Congress’ Task: An Honest Debate over ‘Stoneridge’

by Jacob Zamansky on March 23rd, 2009 at 11:26 am : Comments 000

When a murder for hire crime is committed, two trials usually proceed.  The prosecutor’s office brings a criminal case and the victim’s family usually sues the defendant’s in civil court for monetary damages.  Unfortunately, it doesn’t work like that in the corporate world due to a Supreme Court ruling labeled, “The Stoneridge Decision,” which declared that “third-party liability” is limited to those that directly influenced investment decisions.  In other words, even though lawyers, investment bankers and auditors may have aided a corporate fraud, because a corporation interacts directly with shareholders, service providers don’t have any liability. I think there is something fundamentally wrong with this picture.

Lest anyone say the comparison I’ve just described is overly dramatic, I’ve excerpted below Federal Judge Gerald Lynch’s opinion regarding a fraud case he was forced to dismiss because of the crippling Supreme Court Stoneridge snub:

There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder - one who ‘counsels, commands, induces or procures’  but he is nonetheless liable as a principal for the commission of crime. Likewise, some civil accomplices are deeply and indispensably implicated in the wrongful conduct.

 The fraud case Judge Lynch is referring to involves Mayer Brown, a large law firm, which was one of the law firms that has been alleged to have helped Refco, a now defunct brokerage giant, hide over $1 billion in losses from shareholders.

In addition to shareholders, the Stoneridge Decision has a huge impact for investors that have fallen victim to Ponzi Schemes and fraudulent hedge funds.  In almost all these cases there is nothing left of the funds leaving penniless victims without any recourse, even if the individuals responsible for ripping them off had help from outside sources?

Unfortunately a law on the books as influential as the Stonebridge Decision doesn’t gain the attention it deserves compared with the A.I.G. bonuses, for instance, but this law’s implications are greatly felt on Main Street U.S.A.

In related news, Bernard Madoff’s accountant was arrested earlier this week and charged with aiding and abetting investment adviser fraud and four counts of filing false audit reports. He faces up to 105 years in prison if convicted.  Reportedly, the accountant received $186,000 a year in fees for audit work, bookkeeping and tax services.

These fees and other assets owned by the allegedly crooked accountant are likely out of the reach for investors who took his audits at face value.  Indeed, while the accountant is likely to be sitting in a warm jail cell, the victims are left out in the cold.

The next session of Congress is likely going to be focused on reforming regulation of the financial services industry.  An honest discussion over the consequence of the Stoneridge Decision needs to be at the forefront of the agenda. I urge Congress to take meaningful steps to addressing this immensely important issue.

Filed under Bernard Madoff, Congress, SEC, Wall Street
and fraud, stoneridge decision, third party liability