US advisers are celebrating a key ruling by the Supreme Court yesterday (16 January) that protects third-party defendants in securities litigation - including law firms, accountants and bankers - from so-called 'scheme liability' over their role in corporate fraud, writes the Legal Times.
The eagerly-anticipated decision came in Stoneridge Investment Partners v Scientific-Atlanta and Motorola - dubbed by some as the Roe v Wade of securities law - in which investor groups that sued cable operator Charter Communications for fraud also pursued companies that sold cable boxes figuring in some of Charter's fraudulent transactions.
By a five to three vote, the court said that because investors victimised by Charter did not rely on any statements or omissions made by vendors Scientific-Atlanta and Motorola, the vendors could not be held liable under Section 10(b) of the Securities Exchange Act of 1934.
The ruling, authored by Justice Anthony Kennedy, may curb what business defendants have portrayed as a relentless search by plaintiffs for alternative deep pockets in securities class actions when the main company involved has collapsed. One such piece of litigation, by Enron investors seeking billions in damages from bankers and Wall Street firms that did business with Enron, may be directly affected by the ruling.
"The proper way to look at it, I think, is that the Enron case is dead after today," said Ted Frank of the American Enterprise Institute.
Mayer Brown partner Stephen Shapiro, who represented Scientific-Atlanta and Motorola, commented: "It is a win for investors because suits like this one take money from one group of investors at the expense of another group of investors, with big rake-offs for lawyers. And it is a win for the US economy."
Lawyers representing investor-plaintiffs criticised the ruling and also cautioned that the door remains open for suits against third parties, especially financial institutions, in some circumstances.
Steven Toll of class action specialist Cohen Milstein Hausfeld & Toll in Washington DC said: "The Supreme Court’s decision is yet another unfortunate example of the pro-business, anti-investor sentiment of a majority of judges on the Supreme Court."
The news marks the latest in a series of recent court rulings that have raised the bar for securities class actions, after last year's Tellabs Inc v Makor and Dura Pharmaceuticals v Broudo in 2005, which respectively tightened pleading and causation standards for securities class actions.
The Legal Times is a US sister title of Legal Week. Click here for a full version of this article; and here for more US news on law.com.