Investors lose in court ruling
The 5-3 decision rejected a broad theory of liability for parties who allegedly play a role in misleading auditors and inflating a stock price.
Writing for the court majority, Justice Anthony Kennedy said the stance urged by a group of investors would create liability beyond what Congress had intended in securities law. He also cautioned that greater liability might harm U.S. companies and deter overseas firms from doing business here.
The financial community had been anxiously awaiting a ruling in the case, "Stoneridge Investment Partners v. Scientific-Atlanta," which was argued before the justices in October.
Among those closely watching the case were Enron shareholders. In a $40 billion lawsuit, they have sued Merrill Lynch, Credit Suisse and Barclays, citing their roles in Enron's 2001 collapse.
Patrick Coughlin, attorney for the University of California Regents and other Enron shareholders, called the ruling "a very anti-investor decision" that will hurt the biggest fraud cases - "the Enrons and WorldComs of the world."
A federal appeals court had booted the Enron suit, but shareholders' attorneys appealed to the Supreme Court. The high court Friday will decide the fate of the suit, likely returning it to the lower court in light of the Stoneridge ruling.
Scientific-Atlanta hailed the decision. In a statement, Susan Hurd, a partner at Alston & Bird for the firm, says the court correctly refused to allow rampant liability "that would reach potentially the whole marketplace in which the primary defendant did business."
Tuesday's case was brought by investors in Charter Communications, a cable company, against Scientific-Atlanta and Motorola, which sold cable boxes to Charter. Investors in Charter claimed the company overpaid for the boxes, with the understanding that suppliers would return the overpayment by purchasing advertising from Charter.
That transaction allegedly allowed Charter to record the advertising purchases as millions in extra revenue and, as Kennedy wrote, "to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers."
Stoneridge Investment, the lead plaintiff, sued under a federal securities provision prohibiting deceptive statements and sought to impose liability on the suppliers.
Kennedy rejected expanded liability in private lawsuits for suppliers and others not directly involved in the public deception.
He said the key test for liability is whether investors relied on an entity's actions or statements. In this case, Kennedy said, investors had no knowledge of deceptive acts during the time in question.
The ruling affirmed a decision by the U.S. Court of Appeals for the 8th Circuit throwing out the lawsuit.
Justice Stevens, writing in dissent, said investors relied on Charter's revenue statements when they decided to invest in the company and in doing so relied on the suppliers' fraud.
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