January 15, 2008

SCOTUS Ruling Bad News For Enron Plaintiffs

The Supreme Court today drew a line around securities law, ruling that third-party defendants could not be sued for facilitating or failing to disclose fraud.

The 5-3 ruling in Stoneridge Investment Partners v. Scientific-Atlanta [PDF] was authored by Justice Anthony Kennedy. (Justice Stephen Breyer recused himself from this case.) This Supreme Court is not a fan of class-action lawsuits, and today's ruling reflected the justices' desire to cap those suits to a manageable minimum.

If the anti-fraud litigation were to apply to every party, Kennedy wrote, "it would revive in substance the implied cause of action against all aiders and abettors except those who committed no deceptive act in the process of facilitating the fraud; and we would undermine Congress' determination that this class of defendants should be pursued by the SEC and not by private litigants." In other words, there are already statutory safeguards against third-party fraud. Expanding the scope of securities litigation is not only unnecessary, but would invite a flurry of questionable lawsuits, according to the court's majority.

The ruling probably spells doom for pending lawsuits brought by Enron investors, who allege that by virtue of their roles as business partners, big banks like Merrill Lynch enabled Enron execs to perpetuate the illusion that the company was profitable.

For more on the ruling, see BLT, Bloomberg News and SCOTUSBlog.

Posted at 2:20 PM
Posted to: Constitution, Economy, Supreme Court
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