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High Court Mulls Corporate Fraud Liability, Rejects Torture Case Appeal

October 9, 2007 at 12:00 AM EDT
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GWEN IFILL: In a case that contains echoes of Enron, the court is being asked to decide whether shareholders can sue third parties, like banks and accounting firms, for fraud committed by the company they invested in. NewsHour regular Marcia Coyle of the National Law Journal was in the courtroom, as always, today, and she joins us now. Hi.

MARCIA COYLE, National Law Journal: Hi, Gwen.

GWEN IFILL: I heard this described as the Roe v. Wade of securities law. How big a deal was this? And how did it end up at the court?

MARCIA COYLE: I even heard it described as the Brown v. Board of Education of securities fraud today. It is a big case. A lot of money is potentially involved, not necessarily in the case that was argued today, but, as you mentioned, in the background is looming the Enron fraud.

Shareholders of Enron already have a petition pending in the Supreme Court relying on the same sort of argument that the case today, the investors in that case were urging the justices to accept.

The case today involved Charter Communications, which is one of the largest cable providers in the nation. Charter was having cash flow problems. In order to meet Wall Street expectations, it came up with a scheme to inflate its balance sheet, basically.

It agreed with two of its vendors of cable boxes for televisions to overpay them by roughly $17 million on condition that the vendors would take that money and buy advertising from Charter, thus inflating its balance sheet.

When the scheme was revealed, the stock price tanked. Investors lost a lot of money. They sued Charter and the vendors. The Securities and Exchange Commission also went after Charter Communications criminally and civilly.

Revisiting Enron

GWEN IFILL: I remember the Andersen accounting firm going out of business, clearly a third party, after Enron. How is this different from -- what are the businesses, the vendors, the third-party companies claiming that this is different from that?

MARCIA COYLE: Well, the investors here say that the vendors here committed a deceptive act. They backdated contracts. There was improper accounting. They were integral to the securities fraud that occurred here.

In 1994, the Supreme Court said that you could not bring private lawsuits under the securities law for aiding and abetting a fraud. And the investors are saying, we're not that case. This wasn't an innocent party whose transaction, legitimate transaction, was used in furtherance of a fraud. This was a party that knew it was doing a deceptive act to further the fraud. So this is not aiding and abetting. And under the securities law, they should be held liable.

GWEN IFILL: And just like the Chamber of Commerce and the White House were saying, you're just going to be opening the flood gates if you let this apply to that.

MARCIA COYLE: Exactly. The lawyers for the vendors here said today, really, this is aiding and abetting in disguise. And the Supreme Court has said you can't do that.

They say the only party here that committed a fraud on the marketplace by making a public disclosure, a misleading communication that investors relied on, was Charter itself. And Charter is the one that should be held liable, not the third party.

Justices' reactions to investors

GWEN IFILL: How did the justices seem to be responding to the arguments as they were made?

MARCIA COYLE: It seemed as though a majority of them were very skeptical of the investors' arguments. Several of them, like Justice Kennedy and Justice Alito, said they didn't see any difference here between aiding and abetting, which the court has said you cannot sue under securities laws for.

Chief Justice Roberts, he said, well, you know, Congress has legislated in this area, and quite recently, and they haven't opened liability up to these parties. We should accept that they've taken over the field and not expand liability.

But the investors' lawyers really believe this is not an expansion of liability. They say there is a limit here. If you committed a deceptive act, then you should be liable. That's the limit; it's not an innocent business transaction.

GWEN IFILL: There were heavyweights lined up on both sides of this, from former heads of the FCC, you name it, on both sides of the issue. Does that sort of thing generally affect the seriousness with which justices take arguments?

MARCIA COYLE: Well, I think the justices are accustomed to seeing in high-profile, as well as high-stakes litigation like this, a lot of amicus briefs. There are more than two dozen filed in this case.

And it's sort of a classic breakdown between trial lawyers representing victims versus big business concerned about what the financial liability will be for them and for professionals, like banks, accountants and law firms. And I think just about every major Supreme Court lawyer in town was on one of those briefs.

Rejecting a torture case appeal

GWEN IFILL: The court also made news today [about] something they chose not to do, which was not to take the case of a man named Khaled el-Masri, who said he had been abducted and tortured and held against his will by the United States government, by the CIA, in particular.

MARCIA COYLE: Yes. It was apparently a clear case of mistaken identity. He was picked up in 2003 in Macedonia, and he was turned over to CIA operatives who, in what we know as an extraordinary rendition policy, transported him to a prison in Afghanistan for interrogation, a country that would allow torture.

And then, when they were through with him, he was left in a remote section of Albania. He sued the government, seeking compensation and an apology, but he lost in the lower courts because the government raised the state secrets defense, basically saying to the court, "You can't go forward with this lawsuit because it will endanger national security."

That defense operates almost as an automatic shutdown of lawsuits. And the Supreme Court today decided it would not review his challenge of that state secrets doctrine.

GWEN IFILL: The CIA never admitted whether or not they engaged in this activity.

MARCIA COYLE: It never has. But it seems to have been fairly well-documented, and it's caused considerable tension between the United States and the German government.

GWEN IFILL: And is it fair to say we don't know what the reasoning was of the court who decided not to take this case?

MARCIA COYLE: They never say why they don't take a case, but it's also fair to say that there are more cases like this coming. The war on terror has generated a lot of litigation.

And even outside of that, there's a case pending from the ACLU that challenges the state secrets defense in the domestic surveillance operation by the National Security Agency. So the court may yet face what that defense involves.

GWEN IFILL: Marcia Coyle of the National Law Journal, as always, thanks a lot.

MARCIA COYLE: My pleasure.