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Court limits investor suits against 3rd parties
Breaking Legal News | 2008/01/16 07:02
In a case born of the accounting scandals that rocked the nation in the first half of the decade the Supreme Court Tuesday limited the ability of defrauded investors to sue accountants, bankers and lawyers who may have helped a company commit the fraud.

The 5-3 decision represents a victory for corporate America, the business lobby and the Bush administration, all of which urged the court to insulate those third parties from so-called "scheme liability," which attempts to reach outside companies who may have contributed to the stock fraud.

"The Supreme Court today handed down a major victory for the U.S. economy and investor welfare," said Stephen Shapiro, the Chicago lawyer who argued the defendants.

The ruling is likely to have a major impact on class-action lawsuits arising from the implosions of Enron Corp. and HealthSouth Corp., among others, making it less likely that those suits will survive. It brought a torrent of criticism from investor advocates and some on Capitol Hill, including Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee.

The decision, Dodd said, will "protect wrongdoers from the consequences of their actions."

The case involved investors who sued Scientific-Atlanta Inc. and Motorola Inc., vendors for cable company Charter Communications Inc., alleging that the vendors were part of a scheme to misrepresent Charter's revenue and pump up its stock price. When the accounting errors were revealed the stock price plummeted.

The dispute was one some observers labeled the "Roe vs. Wade" of securities law, with more than 30 friend-of-the-court briefs filed. When the case was accepted by the court, speculation mounted on the Bush administration's position. In an unusual move, the White House ignored the advice of the Securities and Exchange Commission, accepting instead the Justice Department's recommendation to side with such groups as the U.S Chamber of Commerce and the National Association of Manufacturers.

Justice Anthony Kennedy, writing for the five-justice majority, said that because the vendors made no specific representations about the health of Charter's finances to Charter's investors the vendors weren't liable under federal securities laws. Only the SEC has the authority to bring such "aid-and-abetter" actions against third parties, the court held.

Jeffrey McFadden, a Washington securities litigator, said, "The court looked at the case in very practical terms: Who were the parties that actually made the statements that deceived someone?"

In October Kennedy voiced concern that siding with the investors would result in an explosion of securities litigation. And on Tuesday he seemed to echo that concern in writing, "Were the implied cause of action to be extended to the practices described here, there would be a risk that federal power would be used to invite litigation beyond the immediate sphere of securities litigation."

Kennedy noted the potential impact on the U.S.economy, saying that "contracting parties might find it necessary to protect against these threats. Overseas firms with no other exposure to our securities laws could be deterred from doing business here."

Shapiro, with Chicago firm Mayer Brown, said the outcome actually benefits most investors because a decision the other way would have driven up the costs of outside legal and financial services.

Along with Kennedy, Justices Antonin Scalia, Clarence Thomas, John Roberts and Samuel Alito formed the majority. Justice Stephen Breyer recused himself from consideration of the case because he owns stock in one of the parties.

Justice John Paul Stevens, with Justices David Souter and Ruth Bader Ginsberg, dissented. Stevens wrote that Charter could not have pulled off the accounting fraud without the vendors' help and that the vendors knew that investors would rely on Charter's inflated stock price as a measure of the company's worth.


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Class action or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued. This form of collective lawsuit originated in the United States and is still predominantly a U.S. phenomenon, at least the U.S. variant of it. In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule. Since 1938, many states have adopted rules similar to the FRCP. However, some states like California have civil procedure systems which deviate significantly from the federal rules; the California Codes provide for four separate types of class actions. As a result, there are two separate treatises devoted solely to the complex topic of California class actions. Some states, such as Virginia, do not provide for any class actions, while others, such as New York, limit the types of claims that may be brought as class actions. They can construct your law firm a brand new website, lawyer website templates and help you redesign your existing law firm site to secure your place in the internet.
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