Supreme Court Affirms Limitations on Third-Party Liability for Securities Fraud

On January 15, 2008, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the Supreme Court affirmed in a 5-3 opinion the Eighth Circuit Court of Appeals’ decision, which dismissed claims for alleged violations of the federal securities laws. These claims were brought against business partners of a cable company that purportedly issued misleading financial statements. The Supreme Court opinion has been widely hailed in the popular media as imposing limits on investors’ ability to bring federal securities law claims against third parties such as banks, accountants, attorneys, and business partners.

In upholding the Eighth Circuit’s ruling, the Supreme Court assumed that the plaintiff had adequately alleged that certain third parties engaged in transactions with the cable company that had no “economic substance.” In particular, the Court described allegations contending that the cable company knowingly overpaid for cable boxes from the third parties and that the third parties then used those funds to overpay for advertising purchased from the cable company. The transactions were alleged to be inherently deceptive and to have been undertaken solely to allow the cable company to meet certain projected revenue and operating cash flow numbers. The Supreme Court, however, held that, even assuming that these facts were true, they still did not set forth a claim for securities fraud against the third parties.

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