Ruling likely to have an impact on class-action suit by Enron shareholders
The Associated Press
updated 3:06 p.m. ET, Tues., Jan. 15, 2008
WASHINGTON - The Supreme Court ruled Tuesday against investors who sue businesses that manipulate stock prices of publicly traded companies.
In a 5-3 decision that split along conservative-liberal lines, the court gave a measure of protection from securities lawsuits to suppliers, banks, accountants and law firms that do business with corporations engaging in securities fraud.
The ruling comes at a pivotal point for a similar class-action lawsuit covering more than a million shareholders who invested in scandal-ridden Enron Corp. Stockholders in Enron, once the nation’s seventh-largest company, are seeking more than $30 billion from Wall Street investment banks, alleging they schemed with Enron to hide its financial problems.
“This is a very anti-investor opinion and it could severely impact the ongoing Enron case,” said Patrick Coughlin, lead attorney for Enron investors.
Shortly after the decision, the justices put the Enron investors’ suit on their list of cases to consider Friday at one of their regular private conference.
The case the justices decided Tuesday has been watched closely by business and industry, which argued that an adverse ruling would open the door to a flood of frivolous lawsuits.
The outcome “is important relief for manufacturers,” said Quentin Riegel, vice president for litigation at the National Association of Manufacturers. “It prevents creeping liability, attempts to expand primary responsibility from one party to third parties who were not involved in making misleading statements.”
The justices ruled against investors who alleged that two suppliers colluded with Charter Communications Inc. to deceive Charter’s stockholders and inflate the price of the cable TV company’s stock.
Charter investors do not have the right to sue because they did not rely on the deceptive acts of Charter’s suppliers, said the majority opinion by Justice Anthony Kennedy.
“No member of the investing public had knowledge” of the suppliers’ deceptive acts, Kennedy wrote.
In his opinion, Kennedy hit some of the same points business groups have been arguing.
An adverse ruling for business would mean that “overseas firms with no other exposure to our securities laws could be deterred from doing business here,” Kennedy wrote.
Regarding the Enron case, the justices could refuse to hear it, which could spell its end, or the justices could send it back to the lower courts, where lawyers for the investors could try to revive it, though a federal appeals court has already ruled against them.
Coughlin, representing Enron investors, says the case has somewhat different circumstances than the suit against Charter’s suppliers.
In the Enron case, he said, “these investment banks did speak to the market about Enron’s operations in analysts’ reports and through underwriting, so we may be able to show that investors relied on that information.”
Dissenting in the case against Charter’s suppliers, Justice John Paul Stevens said the court is engaged in a continuing campaign to undercut investor lawsuits.
Charter inflated its revenues by $17 million and “it could not have done so absent the knowingly fraudulent actions” of the two suppliers, Scientific-Atlanta Inc. and Motorola Inc., Stevens wrote.
A liberal Supreme Court in 1971 endorsed investor lawsuits under antifraud provisions of securities law. In 1994, a more conservative Supreme Court imposed limits on such lawsuits, prohibiting cases against third parties for aiding and abetting a company’s misstatements. The Republican-controlled Congress enacted the restrictions into law the next year.
Joining Kennedy in the majority were Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito. In his dissent, Stevens was joined by Justices David Souter and Ruth Bader Ginsburg.
Justice Stephen Breyer disqualified himself from the case because he owns stock in Cisco Systems Inc., which now owns Scientific-Atlanta.
The case is Stoneridge v. Scientific-Atlanta, 06-43.
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This strikes me as extremely problematic. Letting companies the knowingly help other companies commit fraud off the hook is kind of like allowing the getaway driver out of criminal charges just because she didn't walk into the bank with a gun. Sure, maybe the punishment should be different, but it is still complicity. The argument, as I understand it, is that the cable box supplier did not mislead the investors themselves and that because the investors did not know about the manufacturer's involvement they did not base their investment decisions on it. What the Hell is that? They based their investments on fraudulent numbers, right? So it seems that companies that are complicit misleading investors should be able to be held liable. While understanding the argument that a ruling in the opposite direction have might scared away foreign companies from doing business with US firms, that is a problematic argument both because the law should not be tempered because it is potentially economically expedient and because I would think that now investors might be more wary of investing in US companies since this ruling is libel to send the message that collusion by third parties is implicitly protected. Bad court! Bad court!
