U.S. Supreme Court Curtails Investor Lawsuits: Subprime Exposure

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Breaking Developments Affecting the London Market

The United States Supreme Court dealt a significant blow to investor lawsuits in a decision issued on January 15, 2008. In Stoneridge Investment Partners v. Scientific-Atlanta, Inc. (06-43), the Supreme Court curbed the ability of shareholders to recover damages from “secondary”

parties, which could include investment banks, lawyers, accountants, consultants and other parties.

Secondary Liability per Stoneridge

Stoneridge involved a class-action suit filed by investors against Charter Communicates, Inc., a cable television operator. The Stoneridge plaintiffs also named two of Charter’s suppliers, Scientific-Atlanta, Inc. and Motorola, Inc. The investors alleged that Scientific-Atlanta and

Motorola were liable for securities fraud under the Securities Exchange Act of 1934 and SEC Rule 10b-5. The complaint alleged that Charter entered into fraudulent agreements with its suppliers to permit Charter to report higher revenues and profitability, thereby misleading

investors. The investors claimed that the suppliers’ knowing participation in this scheme to defraud investors swept them into the purview of securities fraud.

Writing for a 5-3 majority, Justice Anthony Kennedy stated that investors could not establish reliance on any deceptive statements made by Charter’s suppliers to establish liability on the suppliers. Scientific-Atlanta and Motorola “had no duty to disclose, and their deceptive acts were not communicated to the public.” As a result, investors “cannot show reliance upon any of the [companies’] actions except in an indirect claim chain that we find too remote for liability.” Justice Kennedy was joined by Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito.

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