Investors can't sue third parties if stock tanks: USSC

By Rob Luke | Jan 17, 2008

Justice Anthony Kennedy

WASHINGTON, D.C. -- Investors lost yet another U.S. Supreme Court battle over whether third parties charged with fraudulently helping lift a stock price can be held liable.

In Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc. (docket# 06-43) the USSC affirmed Jan. 15 an Appeals Court ruling against such liability. Stoneridge had sued alleging the respondents had allowed Charter Communications, Inc. to misuse its information to mislead auditors into issuing a false financial statement.

The Supreme Court held that the respondents could not be held liable for Charter's deception because the company's investors did not rely on their statements or representations. The plaintiffs must instead prove they relied on the defendants' actual misrepresentations to hold them liable.

Extending such liability could prove economically disruptive, wrote Justice Anthony M. Kennedy for the 5-3 majority. "The extensive discovery and the potential for uncertainty and disruption in a lawsuit could allow plaintiffs with weak claims to extort settlements from innocent companies," Kennedy wrote.

In dissent, Justice John Paul Stevens wrote that the respondents' action breached the relevant section of the 1934 Securities Exchange Act. "Congress enacted [the section] with the understanding that federal courts respected the principle that every wrong would have a remedy," Stevens wrote. "Today's decision simply cuts back further on Congress' intended remedy."

The USSC struck down a similar lawsuit several months ago by tossing a shareholder action that was based on an inference of intentional action, LNL reported. That ruling also made it tougher for company shareholders to bring lawsuits over tanked stocks.

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