Supreme Court Limits Third-Party Securities Fraud Suits

By Aaron Poehler

Published on January 16, 2008

In upholding a lower court's dismissal of a lawsuit brought by Stoneridge Investment Partners on behalf of Charter Communications shareholders against Scientific Atlanta (which later became a unit of Cisco Systems) and Motorola, the Supreme Court affirmed that federal securities law does not extend to allow shareholders to pursue securities fraud action against third parties such as banks, financial advisors, and auditors, though those parties are still subject to civil actions and criminal penalties imposed by the Securities and Exchange Commission.

The lawsuit alleged that that Scientific Atlanta and Motorola conspired with Charter in a fraudulent scheme to artificially inflate Charter revenue and operating income figures by $17 million in 2000.

Speaking for the court majority, Justice Anthony Kennedy said that because investors had only an indirect relationship with the third parties involved in the case, Scientific Atlanta and Motorola were under no obligation to disclose or communicate their deceptive acts and that allowing such lawsuits to proceed would place American businesses at a competitive disadvantage in the international marketplace.

Justices John Paul Stevens, David Souter, and Ruth Bader Ginsburg, dissented from the court's decision.

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