Supreme Court to Examine Scope of Investor Rights

Securities case could impact Enron shareholders, banks.

ByABC News
February 12, 2009, 4:58 PM

Oct. 9, 2007 — -- The Supreme Court is set to take up the issue of investor rights Tuesday in what could be one of the most important securities cases the high court has considered in more than a decade.

At issue is whether third parties, such as vendors, accounting firms or banks, can be held primarily accountable when they knowingly contribute to a fraudulent scheme to inflate stock prices.

In the case before the court, investors in Charter Communications claim that the cable company used its vendors, Scientific-Atlanta and Motorola Inc., in a scheme to inflate stock prices.

The investors allege 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 say they want 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 claim.

Should the court rule that such vendors can be held accountable as "primary violators" in securities laws, the impact on the business community would be enormous.

Georgetown University law professor Donald Langevoort said that the case could have as large an impact on the business world as the landmark abortion case Roe v. Wade had in the arena of abortion rights.

"This is securities law Roe v. Wade," he said.

Langevoort said at issue is how deeply a secondary party has to be involved to cross from aiding and abetting to actual fraudulent behavior. According to Langevoort, the court will explore the question, "When do you cross the line as a behind the scenes player?"