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Justices Uphold Limits on Security Fraud Suits

BY Admin  January 15, 2008 at 4:50 PM EDT

The Supreme Court

In one of the weightiest business cases the court has seen in years, the justices ruled 5-3 in favor of upholding the limits.

The case before the court was brought against Scientific Atlanta and Motorola Inc. by Stoneridge Investment Partners on behalf of Charter Communications shareholders. It had been dismissed by a lower court.

Stoneridge claimed the companies schemed to help inflate Charter’s revenues by $17 million in 2000 by buying advertising from Charter with money provided by Charter.

The decision will likely affect a class-action lawsuit by shareholders who invested in Enron Corp. That suit is seeking more than $30 billion from investment banks, accusing them of working with Enron to hide the company’s financial problems.

Justice Anthony Kennedy concluded for the majority that even if the companies helped Charter inflate revenue, Charter investors do not have the right to sue because they did not rely on the acts of the third-party companies when they purchased or sold stock.

”No member of the investing public had knowledge” of those deceptive acts, Kennedy wrote.

The ruling was a defeat for investor advocates, but was “good news for business, the U.S. economy and international trade,” Tim Bishop of the law firm Mayer, Brown & Platt told the Los Angeles Times.

The ruling falls in line with the 1994 court decision protecting accountants from claims of aiding fraud. Both cases reinforced that suits must be directed at the company that tricked its investors, and not parties that worked for them.