By: Scott B. Riddle, Esq.

This is not a bankruptcy case, but it will be applicable in many large bankruptcy cases involving allegations of fraud by shareholders or investors.

On January 15, 2008, the United States Supreme Court entered an important decision in Stoneridge Investment Partners v. Scientific-Atlanta (06-43) (click here to download the opinion).

There is no need to re-invent the wheel here, or wait on law review articles to analyze the case.  Lawyers and scholars have already provided a thorough analysis of the important two-day old opinion.  Here are just a few of the articles:

From the Supreme Court Blog

The Supreme Court, in one of the most important securities law rulings in years, decided Tuesday that fraud claims are not allowed against third parties that did not directly mislead investors but were business partners with those who did. …

Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive. One impact of the decision is likely to be the scuttling of a massive $40 billion lawsuit against financial institutions growing out of the Enron scandal. The Court has a case on its docket involving that very dispute, and Tuesday’s ruling will be followed up soon, perhaps by next week, with action on that case — California Regents v. Merrill Lynch, et al. (06-1341).

Justice Anthony M. Kennedy, who wrote the Stoneridge ruling, said the private right to sue for securities fraud “does not reach the customer/companies because the investors did not rely upon their statements or misrepresentations.” The ruling upheld a decision by the Eighth Circuit Court rejecting claims against Scientific Atlanta, Inc., and Motorola, Inc. The investors contended that those two companies helped a giant cable TV firm, Charter Communications, inflate artificially its financial statements in order to bolster its stock’s price. The investors contended that the two companies should be treated as “primary violators,” even though they had not themselves issued any public statements to advance the alleged manipulation plot.

Prof. Larry Ribstein’s Ideoblog

I’m very sympathetic with the result. The amicus brief I signed onto argued against a 10b-5 private right of action “against a non-trading, non-speaking entity that merely ‘enables’ the commission of an alleged fraud by a public company on its shareholders.”

My problem is that, instead of focusing on the type of conduct that should get a defendant into trouble under the securities laws, the Court focused on reliance. This is a weak theory once you accept, as the Court does, that 10b-5 liability can be based on conduct rather than misstatements. Given the fraud-on-the-market presumption of reliance, it’s far from clear why reliance was missing here, as the dissent pointed out. …

Professor Stephen Bainbridge has a primer on the case on his Business Associations Blog, and summarizes the opinion in this post.  

 A few other random articles: