US Supreme Court rules on third party liability towards company investors

On January 25, the American Supreme Court delivered its decision in Stoneridge Investment Partners LLC v Scientific-Atlanta Inc. et al., described by the UK's Financial Times as "the most important securities case in more than a decade". The issues and the finding of the majority (5 to 3) of the Court are well described in Justice Kennedy's opening remarks:

"We consider the reach of the private right of action the Court has found implied in §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and SEC Rule 10b–5, 17 CFR §240.10b–5 (2007). In this suit investors alleged losses after purchasing common stock. They sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price. We conclude the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations. We affirm the judgment of the Court of Appeals."

The decision is available here.

For further discussion, click here and here.