Have we finally discovered a disadvantage to corporate personhood?

For decades now corporations have been granted the rights of people without the commensurate responsibilities. Finally, there’s a chance that this will be partly reversed. The Supreme Court heard today the case of Stoneridge Investment Partners vs. Scientific-Atlanta Inc., a case that is being billed by many securities law experts as the “Roe v. Wade” of securities law. The gist of the case is that the plaintiffs (Stoneridge Investment Partners) want to be able to sue the defendants (Scientific-Atlanta Inc., now owned by Cisco) for their part in a fraud that artificially boosted the stock price of Charter Communications, and that the fraud resulted in the investors losing a great deal of money. The problem is that it’s not presently clear if third parties, namely vendors, banks, insurance agencies, etc., who are party to the fraud but are not the primary defrauding corporation itself are liable for the fraud.

If the Supreme Court rules that third parties are liable, then the banks that helped Enron defraud it’s investors could be sued for damages. If the Supreme Court rules that third parties cannot be held liable, or that existing laws aren’t clear enough to determine Congressional intent, then third parties would be immune to lawsuits until Congress passed a law (and the President didn’t veto it) to make them expressly liable.

35 states have submitted “friend of the court” briefs in support of the investors, but the Bush administration, banks, insurance companies, and manufacturers are supporting Scientific-Atlanta. An interesting aside is that the SEC believe that investors should be permitted to sue, but the President personally intervened and said “no, we’ll be supporting the third parties instead.” Presently, the SEC is permitted to sue on behalf of investors, but not investors themselves, based on a Supreme Court decision in 1994, Central Bank vs. First Interstate Bank.

If you’re a person, though, and you aid and abet the commission of fraud, you’re considered an accessory. True, you’re not going to face the strictest penalties that the primary criminal will, but you’re still considered responsible for your aiding and abetting. So, given that third parties are “juristic persons” according to the law and Supreme Court precedents, third parties should be held similarly responsible for aiding and abetting.

Of course, we shouldn’t expect a logical outcome in this case based on the corporate personhood argument. After all, the Bush administration overruled the SEC, Congress has permitted corporate personhood to exist, and there are a number of misguided Supreme Court precedents that all point to a “pro-business” outcome. In other words, an outcome that benefits manufacturers and limits liability even though it makes no logical sense.

As if we needed more reasons to hate corporate personhood….

8 replies »

  1. I’m not a big fan of corporate crime, and have problems with some of the lack of accountability that many corporations enjoy. That being said, I do like the limited liability that corporations and their shareholders are allowed. I certainly wouldn’t wish to be a stockholder of a corporation and have to assume liability for the corporation. Directors should be held to the highest standards, which unfortunately, hasn’t always been the case. Our present laws allow directors to be held accountable for their misdeeds, and those laws should be rigorously enforced.

    I have a problem with whining shareholders, who sue whenever they lose money on an investment. People should walk into a trade with both eyes open and realize that they’re probably going to lose money in the market. I’ll go one step further and state that the average person has no business playing with stocks, commodities, or options. The people who trade those instruments are among the smartest people on the planet, and it’s lunacy to think that a part time investor can make money against those guys.

    You bring up many valid points in this article that should be clarified through the courts. I hope that they severely limit the “third party” liability and give a good definition to who exactly is a “third party.” Otherwise, they could hold the neighborhood Kinko’s liable if Kinko’s was contracted by the offender to print material that was used to defraud. I hate to see what type of legal minefield that all of this will bring.


  2. The third party liability is already pretty strictly proscribed: “aiders and abettors” are subject to SEC fines and possible criminal prosecution, but cannot be held financially liable. As Brian mentioned, the plaintiffs want to change this situation by allowing corporate “aiders and abettors” to be sued as principals; held just as liable for perpetuating a fraud as the entity which instigated it.

    In many ways, the parallel with individual criminal activity holds true. Under federal law, association, participation, and action constitute aiding and abetting, which then make the defendant guilty as a principal (many states have wider interpretations). It does make logical sense for any principal participant in a crime to share in civil liability… but so far, Congress doesn’t see it that way for corporations.

    I tend to share the “whining shareholder” opinion; also, the plaintiffs themselves will admit that going after third parties with deep pockets is a hell of a lot more profitable than suing a company that’s already swirled down the bowl. On the other hand, if some kind of proportionate penalty system for egregious offenders could be devised, there are certainly corporate entities who deserve more than an SEC slap on the wrist. Lying is lying; cheating is cheating.

    I’ll be very interested to see how this turns out.

  3. Jeff and euphrosyne1115 – Thanks for both of your comments. This is a scarily nuanced issue that involves questions of corporate personhood, who is and is not a “third party,” whether financial liability should be tied to legal liability, etc.

