Supreme Court leans toward business in fraud case

WASHINGTON — Supreme Court justices on Tuesday tilted toward business as they heard arguments in a crucial case pitting corporations against investors.

The case will determine how far legal liability extends when corporations deceive investors. It became apparent Tuesday that conservative, business-friendly justices want to restrain investors' ability to sue third parties such as banks and equipment suppliers.

"My suggestion is that we should not be in the business of expanding (liability)," Chief Justice John G. Roberts said.

The shadow of Enron hangs over this case, called Stoneridge v. Scientific-Atlanta.

As with Enron's multibillion-dollar collapse, investors in the Stoneridge case contend that third parties were part of a larger fraudulent scheme. The legal question in both Stoneridge and in Enron-related lawsuits is whether — and when — these third parties can be sued under securities law.

Scientific-Atlanta made cable television boxes for St. Louis-based Charter Communications, a cable television provider. Stoneridge Investment Partners sued Charter over alleged fraud, in a case that has since been settled.

Stoneridge also sued Scientific-Atlanta and Motorola. The two companies overcharged for the cable television boxes, but then returned the $17 million in excess payments to Charter in the form of spurious advertising purchases. Investors say Charter used this revolving-door money to artificially inflate earnings and thereby keep the company stock price afloat.

"They were not passive bystanders," Stoneridge attorney Stanley M. Grossman said of Scientific-Atlanta and Motorola. "Their deceptive conduct was integral to the scheme."

The equipment manufacturers say that, unlike accountants or lawyers, they weren't filing statements used in the marketplace. Instead, the third-party companies said they were simply communicating with Charter and therefore shouldn't be subject to private lawsuits filed under securities laws designed to protect investors.

"The substance of these communications was never conveyed to investors," Chicago-based attorney Stephen M. Shapiro told the court.

Dozens of kibitzers have joined the case with amicus briefs, with the likes of the California State Teachers Retirement System and the Los Angeles County Employees Retirement Association aligning themselves with Stoneridge investors while the American Bankers Association and American Insurance Association are allied with the corporations.

Roberts joined Justices Antonin Scalia, Anthony Kennedy and Samuel Alito Jr. in revealing pronounced pro-business sympathies Tuesday. Scalia and Kennedy both previously ruled together in a 1994 case limiting business liability, a decade before Roberts and Alito joined the high court, and on Tuesday the veteran justices reiterated their concerns.

"I see no limitation to your proposal for liability," Kennedy told Grossman.

Scalia likewise cautioned that "I really don't understand what the limit is" under the investors' liability proposal, and he spoke dismissively of "private attorneys general" taking on companies. An equally skeptical Roberts wondered "how many links in the chain" lawyers could go to in pursuing lawsuits.

Justice Ruth Bader Ginsburg, and to a lesser extent Justice David Souter, appeared aligned with investors.

The Bush administration, against the recommendation of a divided Securities and Exchange Commission, sided with the business argument that third parties can't be sued under securities law because investors didn't rely on the actions of these third parties.

"The court is appropriately cautious about expanding liability," Deputy Solicitor General Thomas G. Hungar said approvingly.

Roberts had originally recused himself from the case, along with Justice Stephen Breyer. They gave no reason for their recusal decisions, though lawyers presumed it was because the justices owned stock in companies involved.

Roberts subsequently returned to the case, presumably because he sold any stock that caused a potential conflict. If the eight justices deciding the case split 4-4 — an unlikely outcome if Tuesday's session is any indication — then the lower appellate decision will remain intact and the Stoneridge investors will still lose.

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