In a case being watched closely by teacher-retirement funds, the U.S. Supreme Court ruled today that a federal securities law does not allow fraud claims against third parties who did not directly mislead investors, even if they were business partners of companies that did so.
The issues in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. (Case No. 06-43) are pretty far afield from education law that affects the classroom. But the case drew friend-of-the-court briefs from the California State Teachers’ Retirement System, the New York State Teachers’ Retirement System, and the New York City Board of Education Retirement System, among others, on the side of shareholders who were seeking to hold third parties liable for alleged corporate fraud. (Thanks to SCOTUSBlog for the links to the briefs.)
I wrote about the case in Education Week after oral arguments in October. The teacher-retirement funds generally argued that they are some of the most active institutional investors and see themselves as trying to improve the integrity of the public markets in the wake of Enron and other corporate scandals.
Writing for the court in a 5-3 decision, Justice Anthony M. Kennedy said the companies being targeted in the lawsuit, Scientific-Atlanta and Motorola Inc., had done business with cable-TV company Charter Communiciations Inc. as ordinary business partners and suppliers, and investors in Charter did not rely on those companies’ statements or misrepresentations “in the investment sphere.”
In dissent, Justice John Paul Stevens said that Charter “inflated its revenues by $17 million in order to cover up a $15 to $20 million expected cash flow shortfall. It could not have done so absent the knowling fradulent actions of Scientific-Atlanta Inc. and Motorola Inc.”