Supreme Court appears hostile to securities liability case

If Tuesday's arguments in a widely watched securities case are any indication, the Supreme Court appears unlikely to expand liability in cases of accounting fraud to banks and other parties that had extensive business dealings with the Enrons of the world.

Instead, three justices likely to control the case's outcome — Anthony Kennedy, Samuel Alito and Chief Justice John Roberts — aimed skeptical questions at a lawyer seeking to sue Motorola and Scientific-Atlanta for allegedly deceiving shareholders of cable company Charter Communications.

"I see no limitation to your proposal for liability," Kennedy told the lawyer pressing the lawsuit.

The case will affect investor efforts to recoup billions of dollars lost in frauds at Enron, HealthSouth and other companies. Enron investors are targeting banks, including Merrill Lynch, while HealthSouth shareholders are suing UBS and other banks. Georgetown University law professor Donald Langevoort has called the case "securities law's Roe v. Wade."

Business groups say an adverse ruling would put honest companies at risk and dissuade foreign corporations from dealing with American businesses. Trade groups representing banks, accounting firms and law firms are urging the court to restrict "third party" lawsuits.

The Supreme Court in 1994 ruled 5-4 that federal securities law bars lawsuits for "aiding and abetting" another company's wrongdoing. Kennedy wrote that opinion, and two other current justices, Antonin Scalia and Clarence Thomas, joined the majority.

Motorola and Scientific-Atlanta, which is now a Cisco Systems subsidiary, say the investors are trying to circumvent that ruling by presenting a similar claim under a different label.

That argument resonated with Alito, who told shareholder lawyer Stanley Grossman, "I see absolutely no difference between your test and the elements of aiding and abetting."

Roberts noted that Congress changed the law in 1995 to permit aiding-and-abetting lawsuits by the Securities and Exchange Commission, but not by private shareholders. He questioned whether the court should authorize lawsuits when Congress has chosen not to.

"Isn't the effort by Congress to legislate a good signal that they have kind of picked up the ball, and they are running with it, and we shouldn't?" Roberts asked.

The lawsuit before the justices says that Charter overpaid Motorola and Scientific-Atlanta by $17 million for television set-top boxes and that the two vendors then returned the money by buying advertising at inflated rates on Charter's cable systems.

Charter allegedly then added the $17 million in phony revenue to its books. The lawsuit says the set-top box contracts were backdated to make the two sets of transactions appear unrelated. Charter isn't involved in the Supreme Court case.