Scheme Liability: A Question for Congress, Not for the Court


  • Joseph Grundfest
Publish Date:
August 1, 2007
Publication Title:
Stanford Law and Economics Olin Working Paper, No. 344
Working Paper
  • Joseph Grundfest, Scheme Liability: A Question for Congress, Not for the Court, Stanford Law and Economics Olin Working Paper, No. 344 (August 2007).


Any person who knowingly provides substantial assistance, whether through participation in a scheme or by any other means, to another who violates the federal securities laws also violates the federal securities laws. The Securities and Exchange Commission can sue these “aiders and abettors” and force them to make payments for the benefit of shareholders harmed by the fraud. They can also be criminally prosecuted by the Department of Justice. But are they additionally liable in private civil actions filed under Section 10(b) of the Exchange Act?

The United States Supreme Court will, in Stoneridge, decide whether the implied private right of action under Section 10(b) supports claims of “scheme liability” against counterparties who properly account for transactions, make no public statements regarding those transactions, and do not transact in any securities affected by the fraud.

Established Supreme Court doctrine and clear statutory text preclude the imposition of such “scheme liability” in a private action. Whether the scope of the implied private right should be expanded to encompass “scheme liability” is a question properly put to Congress not to the Courts.

Stoneridge is therefore important for reasons that transcend the narrow question of “scheme liability.” Petitioners can prevail only if the Supreme Court repudiates its own precedent, jettisons its well-established technique for interpreting Section 10(b), ignores clearly relevant statutory text, and disregards two Congressional decisions not to expand the private right under Section 10(b) to encompass “scheme liability.” The court will, in other words, have to establish an entirely new jurisprudence of statutory construction.

This new jurisprudence will inevitably re-open a plethora of doctrinal issues regarding the interpretation of the federal securities laws that are today clearly resolved. Where this new and unanticipated jurisprudence would lead – other than to more litigation over the contours of the implied private right of action – is impossible to predict. Stoneridge is truly one of the “most important securities cases” to come before the court “in many years” because, if Petitioners prevail, far more than “scheme liability” is at stake for the future evolution of our nation’s securities markets.