    I don’t like corporate personhood because it means that corporations could potentially claim all the Constitutional rights that actual people enjoy in the U.S., and I think that many of the rights of individuals should not necessarily apply to groups of individuals, especially the whole money=speech thing (that I think should be stripped away from individuals as much as corporations). But I see no reason why we can’t offer the same class of legal protections without creating a juristic person in the process.

    The law of unintended consequences as applied to corporate personhood has hugely benefited corporations for a very long time now. I’d just really like to see it work against corporations once in a while, not because I necessarily think that pursuing deep-pocketed third parties is a good idea, but because it may bring more attention to the entire concept of corporate personhood and the inherently undemocratic manipulations of the system it has engendered and will continue to.

  4. OK I’ll bite.

    What exactly is a whining shareholder and what are some examples?

    I can agree that the average person shouldn’t be investing in stocks since it’s all pretty much a scam anyway and there’s usually a couple sets of books being kept.

    Let’s see Enron, Worldcom, Global Crossing, Adelphia, and many others are good examples. Certainly no one should build a retirement around that kind of strategy, especially when they’re only buying common stock which affords them very little say so or leverage, but mostly allows the company to take the money.

    I noticed the brouhaha with Yahoo this past year where shareholders were unsatisfied with the CEO, the BoD, and company performance. What they should have done was just dump the stock.

    But first and foremost, if corporations were people, they’d get thrown in jail like anyone else for their behavior. A lot of it is outright deception. Very unethical.

  5. Thinking… To me, a whining shareholder would be someone who invests without careful research or knowingly invests in companies with high-risk practices (think the recent mortgage company blow-up), then looks for a scapegoat when their own poor decision redounds upon their bottom line.

    But like I said above, lying is lying and cheating is cheating, and I completely agree: all active parties to a fraud should be held accountable. A shareholder who has been lied to all the way down the line – that’s not a whiner, that’s someone with a legitimate beef.

  6. I made my chops spending over 10 years trading wheat futures as a local in the wheat pit. From this perspective I can say that very bit of trading activity on the exchanges, from the market makers, locals, and pit brokers, is to extract as much money from the general public as possible. The old axiom “The general public is always wrong…” is a fairly accurate description of the way the markets and human nature work.

    As I have said before, the guys who successfully trade are among the smartest people on the planet, and no part time investor will beat them in the long run. I used to tell guys that wanted to invest in the futures markets that they’d be better off going to Vegas. In Vegas, at least when they blew their 100 grand, they’d get comped a little, and would have a good time. The markets just take your money, wham, bam, thank you ma’am.

    I always assume all market activity is composed of lying, cheating, manipulation, and underhanded front runing, pocket trades, wash trades, and just plain old thievery. That’s why hot tips, market gurus, brokers, newsletters, and the business media can and should be ignored by anyone serious about investing or trading. All you need to know about the market is in what the tape tells you, and the tape is always right in the end. Frankly, the Enron mess was great for me. I was able to put on a decent sized short position in Enron, and was able to pull out $16.00 and change per share, in a week. In fact, stock scandals present the best opportunities, as one can short those suckers and squeeze every dime out of them. People forget that one can make huge money when the market goes down….all they have to do is be right. When you’re right about a market and have put out a good line at the right price, you deserve everything that’s coming to you.

    As for deception in the markets, that goes on all of the time. The exchanges are like poker tables. I used to practice deception when I was in the pit at least 100 times a day. For instance, when a pit broker got an order to fill, I’d look at his eyes shift while he was reading the order. If it was a buy order, I’d bid for the same wheat he was buying. If he needed to fill the order, he upped his bid by a quarter or half cent per bushel, I’d turn around and sell it to him, then promptly offer it back down a quarter or half cent. I’d try to fake rallies, and find out where the stop orders were, then I’d try to run the stops. I’d sell the front month, and cover it by going long a farther out month. I could list a hundred different tricks I’ve used, but it all boils down to one thing….. While I was trying to screw everyone, they were all trying to screw me just as badly. This is all legal, by the way. The end result of all of this screwing is an immense pool of liquidity that is unmatched anywhere on this globe…which is a good thing.

    Ann, this sub prime blow-up has presented more moneymaking opportunities for an astute trader than any recent news in a couple of years.

    The general public has no business playing around in the markets….period. I really don’t feel sorry for folks who lose money in the markets. Everybody subscribes to the “Bigger fool theory” and thinks that they will find somebody to pay them more money for their stocks or whatever. It’s human nature to be a little greedy, and the public tends to be greedy. Greed will kill you in the markets every time, whereas a dispassionate, realistic attitude will serve you well. I don’t worry when I lose money on a trade, as that’s just the cost of doing business.

    As for folks putting their retirement nest-egg at risk, that’s just plain tomfoolery.


  7. I see your point… boy, do I. That’s why we have someone like you to manage our investments; I mean that, of course, in the best sense. 😉

    This minnow has no desire to play with the sharks.