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Weighing what has been billed as the securities fraud case of the decade, the Supreme Court on Tuesday seemed poised to slam the door shut on investor class actions aimed at deep-pocket third-party defendants such as accountants, lawyers, and bankers. The fast-paced, hourlong oral arguments in Stoneridge Investment Partners v. Scientific-Atlanta and Motorola played out before a Supreme Court chamber packed with spectators, including Enron plaintiffs, who have a big stake in the outcome of the case. Chief Justice John Roberts Jr. took a leading role in the arguments, repeatedly asserting that the high court should “get out of the business” of expanding private causes of action for investors without the express say-so of Congress. “Congress has taken over,” Roberts said, citing recent legislation aimed at curtailing investor class actions. Roberts and Justice Stephen Breyer had initially recused themselves from the case, presumably because they owned stock in Cisco, the parent company of both Scientific-Atlanta and Motorola. Roberts apparently sold his holdings to re-enter the case, though he made no public explanation for his return. But as the arguments began on Tuesday, Breyer rose and left the chamber, signaling that he remained recused, evidently because he, unlike Roberts, still owns Cisco stock. On the resulting eight-member Court, Justice Samuel Alito Jr. could be the key vote, and his questions seemed to indicate he thought that “aiders and abettors” in securities fraud, who can be sued by the Securities and Exchange Commission, should not be viewed in the same way legally as the principal defrauders. Alito asked no questions of lawyers arguing for the corporate defendants — sometimes a signal of support. Only Justices Ruth Bader Ginsburg and David Souter appeared to be looking for middle ground that would allow private lawsuits in some instances. If true, then the Bush administration and an array of corporate and professional entities and associations can breathe a sigh of relief that the Court won’t allow suits against those who play a secondary role in big-time corporate fraud. In his brief to the Court, Solicitor General Paul Clement warned that siding with investor-plaintiffs would expose “customers, vendors, and other actors far removed from the market to billions of dollars in liability.” Quentin Riegel, general counsel of the National Association of Manufacturers, who attended the arguments, pronounced himself “cautiously optimistic” that the Court will not go along with the investors’ position. “They seemed to recognize that the broad rule sought by the petitioner would be hard to limit.” Stanley Grossman of New York City’s Pomerantz Law Firm appeared to gain little traction with his argument on behalf of investor-plaintiffs that third parties, far from being “innocent bystanders,” can be integral to the fraud and should be held to account in private litigation. Several justices seemed to take his argument to mean that third parties could be held just as culpable through private lawsuits as the main defendant. Arguing on the other side was Mayer Brown’s Stephen Shapiro, a veteran of Supreme Court litigation who once advised advocates to “go for the jugular.” On Tuesday he did just that, asserting that “Congress wanted cases like this one to be handled by an expert and disinterested administrative agency,” not through private litigation that would harm the economy. Deputy Solicitor General Thomas Hungar also assured the Court that the SEC has the power to exact civil fines from secondary actors and distribute them to investors. The case before the Court began when investors, led by Stoneridge, sued cable company Charter Communications for inflating its financial numbers to defraud shareholders. In 2004, Grossman’s Pomerantz firm reached a $146 million settlement with Charter, but it continued to pursue Scientific-Atlanta and Motorola, two companies that sold cable boxes to Charter. The suits against the two vendors were dismissed in the U.S. District Court for the Eastern District of Missouri, with Judge Charles Shaw finding that at most they had “aided and abetted” Charter, which meant they could not be sued by private plaintiffs. The U.S. Court of Appeals for the 8th Circuit affirmed. Stoneridge appealed to the Supreme Court, claiming that in fact the vendors were active participants in Charter’s fraud, even if they did not make public misstatements about their role. According to Stoneridge, the scheme worked this way: Charter paid the vendors $20 more per cable box than it ordinarily would have, and it treated that as a capital expense. In return, the vendors agreed to use the extra cash to buy advertising with Charter, which the company reported as immediate revenue — inflating its cash flow by millions. But in briefs before the Court, the vendors claimed that they properly accounted for the transactions and made no representations that caused Charter stockholders to lose money. Financial services, accounting, and law firms have also raised the alarm that expanded liability would jeopardize the legitimate advice they give to companies that are later found to be committing fraud. “Clever and unscrupulous plaintiffs” could go after law firms, triggering “hugely expensive fact discovery,” asserted the Attorneys’ Liability Assurance Society, a professional liability insurance provider, in a brief by John Villa of D.C.’s Williams & Connolly. Such lawsuits, the brief said, “can be catastrophic for a law firm.” On the other side, consumer groups and 32 states argued just as vociferously that holding securities wrongdoers accountable is essential to maintaining the integrity of financial markets. Waiting in the wings is the Enron litigation, in which investors, under the same theory advanced by Stoneridge, are going after Enron’s bankers — including Merrill Lynch and Credit Suisse — for their role in the energy company’s massive fraud. A petition in the Enron case, Regents of the University of California v. Merrill Lynch, Pierce, Fenner & Smith, is pending before the high court. Investors claim that the bankers designed Enron’s fraudulent transactions.
Tony Mauro can be contacted at [email protected].

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