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The Stoneridge Case: Supreme Court Limits Securities Fraud Lawsuits

January 15, 2008

In a case billed as one of the most important securities cases to reach the high court in decades, the United States Supreme Court handed business a significant victory on Tuesday, restricting the ability of shareholders to sue secondary players like investment banks, accountants and lawyers for securities fraud violations. 

The case, Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, has garnered an incredible amount of attention in recent months.  In simple terms, the Supreme Court had to determine whether shareholders of companies that commit securities fraud should be able to sue accountants, lawyers and other third parties that allegedly participated in the fraud, even if the entities never made fraudulent statements.  This concept of expanding liability to third parties is commonly referred to as “scheme liability.” 

In a 5-3 decision written by Justice Anthony M. Kennedy, the Supreme Court refused to expand liability to secondary actors, holding that any decision to give private litigants the power to sue aiders and abetters “is thus for the Congress, not for this court.” Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr. joined the majority opinion. 

The Stoneridge ruling offers considerable protection for accountants, lawyers and others who may know about corporate malfeasance but fail to communicate with the investing public.  Business groups had expressed concern that expanding the universe of players who could be sued in a securities fraud case would unleash a flood of new class action lawsuits, possibly creating the next class action bonanza.  Such expansive liability would certainly have meant that law firms, investment banks and accounting firms would become prime targets of abusive securities lawsuits simply because of their deep pockets.  The Supreme Court agreed, noting that "extensive discovery and the potential for uncertainty and disruption in a [class action securities fraud] lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies."  Expanding liability to secondary actors would, Justice Kennedy wrote, "expose a new class of defendants to these risks." 

Justice John Paul Stevens, joined by Justice David Souter and Justice Ruth Bader Ginsburg, dissented.  The dissent harshly criticized the majority for its "continuing campaign to render the private cause of action under §10(b) toothless."  Justice Stephen G. Breyer recused himself from the case because he was a shareholder in one of the parties. 

For most court observers, the Supreme Court's decision was expected.  At oral argument last October, the justices' comments and questions left most convinced that the business friendly court would not expand the scope of liability in securities fraud cases. 

The considerable interest in the Stoneridge case is best exemplified by the number of “friend of the court” briefs filed by various individuals and entities interested in the outcome of the case.  All told, more than 100 separate individuals and entities filed "friend of the court" briefs.