The U.S. Supreme Court heard arguments in a case that could determine the ability of defrauded investors to sue third parties in an accounting fraud case, including a company's outside auditors, advisors and lawyers.
The case, Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. and Motorola Inc., involves cable TV provider Charter Communications, which had an agreement with two set-top-box makers, Motorola and Scientific-Atlanta, now owned by Cisco Systems. Charter overpaid for the boxes by $20 each, or about $17 million total, but claimed the extra money went for advertisements from the equipment makers. The company was thereby able to pump up its revenue to meet earnings expectations.
Charter eventually paid $144 million to settle a class action lawsuit brought by investor Stoneridge. Stoneridge then sued Motorola and Scientific-Atlanta, even though it had not invested in either company, but the suit was initially dismissed. The Supreme Court agreed to hear the case after an appeals court in a different case said shareholders could sue third parties under some circumstances.
However, the plaintiffs' lawyers met with skepticism from some of the justices hearing the case. Associate Justice Antonin Scalia pointed out that federal law imposes limits on shareholders' capacity to sue companies they don't hold shares in, while Chief Justice John Roberts criticized the notion of expanding a precedent from 1971 that allowed shareholder claims in securities suits.
One observer believes that the justices are leaning toward the defendants. "It's always difficult to handicap cases, but I think from my understanding of the tenor of oral argument, the plaintiffs may have an uphill fight," said attorney Thomas Dewey, a partner at the New York law firm Dewey Pegno & Kramarsky. "Chief Justice Roberts and Justice Alito are the key votes. I understand that both of them asked the plaintiffs' lawyers some very tough questions. Chief Justice Roberts appeared to indicate that he felt that it was an issue for Congress to address, rather than an issue for the court to address by expanding liability in the manner that the plaintiffs are seeking. It seems from the justices' comments that several of them were reluctant to, in their view, expand securities claims when Congress could achieve the same end if Congress wished to do that."
