University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

26

Pages:

2
Author:

bratrochanter

The text focuses on several key aspects of securities regulation, with particular emphasis on aiding and abetting violations under Rule 10b-5 of the Securities Exchange Act of 1934, the Stoneridge Investment Partners case, and related legal concepts such as whistleblower rewards, statute of limitations, and Regulation FD. Here's a breakdown of the main points: Aiding and Abetting Liability    The SEC can prosecute individuals who aid and abet violations of securities laws, but investors harmed by the violation can only recover damages from the primary violators. Aiding and abetting requires three conditions: 1. A primary violation by another. 2. Knowing or reckless assistance of that violation. 3. Substantial assistance in the violation. In Stoneridge Investment Partners v. Scientific-Atlanta, the Supreme Court examined whether secondary actors could be held liable under Rule 10b-5. The Court ruled that aiding and abetting liability does not apply in private securities fraud actions under §10(b) of the Securities Exchange Act, as no misstatement was made directly to the public by the defendants (Scientific-Atlanta and Motorola). The Stoneridge Case    Stoneridge Investment Partners sued Charter Communications, alleging fraudulent accounting practices. Charter had manipulated its financial statements by entering into sham transactions with Scientific-Atlanta and Motorola. These involved overpayment for digital cable set-top boxes in exchange for advertising purchases, falsely inflating Charter’s revenue. The Court of Appeals dismissed the case, noting that while ScientificAtlanta and Motorola assisted Charter in committing fraud, they had not made any direct misstatements or omissions to the public, and thus, were not liable under §10(b). The Supreme Court agreed, emphasizing that reliance on the deceptive acts of secondary actors must be direct to establish liability. The Court further argued that extending §10(b) liability to secondary actors would broaden the scope of the private right of action beyond what Congress had authorized. Whistleblower Rewards  The Dodd-Frank Act incentivizes individuals to report securities law violations by offering them a reward. The SEC pays a percentage (10-30%) of the penalties from enforcement actions where the information leads to sanctions exceeding $1 million. Statute of Limitations  The Sarbanes-Oxley Act of 2002 extends the statute of limitations for securities fraud claims. Plaintiffs must file within two years of discovering the violation and within five years of the actual violation. Regulation FD (Fair Disclosure)  Regulation FD was implemented to ensure that all investors have equal access to material nonpublic information, particularly by curbing selective disclosure to analysts or institutional investors. o Intentional selective disclosure: Must be followed by simultaneous public disclosure. o Unintentional selective disclosure: Must be followed by public disclosure as soon as reasonably practical (no later than 24 hours or by the next day’s market opening). In essence, the Stoneridge case highlights the Court's reluctance to extend private liability for aiding and abetting under securities fraud laws, emphasizing that reliance must be direct and that aiding and abetting claims are the domain of SEC enforcement actions, not private litigants.