Liability lawyers offer corporate America a deal it can’t refuse

Legions of small businesses, Fortune 500 corporations, institutional investors, Wall Street financial mavens and individual stock owners have closely followed the case. Its outcome will decide if crusading liabilities lawyers can sue third parties like accountants, vendors, public relations firms and suppliers not directly involved in allegedly fraudulent corporate securities activities.

If class action private securities fraud cases can be filed against “silent partners,” it will open up a hugely lucrative new litigation frontier for liabilities lawyers and magnify the many controversial settlements and verdicts liabilities lawyers have compiled in recent years through class action liability suits against “active partners” in allegedly fraudulent corporate actions.

Such suits — especially those also known as “strike suits” — have become commonplace in the corporate world because liabilities lawyers have filed so many whenever a company’s stock price went down, quarterly earnings failed to meet projections or allegedly insufficient dividends were paid out to shareholders. This has been especially true in California’s high tech industry where between 1997 and 2004 nearly half of all such firms were sued in securities actions filed in federal court.  

To win, the plaintiffs must convince the Court to overturn the precedent it established in the 1994 case of Central Bank v First Interstate Bank. In that decision, the justices ruled out liability suits against “aiders and abettors” of fraudulent activities.

Until recently, one of the leading strategists for the Stoneridge plaintiffs was liability law celebrity William S. Lerach. But Lerach recently pleaded guilty to a felony related to his participation in an $11.8 million kickback scheme federal investigators say began decades ago at Milberg Weiss, a prominent New York law firm where Lerach was a senior partner.

Milberg Weiss has long been associated with multibillion-dollar class action liability lawsuits filed on behalf of investors against many of the nation’s top corporations. Three other former partners have also pleaded guilty in recent months to being part of the kickback scheme.

With or without Lerach, Stoneridge is a milestone case for liabilities lawyers, according to Dan Newman, a public relations spokesman recruited for the case by Lerach. Newman told The Wall Street Journal that Stoneridge is “a critically important case for all investors, markets, and victims of corporate fraud.”

What if the plaintiffs win? Darren McKinney of the American Tort Reform Association notes that “the government, in the form of both the Securities and Exchange Commission and the Justice Department, can already bring aiding-and-abetting charges against a so-called ‘secondary’ company that knowingly contributed to fraud perpetrated by a ‘primary’ company.”

But if the Court sides with the plaintiffs, McKinney said, “you can bet the ranch that a whole herd of plaintiffs’ lawyers will rush out to further choke our courts with a glut of lawsuits the likes of which hasn’t been seen since the peak of asbestos litigation.”

University of Chicago law professor Richard Epstein agrees with McKinney on the harmful potential, noting that “for every principal who commits a fraud to the market, there are a dozen who could be hauled into court for participating in a scheme to defraud the market.”

That means, Epstein contends, that “participation in the scheme will not result in liability only to the extent that the particular actions moved share price. It will generate liability for all the losses in question.”

Epstein also points to the potential of the case to have damaging consequences far beyond a particular corporation:

“The upshot is a vast increase in administrative costs, and a near certainty that some firms and individuals will be brought into the process even though they have had little or nothing to do with the underlying wrong.  That vast proliferation of potential liability will make it ever harder to do business, which in turn will drive more companies away from public markets.”

The added costs of a Stoneridge decision for the plaintiffs would add to existing costs that are hampering American competitiveness.

The Manhattan Institute’s Jim Copland told Congress last year that “the tort tax in the U.S. is far higher than that in other developed countries. The percentage of its economy that America devotes to tort law is almost twice that of Germany and three times that of France or Britain.”

Copland pointed to a 2005 PricewaterhouseCoopers report that Europe passed the United States on Initial Public Offerings and in the process “attracting almost three times the number of listings and attracting more than five times the number of overseas IPOs.”

At that rate, it won’t be long before London displaces New York as the world’s financial center, a development that would be harmful to the economic security and opportunities of every American.

Mark Tapscott is the editorial page editor of The Washington Examiner.

"Lawyers Gone Wild" is a series of special reports by The Examiner looking at the cost and consequences of class action lawsuit abuse in the United States. Read the latest articles in the series.