Justices skeptical of suit by investors

Case tests limits of 3rd-party liability

October 10, 2007|By David G. Savage | David G. Savage,LOS ANGELES TIMES

WASHINGTON -- Supreme Court justices signaled yesterday that they might not allow investors to sue bankers and other outside businesses who might have played key roles in a company's scheme to inflate its value.

The justices heard arguments in a closely watched case involving Charter Communications Inc. that asks who can be sued for a stock fraud - just the company that perpetrated the fraud or all those who participated in its fraudulent scheme?

It's a hundred-million-dollar question because lawyers for investors have sued investment bankers and others for the collapse of Enron Corp.

If they could sue key participants, they could win huge damages from the banking companies. But that prospect looked dim after yesterday's oral arguments.

Chief Justice John G. Roberts Jr. led the way in arguing that Congress and past rulings had made clear that lawsuits couldn't be brought against outside players.

In 1994, the Supreme Court sharply limited suits in stock frauds when it shielded those who "aid and abet" the fraud. Only the prime violators - the corporations and executives - who deceive investors can be sued, the court said then.

Congress could have overruled that decision. Instead, lawmakers said that the Securities and Exchange Commission could sue outsiders.

Yesterday, Roberts said the court should not create a new right to sue that wasn't recognized by Congress.

"We don't get into this business [of authorizing new lawsuits] anymore," he told a lawyer for the investors. "Isn't the effort by Congress to legislate a good signal that they have kind of picked up the ball, and they are running with it, and we shouldn't?"

Although his comments were phrased as questions, Roberts and a majority of the justices made clear they did not want to expand the reach of private lawsuits.

The case before the court began when Charter Communications, a St. Louis cable company, was accused of inflating its earnings by entering into a scheme with several of its suppliers, including Scientific-Atlanta Inc.

Charter offered to overpay for cable boxes from Scientific-Atlanta, with the understanding this money would be used to buy advertising from the cable company and thus improve its earnings.

Charter was sued for fraud and settled with a group of investors. Stoneridge Investment Partners, of Malvern, Pa., also sued Scientific-Atlanta for knowingly participating in the fraudulent scheme.

A federal judge in Missouri and the U.S. Court of Appeals threw out the claim because the outside vendor did no more than "aid and abet" the fraud.

Stanley Grossman, a New York lawyer for Stoneridge, argued that all key players should be held liable if they knew the deal was a scheme intended to deceive investors. Executives at Scientific-Atlanta "were not passive bystanders. ... Their deceptive conduct was integral to the scheme," he said.

Several justices questioned whether the outside vendor knew or cared about how Charter managed its business.

"They didn't care what Charter was going to do with" the extra advertising revenue, said Justice Antonin Scalia.

Justice Anthony M. Kennedy also worried about opening the door to lawsuits against companies for having done business with a business that engages in a fraud.

"I see no limitation to your proposal for liability," he told Grossman.

Only Justices Ruth Bader Ginsburg and David H. Souter spoke up for the broader theory of suing the key participants in a fraudulent scheme.

Justice Stephen G. Breyer had withdrawn from the case, apparently because he owns stock in one of the companies.

David G. Savage writes for the Los Angeles Times.

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