U.S. Supreme Court

Supreme Court Limits Investor Suits Against Third Parties

Updated: In a major ruling, the U.S. Supreme Court has decided that third parties are not liable for participating in corporate wrongdoing if they did not directly mislead investors, SCOTUSblog reports.

The court ruled 5-3 in the case, Stoneridge Investment Partners v. Scientific-Atlanta. Justice Stephen G. Breyer did not participate.

Lawyers and other third-party professionals who could have faced lawsuits if the court had expanded liability were following the case closely. The ruling is likely to stymie litigation against banks accused of helping Enron hide financial problems.

“The case involves a cable company and the suppliers of cable boxes,” the Washington Post reports, “but it has been seen largely as a stand-in for investors who want to go after banks and others that allegedly allowed the energy trader Enron Corp. to disguise its financial problems.”

Writing for the majority, Justice Anthony M. Kennedy said investors may only sue those who took direct action relied upon by investors who bought or sold stock. “Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element,” Kennedy wrote, according to an account of the decision by Dow Jones.

Kennedy wrote in his opinion (PDF posted by SCOTUSblog) that the petitioner had urged the court to invoke what some courts call “scheme liability” to hold third parties accountable absent any public statements that mislead investors. Kennedy rejected the approach.

He said Congress had passed a law giving the Securities and Exchange Commission the authority to police those who aid and abet corporate fraud. If the court were to expand liability, Kennedy said, “we would undermine Congress’ determination that this class of defendants should be pursued by the SEC and not by private litigants.”

He also commented on the “practical consequences” if the court were to rule in favor of expanded liability. Such a ruling could allow investors with weak claims to extort settlements from a new class of defendants, raising the price of third-party services, the opinion said. It also could discourage foreign companies from doing business here and shift securities offerings away from domestic markets.

The dissenters were Justices John Paul Stevens, David H. Souter and Ruth Bader Ginsburg.

The ruling is the fifth Supreme Court securities case to favor of business since 2004, Dow Jones says.

Updated at 9:50 AM to include information from the opinion posted on SCOTUSblog, at 10 AM to include information from a Dow Jones story, and at 12:30 PM to include information from a Washington Post story.

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