Supreme Court Raises Bar for Class Actions

In a Charter Communications suit with implications for an Enron-related case, the judges rule 5-3 against investors who accused suppliers of colluding to deceive holders.

In a closely watched decision, the U.S. Supreme Court created new barriers to investors suing companies for alleged fraud aimed at inflating stock prices.

The 5-3 ruling, with the majority opinion written by Justice Anthony Kennedy, gave a measure of protection from securities suits to suppliers, banks, accountants, and law firms that do business with publicly traded companies, the Associated Press reported.

In the case, StoneRidge v. Scientific-Atlanta, the court ruled against investors who had accused two Charter Communications Inc. suppliers of colluding with Charter to deceive stockholders and to manipulate the stock price of Charter, the big cable-television company. Wrote Justice Kennedy, Charter investors don’t have the right to sue because they did not rely on the deceptive acts of Charter’s suppliers, according to AP.

The suit alleged that Charter’s vendors were involved in a sham transaction by the cable company involving behind-the-scenes dealings. Charter’s holders had trouble showing that their investment decisions derived from alleged misconduct by the vendors, in the view of one expert while the case was being heard. In fact, the investors had acknowledged that the vendors — including Motorola and Scientific-Atlanta (now owned by Cisco) — were not providing false information about Charter to the securities market, according to that expert.

Business advocates had worried that a pro-plaintiff ruling could clear the way for a flood of lawsuits. The Tuesday decision is seen as having an impact on a similar class-action lawsuit filed by shareholders who invested in Enron Corp. Those investors are seeking more than $30 billion from Wall Street investment banks, alleging they schemed with Enron to hide its financial problems.


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