By Kenneth Mitchell-Phillips
The Supreme Court, in what's considered to be the most important securities fraud case in years, has placed significant obstacles in the way of securities litigation plaintiffs attempting to hold third-party defendants liable for broad "scheme liability" for their tangential roles in corporate fraud. The decision came through the Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc. case, in which investor groups sued the cable operator Charter Communications and its suppliers for a deceptive arrangement that gave the company's books the illusion of an additional $17 million in revenue.
By a 5-3 vote, the Court said that because investors victimized by Charter did not rely on any statements or omissions made by the vendors Scientific-Atlanta and Motorola, the vendors could not be held liable under Section 10(b) of the Securities Exchange Act of 1934. As a result of the decision, plaintiffs must be able to show that they relied, in making their decision to acquire or hold stock, on the deceptive behind-the-scenes behavior of these financial institutions, often called secondary actors. However, if their behavior that was never communicated to the marketplace, then the court will not hold that their actions induced reliance. According to Justice Anthony M. Kennedy, who wrote for the majority, "Without such a limitation on the concept of reliance, potential liability would reach the whole marketplace in which the issuing company does business."
The Courts decision is considered to be an end to the concept of "scheme liability" and a major victory for investment banks, accountants and vendors, and even lawyers who have become targets of class-action lawsuits accusing them of having engaged in a fraudulent scheme with a company that actually issued the stock.
