THE U.S. Supreme Court ruled last week that businesses that aid in schemes to manipulate stock prices of publicly traded companies are protected from lawsuits by investors. The 5-3 decision, while not unexpected from the conservative court, is unfortunate because it demonstrates once again that this court is not a friend of the common man.
At issue was a lawsuit brought by investors in cable-television provider Charter Communications against Scientific-Atlanta and Motorola, suppliers to Charter of TV set-top cable boxes.
Charter overpaid the two companies some $17 million dollars for cable boxes, then sold them an equal amount of advertising they didn't need, artificially inflating Charter's income figures and making the company more attractive to investors. After the fraud was discovered, Charter had to restate its earnings, the value of its stock fell, stockholders lost millions, and four company executives eventually pleaded guilty to criminal charges.
The rationale of Justice Anthony Kennedy's majority opinion was that because investors were not aware of the suppliers' deceptive acts, the suppliers were not at fault for investor losses. But the reality is that investors did rely on Charter's inflated earnings report, which would not have existed without what Justice John Paul Stevens called in his dissent the "knowingly fraudulent actions" of Scientific-Atlanta and Motorola.
This decision may well have a negative impact on a $30 billion class-action suit brought by Enron investors against Wall Street investment banks they claim schemed with the Houston-based energy company to hide its financial problems. But attorneys for the Enron investors hope to be able to show that their clients directly relied on the banks' analysts' reports and underwriting activities.
The high court's decision is being hailed by business groups, which argued that a ruling against Charter would have unleashed a flood of frivolous lawsuits. We fail to see, however, what is frivolous about holding companies to account for actions knowingly performed that result in predictable harm. Instead of a flood of costly nuisance suits, greater accountability would, as we've argued before, reduce future litigation because companies would be forced to act responsibly.
Indeed, the argument before the court reminded us of the lawyer who, in defending the driver of the getaway car in a bank heist, says his client is blameless because he's not responsible for what his passengers did while inside the bank. That argument wouldn't fly in a bank heist, and it shouldn't have had any legs before the highest court in the land.
Shame on the court for giving businesses new legal license to help other companies steal.