As expected, the Supreme Court today handed a win to third-party defendants including law firms, accountants and bankers in securities fraud litigation in the much-awaited ruling in Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola.
The 5-3 ruling with Justice Stephen Breyer recused said that the private right of action by investors against companies allowed by Section 10(b) of the Securities Exchange Act of 1934 does not extend to third-party vendors and others if investors did not rely on their statements or representations. The Court's swing vote Justice Anthony Kennedy authored the decision, and he was joined by Chief Justice John Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr. The outcome seemed clear from oral arguments last October, which we reported on here.
The Court once again displayed its distaste for class-actions, with Kennedy stating that expanding causes of action in securities litigation would damage the economy and "would allow plaintiffs with weak claims to extort settlements from innocent companies." Kennedy warned, however, that third parties with unclean hands are subject to enforcement actions by the Securities and Exchange Commission and other kinds of civil litigation. The decision will likely have a direct impact on the litigation surrounding the Enron collapse.
Mayer Brown's Steve Shapiro, who argued the case for respondents Scientific-Atlanta and Motorola, was happy with the ruling. "It is a win for investors because suits like this one take money from one group of investors at the expense of another group of investors, with big rake-offs for lawyers. And it is a win for the US economy."
Justice John Paul Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, dissented. Stevens criticized the majority's "mistaken hostility towards the 10(b) private cause of action." He invoked the old common law rule that "every wrong shall have a remedy." and even cited a 1980 Second Circuit decision, Leist v. Simplot, written by Judge Henry Friendly during the year that Roberts, now chief justice, clerked for Friendly. In that decision Friendly reviewed the history of implied causes of action in securities and other laws.
We'll have updates on the blog with more reactions to the decision and in a later story to be posted on LegalTimes.com.