Media Bias Shows in Coverage of Complex Securities Case

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Today's Washington Post story about the latest legal filings in a securities case echoes the bias of liberal blogs and publications on the case.

The Post leads the story this way:

The Bush administration yesterday sided with accountants, bankers and lawyers seeking to avoid liability in corporate fraud cases, arguing that investors must show they lost money after relying on deceptions by third parties in order to proceed with private lawsuits.

The National Association of Manufacturers proposes a different lead:

"The Bush administration yesterday sided with U.S. manufacturers and their 14 million employees, arguing against a reinterpretation of securities law that could lead to an explosive rise in litigation."

To be sure, the case before the Supreme Court this term - Stoneridge Investment Partners v. Scientific-Atlanta - is a complex case dealing with a complex area of securities law, not easily summarized in a brief newspaper lead. Also, to be sure, the NAM's proposed lead reflects its particular bias and perspective regarding the case.

But the Post's lead isn't exactly neutral. In fact, it echoes the point-of-view of recent blog posts published by the decidedly and unabashedly liberal Huffington Post - The Enron Bank Shot and The Enron Bank Shot II - and at TomPaine.com where writer Robert L. Borosage, chairman of the liberal Campaign For America's Future, described Stoneridge this way:

Wall Street's investment banks just got another one step closer to making defrauding investors an accepted line of business. And Enron’s employees who lost their pensions and the small investors who got fleeced in the Enron frauds just got shafted again - this time at the urging of President George W. Bush.

Wall Street’s most powerful investment banks and their friends in high places lobbied the U.S. Solicitor General Paul Clement to reject the recommendation of the Securities and Exchange Commission that the Justice Department support defrauded investors in their appeal to the Supreme Court.

Borosage's piece was linked by several liberal blogs, most prominently by the very liberal DailyKos.com, though Borosage's article does not accurately explain the issues involved in the Stoneridge case.

The basic legal issue in Stoneridge is whether third parties such as investment banks, accountants, lawyers or vendors can be found liable in shareholder lawsuits for scheming with companies accused of deceiving investors.

The case involves Securities and Exchange Act Section 10(b) and SEC Rule 10b-5. As UCLA law professor Stephen Bainbridge explained yesterday, "the Supreme Court held [in the case Central Bank of Denver v. First Interstate Bank of Denver, (1994)], that there was no implied private right of action against those who aid and abet violations of Rule 10b-5. Central Bank thus substantially limited the scope of secondary liability under the rule, at least insofar as private party causes of action are concerned.

The rules as currently interpreted by the courts preclude a private right of action against a non-trading, non-speaking entity that merely enables the commission of an alleged fraud by a public company on its shareholders.

However - and this is a key fact often left out of liberally slanted stories about Stoneridge - the SEC does have the authority to go after such bad actors itself.

The petitioners in the Stoneridge case are seeking to create a new "scheme liability" theory to recast what the law currently deems as secondary conduct as, instead, a primary violation - allowing private lawsuits. If the SCOTUS rules that way it would be a huge boon to the trial lawyers industry.

While liberal media tend to leave out the fact that the SEC already can go after secondary actors in a corporate fraud case, they do tend to highlight another fact regarding Stoneridge, one that fits neatly into an anti-Bush administration meme they've been riding for years.

Enron.

The Supreme Court's decision in the Stoneridge case has implications for other lawsuits pending against various investment banks involved in the Enron scandal. The AP makes the Enron connection in its story today:

WASHINGTON (AP) --The Bush administration on Wednesday took the side of defendant companies in a Supreme Court case that could determine the fate of other investor lawsuits including one stemming from the Enron scandal.

At issue in the case before the high court is whether third parties such as investment banks, accountants, lawyers or vendors can be found liable in shareholder lawsuits for scheming with companies accused of deceiving investors.

That's not actually the issue, though. The issue is whether private individuals can pursue lawsuits alleging Rule 10b-5 violations, not whether third parties can be held liable at all. As I explained above, the SEC is free to pursue third parties for such violations.

The Bloomberg News story carried by the Houston Chronicle and the Chicago Tribune also lead with the Enron angle.

The Bush administration, weighing in on a case before the Supreme Court that could have broad ramifications for lawsuits stemming from Enron's collapse, threw its support Wednesday behind companies under attack from investors.

Much less prominent in any of the news coverage: the point of view that says allowing private parties to initiate lawsuits under Rule 10b-5 would expose the economy to a massive new surge of lawsuits by lawyers aiming to force companies to settle for huge sums of money. It's a point of view that says allowing trial lawyers to get rich suing companies into bankruptcy is not really "pro-investor" and certainly not pro-worker.

Such an explosion of litigation is a distinct possibility and one that the media ought to include in its reporting on the case.