Ruling in a highly significant business case, the Supreme Court today said investors who are seeking to recover damages in securities fraud cases cannot sue lawyers, banks and other businesses who allegedly help corporations manipulate stock prices.
The 5-3 decision, written by Justice Anthony Kennedy, says investors cannot sue those third parties because the businesses did not directly mislead them into buying or selling stocks. "The investors," Kennedy wrote, "did not rely upon their statements or misrepresentations."
The decision split the justices along ideological lines, with conservatives joining to limit the investor lawsuits. Justice Stephen Breyer did not participate in the decision.
The ruling is likely to immediately affect a massive lawsuit stemming from the Enron scandal. Investors have sued investment banks on Wall Street for about $30 billion, arguing the banks helped the company deceive its shareholders.
In the case before the court, investors in Charter Communications claimed that the cable company used its vendors, Scientific-Atlanta and Motorola Inc., in a scheme to inflate stock prices.
The investors alleged that Charter agreed to overpay its vendors for cable boxes, with the condition that the vendors would in turn, use the extra funds to purchase advertising from Charter. The alleged scheme enabled Charter to report higher returns from advertising revenue.
Charter Communications' stock price collapsed when it was disclosed that it faced a criminal investigation for a multitude of alleged fraudulent activities.
In legal papers the investors said they wanted to be able to hold the vendors accountable for the fall in the stock price. "The sole purpose of their deceptive conduct was to further the scheme to overstate Charter's revenue and operating cash flow," attorneys for the investors claimed.
Scientific-Atlanta and Motorola responded that they had no involvement in "the preparation or review of Charter's financial statements." The vendors also claimed that they made "no statements to Charter's investors or accountants and had no duty to do so."
In his opinion Kennedy wrote, "In these circumstances the investors cannot be said to have relied upon any of respondents' deceptive acts in the decision to purchase or sell securities; and as the requisite reliance cannot be shown, respondents have no liability to petitioner under the implied right of action."
John Engler, president and CEO of the National Association of Manufacturers, praised the decision, saying "Without question, a company must give accurate information about its own stock. But the actions of third parties are not covered by this provision in the law. The Securities and Exchange Commission has authority to punish companies that aid and abet illegal activities. The petitioners in this case were seeking an opening to go far beyond the law."
The ruling is a blow to Enron shareholders who lost billions of dollars when the company collapsed.
"The Supreme Court ruling will probably determine whether the Enron shareholders, victims of the largest corporate fraud in history, will be able to hold all the wrongdoers accountable for that fraud," Pamela Gilbert, a lawyer representing Enron shareholders, said in the fall.