Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148 (2008)

(b) The Court has found a rebuttable presumption of reliance in two circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. Affiliated Ute Citizens of Utah v. United States, 406 U. S. 128, 153–154. Second, under the fraud-on p. 149the-market doctrine, reliance is presumed when the statements at issue become public. Neither presumption applies here: Respondents had no duty to disclose; and their deceptive acts were not communicated to the investing public during the relevant times. Petitioner, as a result, can not show reliance upon any of respondents’ actions except in an indirect chain that is too remote for liability. P. 159.

(c) Petitioner’s reference to so-called “scheme liability” does not, ab sent a public statement, answer the objection that petitioner did not in fact rely upon respondents’ deceptive conduct. Were the Court to adopt petitioner’s concept of reliance—i. e., that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect—the implied cause of action would reach the whole marketplace in which the issuing company does business. There is no authority for this rule. Reliance is tied to causation, leading to the inquiry whether respondents’ decep tive acts were immediate or remote to the injury. Those acts, which were not disclosed to the investing public, are too remote to satisfy the reliance requirement. It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transac tions as it did. The Court’s precedents counsel against petitioner’s at tempt to extend the § 10(b) private cause of action beyond the securities markets into the realm of ordinary business operations, which are gov erned, for the most part, by state law. See, e. g., Marine Bank v. Weaver, 455 U. S. 551, 556. The argument that there could be a reliance finding if this were a common-law fraud action is answered by the fact that § 10(b) does not incorporate common-law fraud into federal law, see, e. g., SEC v. Zandford, 535 U. S. 813, 820, and should not be interpreted to provide a private cause of action against the entire marketplace in which the issuing company operates, cf. Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 733, n. 5. Petitioner’s theory, moreover, would put an unsupportable interpretation on Congress’ specific re sponse to Central Bank in PSLRA § 104 by, in substance, reviving the implied cause of action against most aiders and abettors and thereby undermining Congress’ determination that this class of defendants should be pursued only by the SEC. The practical consequences of such an expansion provide a further reason to reject petitioner’s ap proach. The extensive discovery and the potential for uncertainty and disruption in a lawsuit could allow plaintiffs with weak claims to extort settlements from innocent companies. See, e. g., Blue Chip, supra, at 740–741. It would also expose to such risks a new class of defendants—overseas firms with no other exposure to U. S. securities laws—thereby deterring them from doing business here, raising the cost of being a p. 150publicly traded company under U. S. law, and shifting securities offer ings away from domestic capital markets. Pp. 159–164.

For purposes of this proceeding, we take these facts, al leged by petitioner, to be true. Charter, a cable operator, engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations for cable sub scriber growth and operating cashflow. The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company’s billing cutoff dates to inflate reported reve nues. In late 2000, Charter executives realized that, despite these efforts, the company would miss projected operating cashflow numbers by $15 to $20 million. To help meet the shortfall, Charter decided to alter its existing arrangements with respondents, Scientific-Atlanta and Motorola. Peti p. 154tioner’s theory as to whether Arthur Andersen was alto gether misled or, on the other hand, knew the structure of the contract arrangements and was complicit to some degree, is not clear at this stage of the case. The point, however, is neither controlling nor significant for our present disposition, and in our decision we assume it was misled.

To return the additional money from the set top box sales, Scientific-Atlanta and Motorola signed contracts with Char p. 155ter to purchase advertising time for a price higher than fair value. The new set-top box agreements were backdated to make it appear that they were negotiated a month before the advertising agreements. The backdating was important to convey the impression that the negotiations were unconnec ted, a point Arthur Andersen considered necessary for sepa rate treatment of the transactions. Charter recorded the advertising payments to inflate revenue and operating cash flow by approximately $17 million. The inflated number was shown on financial statements filed with the Securities and Exchange Commission (SEC) and reported to the public.

