibited by §10(b)".

Solicitor General. The Department of Justice's Office of the Solicitor General (OSG) argued in its amicus brief in this case that "Allowing liability for a primary violation under the circumstances presented here would constitute a sweeping expansion of the judicially inferred private right of action in Section 10(b) and Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market."

This case is Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., et al., Sup. Ct. No. 06-43, a petition for writ of certiorari to the U.S. Court of Appeals for the 8th Circuit, App. Ct. No. 05-1974. The Court of Appeals heard an appeal from the U.S. District Court for the Eastern District of Missouri. See also, SCUS docket.

See, also stories titled "Supreme Court Grants Cert in Stoneridge Investment v. Scientific-Atlanta" in TLJ Daily E-Mail Alert No. 1,557, March 27, 2007, and "Supreme Court to Consider 10b Liability of Stock Issuers' Vendors" in TLJ Daily E-Mail Alert No. 1,625, August 21, 2007.

1/16. MySpace, which is owned by News Corporation, and most state Attorneys General entered into and released a document [12 pages in PDF] on January 14, 2008, titled "Joint Statement on Key Principles of Social Networking Safety".

It acknowledges the benefits of social networking sites and MySpace's efforts to improve online safety for minors. It provides for the creation of a task force to study online identity management tools and other online safety tools. The appendices, which come after the signatures, list numerous web site design and functionality changes that MySpace has made, or plans to implement.

The document contains no call for state or federal legislation. No other social networking service, and no federal agency is a party to the document.

The document states that "social networking sites are a powerful communications tool that provides people with great social benefits".

It continues that MySpace "has implemented technologies and procedures to help prevent children under 14 from using MySpace and to help protect minors age 14 and above from exposure to inappropriate content and unwarranted contact by adults".

This document then enumerates many principles, and encourages other social networking services to adopt them.

One principle pertains to online safety tools. The document states that "Online safety tools, including online identity management technologies, are important and must be robust and effective in creating a safer online experience, and must meet the particular needs of individual Web sites."

The document also states that MySpace will organize an industry wide entity titled "Internet Safety Technical Task Force" to find and develop online safety tools, and especially, online identity authentication tools.

Another principle pertains to web site design. It states that "Development of effective Web site design and functionality improvements to protect children from inappropriate adult contacts and content must be an ongoing effort."

Another principle pertains to education. It states that "Educating parents, educators and children about safe and responsible social networking site use is also a necessary part of a safe Internet experience for children."

Another principle pertains to law enforcement. It states that "Social networking site operators and law enforcement officials must work together to deter and prosecute criminals misusing the Internet."

Although, the document is silent on many aspects of the nature of this cooperation. It contains nothing regarding data collection by social networking site operators, data retention by social networking site operators, the data that social networking site operators will provide to law enforcement, and pursuant to what process or procedure.

This document is signed by the Attorney Generals of 49 states and the District of Columbia. However, no federal agencies are a party to this document.

MySpace's Chief Security Officer Hemanshu Nigam stated in a release that these principles "set forth what the industry needs to strive towards to provide a safer online experience for teens and we look forward to sharing our ongoing safety innovations with other companies"

Adam Thierer of the Progress and Freedom Foundation (PFF) stated in a release that "This partnership between MySpace and the Attorneys General, along with the establishment of the Task Force, is a giant step forward in the right direction. The principles in the agreement represent a model code of conduct for the entire industry. Other social networking sites would be wise to adopt similar policies and safeguards. I look forward to the coming year as industry partners have the opportunity to transform their safety standards to what MySpace has already done and continues to do."

Thierer has written extensively about online safety tools. See, report [119 pages in PDF] titled "Parental Controls and Online Child Protection: A Survey of Tools & Methods", and story titled "PFF Releases Report on Online Child Protection" in TLJ Daily E-Mail Alert No. 1,598, June 20, 2007. See also, paper [33 pages in PDF] titled "Social Networking and Age Verification: Many Hard Questions; No Easy Solutions", and More News section of TLJ Daily E-Mail Alert No. 1,555, March 21, 2007.

The PFF released on January 16 a paper [7 pages in PDF] by Thierer titled "The MySpace-AG Agreement: A Model Code of Conduct for Social Networking?" that summarizes and analyzes the January 14 document.

The House will meet at 10:00 AM for legislative business. See, Rep. Hoyer's calendar for the week of January 14, and 2008 calendar [4.25 MB PDF].

The Senate will not meet.

8:00 - 9:30 AM. The Northern Virginia Technology Council (NVTC) will host a breakfast program titled "Old Media Meets New Media: Advertising Sales and the Internet". See, notice. The price to attend ranges from $45-$85. Location: Oracle, 1910 Oracle Way, Reston, VA.

