WASHINGTON -- The Supreme Court ruled 9-0 yesterday that the agency set up by Congress to reimburse customers of failed securities firms cannot use the federal racketeering law to sue those who it believes caused a firm's failure by manipulating the price of stocks.
The ruling, with a majority opinion by Justice David H. Souter that four other justices signed, was based on narrow grounds. It left unresolved a broader question about the applicability of the racketeering law, known as RICO, to securities fraud cases.
The failure to address the broader issue apparently prompted a debate within the court, leading four justices to sign two separate opinions that took a different approach to the issue while reaching the same outcome.
Justice Souter's majority opinion held that Securities Investor Protection Corp., a non-profit agency financed by the securities industry to protect customers, does not have the right to sue stock manipulators under the racketeering law because neither the agency nor the customers are the direct victims of the stock fraud.
He said that Congress intended the Racketeer Influenced and Corrupt Organizations Act to be available only to those directly injured by racketeering activity.
In the case of a stock fraud that leads to the failure of a brokerage house, Justice Souter said, the "proximate cause" of any losses to the customers or to Securities Investor Protection Corp. is the failure itself, not the fraud.
"The link is too remote between the stock manipulation alleged and the customers' harm" to meet the "proximate cause" test in such a case, he said.
The decision, Holmes vs. Securities Investor Protection Corp., No. 90-727, overturned a 1990 decision by the 9th U.S. Circuit Court of Appeals in San Francisco.
That court had permitted the SIPC to bring a racketeering suit against Robert Holmes, a former officer of Aero Systems Inc.