The District Court granted respondents’ motion to dismiss for failure to state a claim on which relief can be granted. The United States Court of Appeals for the Eighth Circuit affirmed. In re Charter Communications, Inc., Securities Litigation, 443 F. 3d 987 (2006). In its view the allegations did not show that respondents made misstatements relied upon by the public or that they violated a duty to disclose; and on this premise it found no violation of § 10(b) by re spondents. Id., at 992. At most, the court observed, re spondents had aided and abetted Charter’s misstatement of its financial results; but, it noted, there is no private right of action for aiding and abetting a § 10(b) violation. See Cen tral Bank of Denver, N. A. v. First Interstate Bank of Den p. 156ver, N. A., 511 U. S. 164, 191 (1994). The court also affirmed the District Court’s denial of petitioner’s motion to amend the complaint, as the revised pleading would not change the court’s conclusion on the merits. 443 F. 3d, at 993.

A different interpretation of the holding from the Court of Appeals opinion is that the court was stating only that any deceptive statement or act respondents made was not action able because it did not have the requisite proximate relation p. 159to the investors’ harm. That conclusion is consistent with our own determination that respondents’ acts or statements were not relied upon by the investors and that, as a result, liability cannot be imposed upon respondents.

Invoking what some courts call “scheme liability,” see, e. g., In re Enron Corp. Securities, Derivative, & “ERISA” Litigation, 439 F. Supp. 2d 692, 723 (SD Tex. 2006), peti p. 160tioner nonetheless seeks to impose liability on respondents even absent a public statement. In our view this approach does not answer the objection that petitioner did not in fact rely upon respondents’ own deceptive conduct.

As stated above, reliance is tied to causation, leading to the inquiry whether respondents’ acts were immediate or re mote to the injury. In considering petitioner’s arguments, we note § 10(b) provides that the deceptive act must be “in connection with the purchase or sale of any security.” 15 U. S. C. § 78j(b). Though this phrase in part defines the stat ute’s coverage rather than causation (and so we do not evalu ate the “in connection with” requirement of § 10(b) in this case), the emphasis on a purchase or sale of securities does provide some insight into the deceptive acts that concerned the enacting Congress. See Black, *Securities Commentary: p. 161The Second Circuit’s Approach to the ‘In Connection With’ Requirement of Rule 10b–5*, 53 Brooklyn L. Rev. 539, 541 (1987) (“[W]hile the ‘in connection with’ and causation re quirements are analytically distinct, they are related to each other, and discussion of the first requirement may merge with discussion of the second”). In all events we conclude respondents’ deceptive acts, which were not disclosed to the investing public, are too remote to satisfy the requirement of reliance. It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did.

Petitioner invokes the private cause of action under § 10(b) and seeks to apply it beyond the securities markets—the realm of financing business—to purchase and supply con tracts—the realm of ordinary business operations. The lat ter realm is governed, for the most part, by state law. It is true that if business operations are used, as alleged here, to affect securities markets, the SEC enforcement power may reach the culpable actors. It is true as well that a dynamic, free economy presupposes a high degree of integrity in all of its parts, an integrity that must be underwritten by rules enforceable in fair, independent, accessible courts. Were the implied cause of action to be extended to the practices described here, however, there would be a risk that the fed eral power would be used to invite litigation beyond the im mediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees. Our precedents counsel against this extension. See Marine Bank v. Weaver, 455 U. S. 551, 556 (1982) (“Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud”); Santa Fe, 430 U. S., at 479–480 (“There may well be a need for uniform federal fi duciary standards . . . . But those standards should not be supplied by judicial extension of § 10(b) and Rule 10b–5 to ‘cover the corporate universe’ ” (quoting Cary, *Federalism p. 162and Corporate Law: Reflections Upon Delaware, 83 Yale L. J. 663, 700 (1974))). Though § 10(b) is “not ‘limited to preserv ing the integrity of the securities markets,’ ” Bankers Life*, 404 U. S., at 12, it does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.

Petitioner’s theory, moreover, would put an unsupportable interpretation on Congress’ specific response to Central Bank in § 104 of the PSLRA. Congress amended the se curities laws to provide for limited coverage of aiders and abettors. Aiding and abetting liability is authorized in ac tions brought by the SEC but not by private parties. See 15 U. S. C. § 78t(e). Petitioner’s view of primary liability makes any aider and abettor liable under § 10(b) if he or she committed a deceptive act in the process of providing assist ance. Reply Brief for Petitioner 6, n. 2; Tr. of Oral Arg. 24. Were we to adopt this construction of § 10(b), it would revive in substance the implied cause of action against all aiders p. 163and abettors except those who committed no deceptive act in the process of facilitating the fraud; and we would undermine Congress’ determination that this class of defendants should be pursued by the SEC and not by private litigants. See Alexander v. Sandoval, 532 U. S. 275, 290 (2001) (“The ex press provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others”); FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120, 143 (2000) (“At the time a statute is enacted, it may have a range of plausible meanings. Over time, however, subsequent acts can shape or focus those meanings”); see also Seatrain Ship building Corp. v. Shell Oil Co., 444 U. S. 572, 596 (1980) (“[W]hile the views of subsequent Congresses cannot over ride the unmistakable intent of the enacting one, such views are entitled to significant weight, and particularly so when the precise intent of the enacting Congress is obscure” (cita tions omitted)).

The practical consequences of an expansion, which the Court has considered appropriate to examine in circum stances like these, see Virginia Bankshares, Inc. v. Sand berg, 501 U. S. 1083, 1104–1105 (1991); Blue Chip, 421 U. S., at 737, provide a further reason to reject petitioner’s ap proach. In Blue Chip, the Court noted that extensive dis covery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settle ments from innocent companies. Id., at 740–741. Adoption p. 164of petitioner’s approach would expose a new class of defend ants to these risks. As noted in Central Bank, contracting parties might find it necessary to protect against these threats, raising the costs of doing business. See 511 U. S., at 189. Overseas firms with no other exposure to our secu rities laws could be deterred from doing business here. See Brief for Organization for International Investment et al. as Amici Curiae 17–20. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets. Brief for NASDAQ Stock Market, Inc., et al. as Amici Cu riae 12–14.

“necessarily extends its authority to embrace a dispute Congress has not assigned it to resolve. This runs con trary to the established principle that ‘[t]he jurisdiction of the federal courts is carefully guarded against expan sion by judicial interpretation . . . ,’ American Fire & Cas[ualty] Co. v. Finn, 341 U. S. 6, 17 (1951), and con p. 165flicts with the authority of Congress under Art. III to set the limits of federal jurisdiction.” Cannon v. Uni versity of Chicago, 441 U. S. 677, 746–747 (1979) (Powell, J., dissenting) (citations and footnote omitted).

This restraint is appropriate in light of the PSLRA, which imposed heightened pleading requirements and a loss causa tion requirement upon “any private action” arising from the Securities Exchange Act. See 15 U. S. C. § 78u–4(b). It is clear these requirements touch upon the implied right of ac tion, which is now a prominent feature of federal securities regulation. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U. S. 71, 81–82 (2006); Dura, 544 U. S., at 345–346; see also S. Rep. No. 104–98, pp. 4–5 (1995) (recog nizing the § 10(b) implied cause of action, and indicating the PSLRA was intended to have “Congress . . . reassert its authority in this area”); id., at 26 (indicating the pleading standards covered § 10(b) actions). Congress thus ratified the implied right of action after the Court moved away from a broad willingness to imply private rights of action. See p. 166Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U. S. 353, 381–382, and n. 66 (1982); cf. Borak, supra, at 433. It is appropriate for us to assume that when § 78u–4 was enacted, Congress accepted the § 10(b) private cause of ac tion as then defined but chose to extend it no further.

Here respondents were acting in concert with Charter in the ordinary course as suppliers and, as matters then evolved in the not so ordinary course, as customers. Unconventional as the arrangement was, it took place in the marketplace for goods and services, not in the investment sphere. Charter was free to do as it chose in preparing its books, conferring with its auditor, and preparing and then issuing its financial statements. In these circumstances the investors cannot be p. 167said to have relied upon any of respondents’ deceptive acts in the decision to purchase or sell securities; and as the requi site reliance cannot be shown, respondents have no liability to petitioner under the implied right of action. This conclu sion is consistent with the narrow dimensions we must give to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law.