10:00 AM. The Supreme Court will hear oral argument in Quanta Computer v. LG Electronics. See also, story titled "Supreme Court to Hear Case Regarding Patent Exhaustion Doctrine" in TLJ Daily E-Mail Alert No. 1,683, December 5, 2007.

12:15 - 1:30 PM. The Federal Communications Bar Association's (FCBA) Young Lawyers and Access to Records Committees will host a brown bag lunch titled "FCCdotgov -- Tips and Tricks to Navigating and Using the FCC Website and Online Databases". For more information, contact Chris Bjornson at crbjornson at mintz dot com, Chris Fedeli at chrisfedeli at dwt dot com or Tarah Grant at tsgrant at hhlaw dot com. Location: Mintz Levin, 701 Pennsylvania Ave., NW.

2:30 - 4:30 PM. The Department of State's (DOS) International Telecommunication Advisory Committee (ITAC) will hold a public meeting to prepare advice for the U.S. on positions for the February 2008 meeting of the working groups of the International Telecommunication Union Council. See, notice in the Federal Register, December 31, 2007, Vol. 72, No. 249, at Page 74402. Location: undislcosed.

The Federal Communications Commission's (FCC) 700 MHz auction (Auction Number 73) is scheduled to commence. See, Public Notice [PDF] (DA 07-3415).

The Information Technology Association of America (ITAA), INPUT, and the Software and Information Industry Association (SIIA) will host an event titled "SaaS/Gov '08". See, ITAA notice. For more information, contact Madeleine Rial at mrial at itaa dot org. Location: Ritz Carlton Hotel.

The House will meet at 10:00 AM for legislative business. See, Rep. Hoyer's calendar for the week of January 14, and 2008 calendar [4.25 MB PDF].

The Senate will not meet.

9:15 AM - 1:30 PM. The AeA will host an event titled "AeA Government-Industry Executive Interchange". The topics to be addressed include "Mobility and Wireless", "Telework" and "Identity Management". See, notice. Location: AeA, 601 Pennsylvania Ave., NW.

2:00 - 4:00 PM. The Department of State's (DOS) International Telecommunication Advisory Committee (ITAC) will meet to prepare for advice for the U.S. on positions for the February 2008 meeting of the Telecommunication Development Advisory Group (TDAG) of the International Telecommunication Union (ITU-D). See, notice in the Federal Register, December 19, 2007, Vol. 72, No. 243, at Page 71992. Location: DOS Main, Room 5804, 2201 C St., NW.

The House may meet at 10:00 AM for legislative business. See, Rep. Hoyer's calendar for the week of January 14, and 2008 calendar [4.25 MB PDF].

The Senate will meet momentarily in pro forma session.

8:00 - 9:30 AM. The Northern Virginia Technology Council (NVTC) will host a breakfast program titled "Have it All! Raise Capital to Pursue Government and Commercial Success: FortiusOne and its Investors Tell All". See, notice. The price to attend ranges from free to $85. Location: Price Waterhouse, 1800 Tysons Blvd., 9th floor, McLean, VA.

9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in New Jersey Department of Public Advocacy v. FCC, a petition for review of an Federal Communications Commission (FCC) order pertaining to the rates the local exchange carriers (LECs) charge independent payphone service providers (IPSPs). See, FCC's brief [51 pages in PDF]. This case is numbered App. Ct. No. 07-1020. Location: 333 Constitution Ave., NW.

Martin Luther King's Birthday. See, Office of Personnel Management's (OPM) list of 2008 federal holidays.

The House will not meet.

The House is scheduled to be in session. Votes will be postponed at least until 6:30 PM. See, Rep. Hoyer's 2008 calendar [4.25 MB PDF].

The Senate is scheduled to return from recess.

TIME? The Federal Communications Commission (FCC) will hold a mock spectrum auction by internet and telephone in advance of its Auction Number 73, which is scheduled to begin on January 24, 2008. This is the 700 MHz band auction. See also, story titled "FCC Adopts 700 MHz Band Order" in TLJ Daily E-Mail Alert No. 1,619, July 31, 2007. And see, FCC's Public Notice [122 pages in PDF] dated October 5, 2007, and numbered DA 07-4171, and Public Notice [12 pages in PDF] dated January 14, 2008, and numbered DA 08-83.

9:00 - 10:30 AM. The Information Technology and Information Foundation (ITIF) will host an event titled "Framing a National Broadband Policy". The speakers will be Blair Levin (Stifel Nicolaus) and Robert Atkinson (ITIF). Breakfast will be served. See, notice. Location: ITIF, Suite 200, 1250 Eye Street, NW.

12:15 - 2:00 PM. The Federal Communications Bar Association's (FCBA) Wireless Practice Committee will host lunch. The topic will be "Hot Topics in the CMRS Industry for 2008". The speakers will be Brian Fontes (VP, AT&T Services Inc.), Lawrence Krevor (VP -- Spectrum, Sprint Nextel), Grant Spellmeyer (Director -- Regulatory Affairs, US Cellular), and Thomas Sugrue (VP, T-Mobile USA). The price to attend is $15. See, notice and registration page. Location: Sidley Austin, 1501 K St., NW.

