By PHYLLIS SKUPIEN, ESQ., Andrews Publications Staff Writer

Two Democratic congressional leaders have asked the U.S. Supreme Court to allow them to file an amicus brief in a pending securities fraud dispute that could determine shareholders' chances of recovering their losses for years to come.

House Financial Services Committee Chairman Barney Frank of Massachusetts and Michigan's John Conyers Jr., chairman of the House Judiciary Committee, are supporting shareholders' rights to sue third parties like investment bankers, lawyers, accountants and business partners who participate in a scheme to defraud investors.

Also, a group of former commissioners of the Securities and Exchange Commission has filed a late friend-of-the-court brief criticizing the Bush administration for taking a pro-business stance and failing to support the SEC's position on the issue.

"This is one of the most important securities cases to be heard by this court in years," former SEC chiefs William H. Donaldson and Arthur Levitt Jr. and former commissioner Harvey J. Goldschmid say in their brief.

Frank and Conyers add in their filing, "The [Justice Department's] decision to follow the political and policy directives of the president rather than to support the commission's legal position plots a dangerous course."

The friend-of-the-court briefs side with petitioner Stoneridge Investment Partners, which argues that, under the theory of "scheme liability," primary liability in securities fraud suits can reach those involved in a fraud even if they do not directly communicate false information to the investing public.

Under current legal principles, a secondary actor is considered a primary violator only if it makes a misstatement, owes a fiduciary duty to investors or illegally trades in a company's stock.

But the Supreme Court decided in 1994 in Central Bank v. First Interstate Bank, 511 U.S. 164, that investors cannot sue companies or individuals that only aid and abet a fraud.

The Stoneridge case involves the ability of investors in Charter Communications to sue Scientific-Atlanta Inc. and Motorola Inc. for hiding kickbacks through advertising contracts that generated $17 million in false revenue for the cable TV provider.

The vendors contend that at best they only aided and abetted Charter's fraud and cannot be found liable.

But Stoneridge argues that "scheme liability" is a valid cause of action under a statutory interpretation of Section 10b-5 of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rules 10b-5(a) and (c) thereunder to prosecute those who participate in a fraudulent scheme.

In support of that position, more than a dozen amicus briefs filed to date say the massive financial scandals at Enron, WorldCom, Tyco, Adelphia and Global Crossing showed that accountants, investment bankers and lawyers were involved in fraudulent activity behind the scenes.

The SEC reportedly asked the solicitor general of the Justice Department to file an amicus brief in support of petitioners, but the Bush administration declined to file one by the deadline.

The congressmen say the SEC has consistently supported the position that defendants who commit deceptive acts as part of a scheme to defraud may be found liable under the antifraud provisions of federal securities laws, even if they did not issue a statement to investors.

According to their brief, White House staff conveyed to the solicitor general that President Bush believes it is important to reduce unnecessary litigation and that regulators are in the best position to sue.

The congressmen say the Justice Department then did not file an amicus brief in this case based on policy concerns rather than current law.

In addition, the former SEC commissioners say the agency's limited resources prevent it from pursuing every financial fraud case, so private lawsuits are essential. They also say the continuation of scheme liability will maintain the integrity of the market rather than detract from it.

If third parties cannot be sued, non-issuers who commit securities fraud will be immunized from private liability "merely because they were cunning enough to avoid making a public statement," the commissioners say.

Oral arguments are scheduled for Oct. 9.