In what has been billed the ‘Roe v. Wade‘ of securities law, the Supreme Court narrowly declined to create a new investor claim against any company that did business with a fraudulent company. The Court ruled 5-3 in Stoneridge Investment Partners v. Scientific Atlanta that investors may sue only those who issued statements or otherwise took direction that investors relied upon when buying or selling stock. The decision is a huge blow to trial lawyers eager to cash in on $40 billion in lawsuits against financial institutions that did business with Enron.
The case involved tech bubble company Charter Communications who was successfully sued for fraud by Stoneridge for $144 million after four employees plead guilty to federal conspiracy charges. Stoneridge wanted to find some deep pockets though and went after Motorola and Scientific-Atlanta claiming the two participated in a scheme with Charter to defraud investors even though there was zero evidence the two suppliers played any role in producing Charter’s financial statements.
Justice Kennedy wrote for the majority:
In effect [Stoneridge] contends that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect. Were this concept of reliance to be adopted, the implied cause of action [for aiding and abetting] would reach the whole marketplace in which the issuing company does business