12:15 - 1:30 PM. The Federal Communications Bar Association's (FCBA) Intellectual Property Practice Committee will host a brown bag lunch. The topic will be "Cable and Satellite Content Protection Technologies". The event is free. See, notice and registration page. Location: Dow Lohnes, 1200 New Hampshire Ave, NW.

2:00 PM. The Senate Judiciary Committee (SJC) will hold a hearing on the nominations of Kevin O’Connor (to be Associate Attorney General) and Gregory Katsas (to be Assistant Attorney General in charge of the Civil Rights Division). Location: Room 226, Dirksen Building.

Effective date of the Copyright Royalty Judges' final regulations that set the rates and terms for the use of sound recordings in transmissions made by new subscription services and for the making of ephemeral recordings necessary for the facilitation of such transmissions for the period commencing from the inception of the new subscription service through December 31, 2010. See, notice in the Federal Register, December 20, 2007, Vol. 72, No. 244, at Pages 72253-72256.

Extended deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its Notice of Proposed Rulemaking (NPRM) regarding its program access and retransmission consent rules and whether it may be appropriate to preclude the practice of programmers to tie desired programming with undesired programming. The FCC adopted this NPRM on September 11, 2007, and released the text [144 pages in PDF] on October 1, 2007. It is FCC 07-169, in MB Docket No. 07-198. See also, story titled "FCC Adopts R&O and NPRM Regarding Program Access Rules" in TLJ Daily E-Mail Alert No. 1,640, September 17, 2007. The original comments deadlines were November 30 and December 17, 2007. See, original notice in the Federal Register, October 31, 2007, Vol. 72, No. 210, at Pages 61590-61603. See, also notice of extended deadlines, Federal Register, December 28, 2007, Vol. 72, No. 248, at Pages 73744-73745.

The House is scheduled to be in session. See, Rep. Hoyer's 2008 calendar [4.25 MB PDF].

12:30 - 1:30 PM. The DC Bar Association will host closed panel discussion titled "Public Safety and Critical Infrastructure : Key Issues for 2008 and Beyond". The speakers will be Allan Manuel (FCC's Public Safety and Homeland Security), Mike Keogh (National Association of Regulatory Utility Commissioners), Patrick Halley (National Emergency Number Association), Robert Mayer (USTA). The price to attend ranges from $5 to $10. For more information, call 202-626-3463. See, notice. Location: DC Bar Conference Center, B-1 Level, 1250 H St., NW.

1/15. The U.S. Court of Appeals (7thCir) issued its opinion in IFC Credit Corp. v. United Business and Industrial Federal Credit Union, a case regarding a forum selection clause and jury waiver clause in a contract between a telecommunications equipment seller and purchaser.

The Court of Appeals wrote that a company named Norvergence, which is no longer in business, "sold telecommunications equipment and services -- or claimed to do so". It is not a party to this action. United Business and Industrial Federal Credit Union (UBIFCU) is the defendant below and appellant in this appeal. The Court of Appeals wrote that Norvergence "told lies to make the sales" of telecom equipment to the UBIFCU.

IFC Credit Corporation now claims to be a holder in due course of Norvergence's contracts. IFC seeks to collect payments on contracts for the purchase of equipment and services that it never delivered. The Court of Appeals wrote that if IFC has the status of holder in due course, "then personal defenses that the customers could have asserted against Norvergence are unavailable, and the customers must pay IFC" regardless of Norvergence's wrongful conduct.

IFC is keen to enforce the forum selection and jury waiver clauses in the contracts. It filed a complaint in U.S. District Court (NDIll) against UBIFCU seeking to collect payments specified in the sales contract. The District Court held that the jury waiver clause is unenforcable, and submitted the case to the jury, which returned a verdict in favor of UBIFCU.

IFC brought the present appeal. The Court of Appeals reversed, and remanded with directions hold a bench trial.

This is a complex opinion that addresses what law (state or federal) governs forum selection clauses, unconscionable contract clauses, form contracts, enforceability of forum selection clauses, enforceability of bench trial clauses, and analogies to arbitration clauses.

This opinion also notes that it may be in conflict with other circuits. The three judge panel therefore circulated this opinion to the full court

This case is IFC Credit Corporation v. United Business and Industrial Federal Credit Union, U.S. Court of Appeals for the 7th Circuit, App. Ct. No. 07-1037, an appeal from the U.S. District Court for the Northern District of Illinois, Eastern Division, D.C. No. 04 C 5905, Judge Matthew Kennelly presiding. Judge Frank Easterbrook wrote the opinion of the Court of Appeals, in which Judges Flaum and Kanne joined.

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