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Corporate Fraud Liability Is Curbed

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The Washington Post

Published: January 16, 2008

WASHINGTON - The Supreme Court on Tuesday curbed the ability of investors who lost money through corporate fraud to sue businesses that may have helped facilitate the crime.

In what business interests and investors had described as the court's most important financial case of the year, the court ruled 5-3 that secondary actors such as vendors, accountants and lawyers cannot be liable for corporate fraud if investors did not rely on statements from them in making investment decisions.

The case involves a cable company and the suppliers of cable boxes, but it has been seen largely as a stand-in for investors who want to go after banks and others that they contend allowed the energy trader Enron Corp. to disguise its financial problems prior to a collapse that produced heavy losses for investors.

It has implications for other investor-motivated lawsuits over alleged corporate fraud, including attempts by shareholders to recover billions of dollars in widening losses in mortgage industry investments.

Plaintiffs' attorneys say sometimes the only way for investors to recover money lost because of a company's fraudulent actions is to go after those who helped perpetrate the fraud.

But the nation's business interests say Congress has given regulators the authority to punish lawbreakers, and increasing the number of lawsuits for alleged fraud will just put U.S. firms at a global disadvantage.

The court's majority agreed with that viewpoint, rejecting the argument that today's investors rely not only upon statements made by companies but the transactions behind them.

"Were this concept of reliance to be adopted, the implied cause of action would reach the whole marketplace in which the issuing company does business; and there is no authority for this rule," Justice Anthony Kennedy wrote. He was joined by Chief Justice John Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr.
Justice John Paul Stevens wrote a dissent criticizing the majority for its "continuing campaign" to render "toothless" the court's holding that investors have a right to sue companies for fraudulent behavior.

He was joined by Justices Ruth Bader Ginsburg and David Souter. Justice Stephen Breyer recused himself because of financial investments.

At issue in the case, Stoneridge Investment Partners v. Scientific-Atlanta, was whether a group of investors (Stoneridge) could seek damages against two technology companies (Scientific-Atlanta and Motorola) they say helped a St. Louis firm called Charter Communications inflate its revenue through a series of sham deals in 2000.

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