Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Will Stoneridge save the banks and the rating agencies?

The decision
of the US Supreme Court in the Stoneridge case is doubtless a victory
for business, but I doubt whether it will be enough to save the banks
and the rating agencies when it comes to the inevitable sub prime
related litigation. The court refused to allow investors to sue
“entities who, acting both as customers and suppliers, agreed to
arrangements that allowed the investors’ company to mislead its
auditor and issue a misleading financial statement affecting the stock

I am not a lawyer, but I think the penultimate paragraph of the
opinion seems clear enough: “Unconventional as the arrangement
was, it took place in the marketplace for goods and services, not in
the investment sphere. … In these circumstances the investors cannot
be said to have relied upon any of respondents’ deceptive acts
in the decision to purchase or sell securities; and as the requisite
reliance cannot be shown, respondents have no liability to petitioner
under the implied right of action. ”

While agreeing that that the anti fraud provisions of securities
law are not “limited to preserving the integrity of the
securities markets,” the court asserts that these provisions do
“not reach all commercial transactions that are fraudulent and
affect the price of a security in some attenuated way.”

I do not see how any of this will help the originators and
underwriters of sub prime securities or the agencies that rated them
if their actions turn out to be fraudulent. It will take a lot of
investigative effort to determine whether there was fraudulent
behaviour (and even more effort to establish the fraud if any in a
court of law), but private players have every incentive to expend this


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