The Court seems to assume that respondents’ alleged con duct could subject them to liability in an enforcement pro ceeding initiated by the Government, ante, at 166, but never theless concludes that they are not subject to liability in a private action brought by injured investors because they are, at most, guilty of aiding and abetting a violation of § 10(b), p. 168rather than an actual violation of the statute. While that conclusion results in an affirmance of the judgment of the Court of Appeals, it rests on a rejection of that court’s rea soning. Furthermore, while the Court frequently refers to petitioner’s attempt to “expand” the implied cause of ac tion1—a conclusion that begs the question of the contours of that cause of action—it is today’s decision that results in a significant departure from Central Bank.

The Court of Appeals incorrectly based its decision on the view that “[a] device or contrivance is not ‘deceptive,’ within the meaning of § 10(b), absent some misstatement or a failure to disclose by one who has a duty to disclose.” In re Charter Communications, Inc., Securities Litigation, 443 F. 3d 987, 992 (CA8 2006). The Court correctly explains why the stat ute covers nonverbal as well as verbal deceptive conduct. Ante, at 158. The allegations in this case—that respondents p. 169produced documents falsely claiming costs had risen and signed contracts they knew to be backdated in order to dis guise the connection between the increase in costs and the purchase of advertising—plainly describe “deceptive de vices” under any standard reading of the phrase.

The Central Bank of Denver was the indenture trustee for bonds issued by a public authority and secured by liens on property in Colorado Springs. After default, purchasers of $2.1 million of those bonds sued the underwriters, alleging violations of § 10(b); they also named Central Bank as a de fendant, contending that the bank’s delay in reviewing a sus picious appraisal of the value of the security made it liable as an aider and abettor. Id., at 167–168. The facts of this case would parallel those of Central Bank if respondents had, for example, merely delayed sending invoices for set-top boxes to Charter. Conversely, the facts in Central Bank would mirror those in the case before us today if the bank had knowingly purchased real estate in wash transactions at above-market prices in order to facilitate the appraiser’s overvaluation of the security. Central Bank, thus, poses no p. 170obstacle to petitioner’s argument that it has alleged a cause of action under § 10(b).

In Basic Inc., we held that the “fraud-on-the-market” the ory provides adequate support for a presumption in private securities actions that shareholders (or former shareholders) in publicly traded companies rely on public material mis statements that affect the price of the company’s stock. Id., at 248. The holding in Basic is surely a sufficient response to the argument that a complaint alleging that deceptive acts p. 171which had a material effect on the price of a listed stock should be dismissed because the plaintiffs were not subjec tively aware of the deception at the time of the securities’ purchase or sale. This Court has not held that investors must be aware of the specific deceptive act which violates § 10b to demonstrate reliance.

Even if but-for causation, standing alone, is too weak to establish reliance, petitioner has also alleged that respond ents proximately caused Charter’s misstatement of income; petitioner has alleged that respondents knew their deceptive p. 172acts would be the basis for statements that would influence the market price of Charter stock on which shareholders would rely. Second Amended Consolidated Class Action Complaint ¶¶ 8, 98, 100, 109, App. 19a, 55a–56a, 59a. Thus, respondents’ acts had the foreseeable effect of causing peti tioner to engage in the relevant securities transactions. The Restatement (Second) of Torts § 533, pp. 72–73 (1977), provides that “[t]he maker of a fraudulent misrepresentation is subject to liability . . . if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other.” The sham transactions described in the complaint in this case had the same effect on Charter’s profit and loss statement as a false entry directly on its books that included $17 million of gross revenues that had not been received. And respond ents are alleged to have known that the outcome of their fraudulent transactions would be communicated to investors.

The Court’s view of reliance is unduly stringent and un moored from authority. The Court first says that if petition er’s concept of reliance is adopted the implied cause of action “would reach the whole marketplace in which the issuing company does business.” Ante, at 160. The answer to that objection is, of course, that liability only attaches when the company doing business with the issuing company has itself violated § 10(b).4 The Court next relies on what it views as a strict division between the “realm of financing business” and the “ordinary business operations.” Ante, at 161. But petitioner’s position does not merge the two: A corporation engaging in a business transaction with a partner who trans mits false information to the market is only liable where the p. 173corporation itself violates § 10(b). Such a rule does not in vade the province of “ordinary” business transactions.

