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The Battle of StoneRidge

America's Supreme Court reduces companies' risk of being sued.
Economist Staff, The Economist
January 21, 2008

Sighs of relief were audible in boardrooms across America this week at the Supreme Court's long-awaited decision in StoneRidge Investment Partners v Scientific Atlanta. At issue were the circumstances in which a company can be sued for "scheme liability". On January 15th the court ruled that a firm could not be held liable for a securities fraud merely because it was a business partner of a company that committed the fraud.

The ruling, regarded as the most important in years on corporate-securities law, related to a case brought by investors in Charter Communications, a cable-television firm. They had sued two companies, Scientific Atlanta and Motorola, arguing that they had helped Charter artificially boost its profits in 2000 through its accounting treatment of set-top boxes they had supplied to the cable firm. The court found that because neither Scientific Atlanta nor Motorola made any statements that had been relied on by the investors, they bore no scheme liability.

Robert Monks, a corporate-governance activist, had predicted that if the court ruled this way it would further reduce the accountability of American business to shareholders. In the past couple of years the Supreme Court has made several rulings favouring corporate defendants over shareholders. One immediate casualty of the StoneRidge ruling is likely to be a $40 billion class-action suit against the financial-services firms that advised Enron. It is also likely to make it harder to bring successful suits against Wall Street advisers and ratings agencies over the subprime-mortgage meltdown.

Corporate lawyers had argued that, if the court found for the investors, it would increase the already excessive litigation risk facing firms, which acts as a deterrent to doing business in America. Though it is arguably the job of Congress, not the Supreme Court, to worry about the competitiveness of America's capital markets, that was clearly on the minds of the majority of the justices, who observed that, had they favoured the investors, "overseas firms with no other exposure to our securities laws could be deterred from doing business here...This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets."




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