Supreme Court Rules Against Investors

Jan. 15, 2008 — -- 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."