Finally, the Court relies on the course of action Congress adopted after our decision in Central Bank to argue that siding with petitioner on reliance would run contrary to con gressional intent. Senate hearings on Central Bank were held within one month of our decision.5 Less than one year later, Senators Dodd and Domenici introduced S. 240, which became the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737.6 Congress stopped short of undo ing Central Bank entirely, instead adopting a compromise which restored the authority of the SEC to enforce aiding and abetting liability.7 A private right of action based on p. 174aiding and abetting violations of § 10(b) was not, however, included in the PSLRA,8 despite support from Senator Dodd and members of the Senate Subcommittee on Securities.9 This compromise surely provides no support for extending Central Bank in order to immunize an undefined class of ac tual violators of § 10(b) from liability in private litigation. Indeed, as Members of Congress—including those who re jected restoring a private cause of action against aiders and abettors—made clear, private litigation under § 10(b) contin ues to play a vital role in protecting the integrity of our securities markets.10 That Congress chose not to restore p. 175the aiding and abetting liability removed by Central Bank does not mean that Congress wanted to exempt from liability the broader range of conduct that today’s opinion excludes.

While I would reverse for the reasons stated above, I must also comment on the importance of the private cause of ac tion that Congress implicitly authorized when it enacted the Securities Exchange Act of 1934. A theme that underlies the Court’s analysis is its mistaken hostility toward the § 10(b) private cause of action.11 Ante, at 164–165. The Court’s current view of implied causes of action is that they p. 176are merely a “relic” of our prior “heady days.” Correc tional Services Corp. v. Malesko, 534 U. S. 61, 75 (2001) (Scalia, J., concurring). Those “heady days” persisted for 200 years.

During the first two centuries of this Nation’s history much of our law was developed by judges in the common-law tradition. A basic principle animating our jurisprudence was enshrined in state constitution provisions guaranteeing, in substance, that “every wrong shall have a remedy.”12 p. 177Fashioning appropriate remedies for the violation of rules of law designed to protect a class of citizens was the routine business of judges. See Marbury v. Madison, 1 Cranch 137, 166 (1803). While it is true that in the early days state law was the source of most of those rules, throughout our his tory—until 1975—the same practice prevailed in federal courts with regard to federal statutes that left questions of remedy open for judges to answer. In Texas & Pacific R. Co. v. Rigsby, 241 U. S. 33, 39 (1916), this Court stated the following:

“Following Rigsby the Supreme Court recognized im plied causes of action on numerous occasions, see, e. g., Wyandotte Transportation Co. v. United States, 389 U. S. 191 . . . (1967) (sustaining implied cause of action by United States for damages under Rivers and Harbors Act for removing negligently sunk vessel despite ex press remedies of in rem action and criminal penalties); United States v. Republic Steel Corp., 362 U. S. 482 . . . (1960) (sustaining implied cause of action by United p. 178States for an injunction under the Rivers and Harbors Act); Tunstall v. Locomotive Firemen & Enginemen, 323 U. S. 210 . . . (1944) (sustaining implied cause of ac tion by union member against union for discrimination among members despite existence of Board of Media tion); Sullivan v. Little Hunting Park, Inc., 396 U. S. 229 . . . (1969) (sustaining implied private cause of action under 42 U. S. C. § 1982); Allen v. State Board of Elec tions, 393 U. S. 544 . . . (1969) (sustaining implied private cause of action under § 5 of the Voting Rights Act de spite the existence of a complex regulatory scheme and explicit rights of action in the Attorney General); and, of course, the aforementioned decisions under the secu rities laws. As the Supreme Court itself has recog nized, the period of the 1960’s and early 1970’s was one in which the ‘Court had consistently found implied reme dies.’ Cannon v. University of Chicago, 441 U. S. 677, 698 . . . (1979).”

In light of the history of court-created remedies and spe cifically the history of implied causes of action under § 10(b), the Court is simply wrong when it states that Congress did not impliedly authorize this private cause of action “when it first enacted the statute.” Ante, at 167. Courts near in p. 180time to the enactment of the securities laws recognized that the principle in Rigsby applied to the securities laws.13 Congress enacted § 10(b) with the understanding that federal courts respected the principle that every wrong would have a remedy. Today’s decision simply cuts back further on Con gress’ intended remedy. I respectfully dissent.