In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the Supreme Court addressed whether two third-party participants in a fraudulent scheme, engineered by a corporate issuer, faced liability in a private securities lawsuit for harm caused by the issuer’s false and misleading corporate disclosures. Though the inquiry would seem to be a matter of determining whether the participants’ deceptive, behind-the-scenes conduct constituted a “primary” violation of the antifraud prohibition found in SEC Rule 10b-5, the Court instead answered by interpreting the reliance element of the plaintiffs’ cause of action. The Court held that there is no reliance, and hence no liability, when the link between the third party’s actions and the resulting misrepresentation by the issuer is too remote or attenuated.

Conduct, reliance, and proximity, however, are conceptually distinct; by blending them together, Justice Kennedy’s opinion makes something of a doctrinal mishmash. The dish is tasty enough to those who dislike strong securities class actions, with abundant probusiness dicta adding ample spice. But the recipe has few serious academic defenders, even among those who like its outcome, and has been the object of disgust for those who do not. The standard account is that the Court was, yet again, showing its reflexive antipathy toward private securities class actions, throwing whatever was at hand into the pot in order to achieve a business-friendly result. As we shall see, most lower courts have read Stoneridge as doing little more than truncating third-party liability via an especially strict reliance requirement.

My sense is that both courts and commentators have paid too much attention to the dicta and too little to the holding. Though I, too, would have decided the case differently, the substance of the academic criticism and the unimaginative way lower courts have read and applied the Court’s teachings are too simple. In Stoneridge, as in the two other most recent Supreme Court decisions addressing securities class actions, Tellabs the Court articulated a more moderate test than it might have, even though all three held for the defendants. Pure antipathy toward securities class action plaintiffs presumably would have led to more extreme holdings, which suggests that something different is going on.

In this Article, I offer a novel reading of Stoneridge. There is a respectable idea at work in the opinion, which we can refine. The Court’s choice of reliance as the crucial element indicates the Court’s comfort with having different liability outcomes in Rule 10b-5 cases depending on whether the action is an SEC enforcement or criminal prosecution (where reliance is not required) or private litigation (where it is). Why might such a distinction make sense? One possible answer comes by considering the extraordinary nature of the liability in private fraud-on-the-market cases, which is based on the aggregate claims of all those who bought or sold from the time of the alleged primary misrepresentations to the date of corrective disclosure. This figure can be staggeringly large, yet disconnected from any meaningful reliance-in-fact requirement. Even if the underlying conduct was wrongful, making a defendant pay such a large amount can seem severely disproportionate. By contrast, in SEC enforcement actions, the monetary penalty varies based on a set of factors specifically tied to the gravity of the wrongdoing. In Part I, I expand on this idea and make my main argument: that by emphasizing remoteness and attenuation in the context of private securities litigation, Stoneridge reinvigorates the idea of duty as a limitation on liability to open-market investors in order to constrain the unique liability risk that defendants face.