The Supreme Court on 1/15/08 affirmed 5 to 3 an 8th Circuit decision that relieved two third-party vendors from liability under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 for deceptive conduct. The Court ruled that the equipment vendors, who agreed with the corporation to engage in a rebate scheme that allegedly had no legitimate business or economic purpose except to artificially inflate the corporation's financial statements, issued no statements to the public that investors relied upon. The Court also reaffirmed that the defendants may not be sued in a private suit for aiding and abetting the corporation's violations; only the SEC or certain state prosecutors may bring such suits.
This was a high profile case in which the Court was being asked to substantially expand the universe of companies that can be sued when a company deceives its own investors. The NAM filed a brief 8/15/07 arguing that expanded liability is not provided for in the statute, and that such expansion would chill legitimate commerce, harm the economy, encourage frivolous claims, increase the costs of litigation, and encourage coercive settlements.
Manufacturers are relieved that the Court stepped in to prevent "creeping liability," where plaintiffs attempt to expand primary responsibility for one's acts to third parties who were not involved in making any misleading statements. The Court properly recognized that Congress did not create a broadened right to sue in this situation, and underscored the need for plaintiffs to show that they relied on fraudulent or misleading statements.