On the front page of its Business section, the Washington Post (1/16, D1, Barnes, Johnson) reports that, on Tuesday, the Supreme Court “strictly limited the ability of investors who lost money through corporate fraud to sue other businesses that may have helped facilitate the crime, a decision that could doom stockholder efforts to recover billions of dollars lost in Enron and other high-profile cases.” The decision was called “a complete victory for the defendants” and “a victory for business interests in a case they had identified as their most important of the year.”
On the front of its Business Day section, the New York Times (1/16, C1, Greenhouse) notes that the 5-3 decision in the case of Stoneridge Investment Partners v. Scientific-Atlanta Inc. “held that in order to proceed with” a “scheme liability” lawsuit, “plaintiffs must be able to show that they had relied, in making their decision to acquire or hold stock, on the deceptive behind-the-scenes behavior of these financial institutions, often called secondary actors. But behavior that was never communicated to the marketplace cannot be said to have induced reliance,” according to Justice Anthony M. Kennedy.
”If the ruling had gone the other way,” notes the Wall Street Journal (1/16, A4, Bravin, Scannell, subscription required), “it could have expanded the power of defrauded shareholders to sue, invigorating the multibillion-dollar field of securities class-action lawsuits.” As it happened, “the court’s opinion maintains a status quo and extends Wall Street’s winning streak on securities cases.”
The Christian Science Monitor (1/16, Richey) explains that the “suing investors in the Stoneridge case had purchased stock in Charter Communications, a cable TV company. After settling their suit against Charter, the investors then sued two of Charter’s vendors, Scientific-Atlanta and Motorola, for their alleged involvement in helping cover up an ongoing fraud at Charter.” By ruling against “the second suit against Scientific-Atlanta and Motorola, the high court declared the two companies were too remote from any investor deception at Charter to trigger legal liability for the vendors.”
However, the decision “is not a true surprise,” according to the Los Angeles Times (1/16, Savage). “In 1994, the court shielded accountants and others from claims they had ‘aided or abetted’ a fraudulent scheme, and it adopted then the same legal principle that was repeated today. Stock fraud suits should be directed only at the company that fooled investors, not others who did work for the deceptive company.”
John Engler, president of NAM, said, “A contrary decision would have overturned decades of established law and greatly expanded potential liability of our member companies,” according to Forbes (1/16, Wingfield).
The New York Law Journal (1/16, Mauro) expands on Engler’s statements, adding that Engler said, “The petitioners in this case were seeking an opening to go far beyond the law in search of deep pockets, and we really don’t need any more of that in our country. This decision will prevent creeping liability in this area of securities law.”
Still, the outcome “is important relief for manufacturers,” Quentin Riegel, vice president for litigation at the National Association of Manufacturers, told the AP (1/16, Yost). Riegel added that the ruling will stop “creeping liability, attempts to expand primary responsibility from one party to third parties who were not involved in making misleading statements.”
The Houston Chronicle (1/15, Ivanovich) added that, writing for the majority, Justice Kennedy noted that if third parties could be sued, “[c]ontracting parties might find it necessary to protect against these threats, raising the costs of doing business.…Overseas firms with no other exposure to our securities laws could be deterred from doing business here.” This “could the raise of cost of being a publicly traded company.”
Dissenting Justices included John Paul Stevens, David Souter, and Ruth Bader Ginsberg, Reuters (1/16, Vicini, Youngalai) notes. “Stevens objected to what he called the court’s continuing campaign to render ‘toothless’ private lawsuits under a section of federal securities law dealing with manipulative and deceptive practices.” The Financial Times (1/16, Waldmeir, subscription required), Bloomberg (1/16, Stohr), Dow Jones (1/16, Anderson), and the St. Louis Business Journal (1/16) also cover the story.
WSJ calls Stoneridge case “legal opportunism.” The Wall Street Journal (1/16, subscription required) editorialized on the Stoneridge case, noting that, in fraud cases, “[e]ven class actions against actual fraudsters are of dubious merit, because they merely transfer wealth from one set of shareholders to another, neither of whom are guilty parties.” It is the “lawyers bringing the suit [who] are the only net winners in almost every case, since over time an investor is as likely to be a payor as a recipient of such claims. But a class action against companies in which the ‘class’ never even owned any shares is at an even further remove from any claim to justice.” The Journal adds that Tuesday’s “early stories on the case described the ruling as a setback for ‘investors,’ which says a lot about the sympathies or ignorance of the press. Investors were fortunate that at least five Justices know the difference between genuine fraud and legal opportunism.”