Supreme Court Rejects "Scheme Liability" in Section 10(b) Securities Cases

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In a widely-anticipated decision, the Supreme Court yesterday refused to expand the implied private right of action for securities fraud under Section 10(b) to include investor claims for socalled “scheme” liability against those who advise or do business with securities issuers. In

Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., No. 06-43 (U.S. January 15, 2008), the Court held that Section 10(b) does not permit investors to recover from a “secondary” party that allegedly participates in a fraudulent scheme with an issuer, unless that party violates a duty to disclose in doing so, or the investors relied on that party’s public misstatements or acts.

In other words, defrauded investors cannot use Section 10(b) to sue business advisors or firms who did not directly mislead the investors, but who nevertheless worked with issuers that did. The Court’s decision in Stoneridge thus curbs the threat of vastly-expanded potential securities

law liability, not just for the issuer’s investment bankers, lawyers, accountants, and other advisors, but also for any firm that is or was a vendor, customer or business partner of the issuer.

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