The most interesting thing about Stoneridge to my mind is that the avowed textualists on the Court (Justices Scalia, Thomas, Alito, et al.) took an explicitly non-textual tack in this case. Setting aside the policy stuff for/against extending civil liability to SA/Motorola in situations like Stoneridge, the plain text of Rule 10b-5(a) and (c ) arguably support the idea of “scheme liability.” After all, it’s not hard to get from the words “any person” who “directly or indirectly” employs “any … scheme” to the idea of “scheme liability.” (Justice Stevens’s dissent alludes to this jurisprudential nuance, but not as vigorously as it perhaps could have done.) The textualists on the Court thus ignored (if indeed they didn’t outright set aside) the plain meaning of the statute [notice how Kennedy's opinion contains absolutely no statutory analysis; he just quotes the statute, and then moves on to caselaw] in favor of their interpretation that Congress didn’t want the result necessitated by scheme liability, given that Congress twice considered and rejected (in 1995 and 2002) the idea of extending private civil liability to secondary actors in situations like this. (The oral argument shows this even more conclusively.)

Nonetheless, it was the right decision.

I don’t know enough about the nuances and precedents of 10(b) to know whether or not there was a better legal basis for this decision. Larry Ribstein suggests there was. Jay Brown suggests there wasn’t. Elizabeth here suggests there might have been, but maybe not. What strikes me, as someone who straddles the world of economics and law, is (a) how poorly people outside of the legal world understand the downstream impact of a decision based, as this one appears to be in part, on policy considerations, and (b) how poorly most people outside of business really get the downstream impact of the policies being debated around decisions like this one.

From a legal perspective, I have to share Elizabeth’s extreme skepticism (even revulsion) about a Supreme Court judge basing their decision on economic policy concerns, even those with which I am very sympathetic. While most businessmen cheer this decision, a few years down the road another judge is going to provide some public policy reason why a good law should be shut down. It’s very hard for non-lawyers to see how the stripping of a rich man’s property in Hawaii a couple decades back led directly to a middle-class woman in Connecticut losing her home to private developers. No-one knows what will come from this muddled attempt to insert economic policy considerations into a judgment of law, except that some court down the road will feel emboldened to do the same thing with god-knows-what effect, which corrodes the rule of law.

On the other hand, and not to justify this breach, I know how bad it really is out here in the real world where lawyers have to crawl into ever finer nooks and crannies of every transaction because of the increasing scrutiny, most of it well-intentioned, to prevent fraud. For every case where bad behavior can be clearly and plausibly “alleged,” as in Stoneridge, there is an almost infinite set of border-line or innocent behaviors that could also be “alleged” which will collectively cost shareholders far more than the losses of the one or two percent who might be truly victimized by what was alleged in something like scheme liability. From the perspective of a governance practitioner working diligently for the investors, the call for “shareholder rights” often obscures the fact that nearly all shareholders would, at the margin, much rather have higher risk-adjusted returns than more rights. The policies designed to prevent the bad two percent from screwing their shareholders affect 100 percent of the companies. Most people outside of the business world have no idea how real and how significant that cost is.

And still, Elizabeth is right. It’s no excuse for a judge to use anything other than the law and precedent to make their decisions.

The question of duty is relevant because one could view the role of the secondary defendants as involving an omission to disclose their misconduct. In such an instance, reliance cannot be established but liability will not follow unless there was a duty to disclose. None was present here, leaving only the reliance concept to supply the necessary causal link.

Much of the rest of the opinion is intended to explain why the majority believed that the scheme theory, if adopted, would be harmful. Such a discussion may be unavoidable when the Court is faced with the question of whether or not to supply an expansive reading to a cause of action that, in reality, Congress did not originally intend to create, whatever the merits of doing so now would be.

I have to also disagree with the Professor’s assessment of what the impact of a contrary ruling would be. Scheme liability was a notion that was controversial at best, rejected by a number of circuits. The lower courts had not yet adopted it in large numbers. Had it been approved in Stoneridge, I can assure you that every case would have included new peripheral defendants to add to the inevitable settlement, especially if there was any doubt to the financial stability of the primary defendants. This could well have discourage companies from doing business here.

There is language in the Stoneridge opinion that the SEC should consider before bringing any more of these cases. “Were the implied cause of action to be extended to the practices described here, however, there would be a risk that the federal power would be used to invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees.” This would seem to apply as much to SEC enforcement actions as private litigation. Perhaps the enforcement division should reconsider its activist approach in these cases.

Ashby Jones: The case centered on the issue of “scheme liability,” i.e., whether third parties — investment bankers, lawyers, accountants and vendors — can be held liable under the federal securities laws for fraud committed by …