The chairman of the Senate Banking Committee has warned the Bush administration it should not oppose the concept of 'scheme liability' in a securities fraud case now before the US Supreme Court.
Acceptance of the idea of scheme liability by the court would mean third parties who knowingly participate in or support illegal securities activities could be sued for monetary damages.
In letters to President Bush and US Solicitor General Paul Clement dated Aug 13, Committee chairman Christopher Dodd of Connecticut said the SEC has already decided third-party participants in illegal securities activities should be held liable in court.
Dodd said going against that opinion would hurt shareholders seeking damages, and would 'compound the damage already caused to the investing public by the failure thus far to advocate the views of the Commission' in the case.
'I would encourage the rejection of any such plan,' Dodd wrote.
The administration faces a deadline of this Wednesday by which it could decide to file a brief in the Supreme Court case Stoneridge Investment Partners v Scientific Atlanta.
US Treasury Secretary Henry Paulson earlier this year said he does not support scheme liability, which has led to speculation the administration is preparing to oppose the independent SEC in the case.
'There's a lot of people who fear a brief will be sent opposing scheme liability,' said Joanne Doroshow, executive director of the Center for Justice and Democracy.
At issue in the Stoneridge case is whether a third party should be held liable for participating in fraudulent securities activities of a primary actor, even if the third party did not make any public statements concerning these activities. The Supreme Court case follows a decision by the Eighth Circuit Court of Appeals rejecting scheme liability.
Dodd's letters also urged the administration to send in briefs to the court supporting the SEC's view third parties that participate in securities violations should be held liable.
'It is my view that when the Supreme Court considers a case involving securities law, it should have the views of the Federal regulatory agency with expertise in securities law and practice,' Dodd wrote.
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