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Plaintiffs and defense attorneys alike called the U.S. Supreme Court’s much-anticipated ruling in Stoneridge Investment Partners v. Scientific-Atlanta a continuation of the court’s pro-business bent and a reaffirmation of existing law. The decision offers some protection to law firms, accounting firms, investment bankers and vendors from being sued by investors when the investors’ company partakes in illegal acts that lower the stock price. The court voted 5-3 with Justice Anthony M. Kennedy writing for the majority and Justice John Paul Stevens writing the dissent. The court, with Justice Anthony M. Kennedy writing for the majority, offered a bit of security to those third parties by ruling that “an implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements and representations.” It rejected the plaintiffs’ “scheme liability” argument that if a third party somehow participated in the scheme to defraud investors it was liable under Section 10(b) of the Securities Exchange Act of 1934 for a private cause of action. The court said that although respondents Scientific-Atlanta and Motorola assisted in Charter Communications’ scheme to inflate its earnings, it was only Charter Communications that put the false earning statements into the public domain. “In these circumstances, the investors cannot be said to have relied upon any of respondents’ deceptive acts in the decision to purchase or sell securities; and as the requisite reliance cannot be shown, respondents have no liability to petitioner under the implied right of action,” Kennedy said. He said the ruling is consistent with the narrow dimensions the court must give to a right of action that was not expressly authorized by Congress when it first enacted, and when it revisited, the law. Jay A. Dubow, a securities partner at Pepper Hamilton, said the Stoneridge ruling is “very significant” more for what it didn’t do. “It would have been sort of earthshaking if it would have gone the other way,” he said. A different ruling would have opened the door for all sorts of cases by investors against third parties, Dubow said. Lisa Wood, co-chairwoman of the securities litigation group at Foley Hoag in Boston, said in a statement that Stoneridge is the third securities case decided by the Supreme Court in the last three years, following Tellabs Inc. v. Makor Issues and Rights Ltd. and Dura Pharmaceuticals v. Broudo.Stoneridge continues the court’s recent trend of raising the bar for plaintiffs in securities class actions and in fact, this decision goes much further than any previous ruling in limiting the potential scope of liability of outside professionals in a shareholder lawsuit,” Wood said in the statement. While law firms that advise public companies might be breathing a sigh of relief, plaintiffs attorneys said the ruling doesn’t change much. “The ruling itself is not drastically different than what the law of the land is, if it’s different at all,” said Jeffrey A. Barrack of securities class action firm Barrack Rodos & Bacine. In a 1984 decision in Central Bank of Denver v. First Interstate Bank of Denver, the high court ruled that there was no private cause of action against aiders and abettors under Section 10(b). The majority in Stoneridge, which includes Chief Justice John G. Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr., contains some of the more conservative justices who are more business-friendly, Barrack said. That doesn’t mean, however, that the court shut out the plaintiffs side from filing these suits. Barrack said the court actually reiterated that nonspoken as well as spoken deceptive conduct on behalf of these third parties is actionable under Section 10(b). Stoneridge just happened to be a case that didn’t meet the criteria for either because the vendor defendants did not make any misstatements regarding the earnings of Charter Communications Inc. that were relied on by the investors. Lower courts in this case had said that only misstatements, omissions by one who has a duty to disclose and manipulative trading practices are deceptive under the meaning of Section 10(b), according to the opinion. “If this conclusion were read to suggest there must be a specific oral or written statement before there could be liability under Section 10(b) . . . it would be erroneous,” Kennedy said. When Central Bank was decided, it was a pleasant surprise for defense attorneys who had seen lower courts go the opposite way in the years preceding the decision, Dubow said. Ever since, plaintiffs attorneys have been trying to figure out how to bring third parties back into the picture for these class action suits, he said. Under Central Bank and Stoneridge, Dubow said, the Securities and Exchange Commission still has the authority to bring action against third parties. Stoneridge just reiterates that there is no private cause of action. Duane Morris securities partner Rebecca M. Lambreth said the court correctly upheld Central Bank and applied the law as Congress enacted it. “It provides clarification and certainty to an area the plaintiffs bar wishes very much to throw into uncertainty,” she said. A reverse decision would have “almost without limit” expanded the liability to a variety of third parties and would have increased the cost of doing business, she said. If the law didn’t allow for mistakes to be made, Lambreth said, everything related to doing business would be thrown into uncertainty. If Stoneridge went the opposite way, either advisers would be afraid to give full and accurate advice or people would just stop making decisions, she said. The ruling only serves to uphold what attorneys thought was existing law and the same protections are in place for those who feel fraud was perpetrated against them, Lambreth said. “Nobody’s been given any carte blanche to commit fraud here,” she said. State laws against fraud are still in place and the SEC still has the ability to prosecute aiders and abettors, she said. Timothy E. Hoeffner, a partner at Saul Ewing, has served as an independent examiner in an SEC action against Time Warner and focuses his practice on corporate governance. He said the “mega-frauds” in the earlier part of the decade – including Enron and WorldCom – resulted in the courts loosening their standards for actions against third parties. The Stoneridge ruling brings the standard back in line with the Central Bank decision, he said. “I don’t think anyone I know . . . would say this opinion is a surprise,” Hoeffner said. What will be interesting to watch, he said, is how this opinion affects a case still in the pipeline that is related to Enron and other third parties. The only surprise, he said, was that three of the justices dissented. Stevens’ dissent was joined by Justices Ruth Bader Ginsburg and David Souter. “The court seems to assume that respondents’ alleged conduct could subject them to liability in an enforcement proceeding initiated by the government, but nevertheless concludes that they are not subject to liability in a private action brought by injured investors because they are, at most, guilty of aiding and abetting a violation of Section 10(b), rather than an actual violation of the statute,” Stevens said. He said the majority actually departed from the Central Bank ruling by giving it an overly broad reading. Justice Stephen Breyer recused himself from the case.

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