Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola

In Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola, the US Supreme Court handed a win to third-party defendants — including law firms, accountants and bankers — in securities fraud litigation.

The 5-3 ruling written by Justice Kennedy held that the private right of action by investors against companies allowed by Section 10(b) of the Securities Exchange Act of 1934 does not extend to third-party vendors and others if investors did not rely on their statements or representations. The ruling demonstrated the Court’s distaste for class-actions, with Kennedy stating that expanding causes of action in securities litigation would damage the economy and “would allow plaintiffs with weak claims to extort settlements from innocent companies.” Kennedy warned, however, that third parties with unclean hands are subject to enforcement actions by the Securities and Exchange Commission and other kinds of civil litigation. The decision will likely have a direct impact on the litigation surrounding the Enron collapse.

Justice John Paul Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, dissented. Stevens criticized the majority’s “mistaken hostility towards the 10(b) private cause of action.” He invoked the old common law rule that “every wrong shall have a remedy.” and even cited a 1980 Second Circuit decision, Leist v. Simplot (638 F.2d 283), written by Judge Henry Friendly during the year that Roberts, now chief justice, clerked for Friendly. In that decision Friendly reviewed the history of implied causes of action in securities and other laws.

Source: New York Law Journal, Third Parties Shielded From Securities Suits, By Tony Mauro
January 16, 2008