Securities-fraud types have been awaiting the U.S. Supreme Court’s decision in Stoneridge Investment Partners v. Scientific Atlanta, and today the court 5-3 affirmed the 8th U.S. Circuit Court of Appeals in finding no private cause of action under Rule 10(b) of the Securities Exchange Act of 1934 for investors who were victimized by an apparent fraud.
In the absence of proof of reliance upon a plan to prop up stock prices, investors can’t sue third parties to the fraud who made misstatements because the statute does not extend to aiding and abetting liability and the misleading financial statements were not made public, the court found. The court rejected petitioners’ theory of “scheme liability,” which would allow them to rely not only on financial statements, but on the market transactions those statements reflect. If that rule were to be adopted, the Rule 10(b) action would reach the entire market in which the issuing company does business, the court said.
Justice Anthony Kennedy was joined in the majority by Chief Justice John Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel Alito. Justice John Paul Stevens wrote the dissent, joined by Justices David Souter and Ruth Bader Ginsberg. Justice Stephen Breyer recused himself.
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Justice Stevens wrote a great dissnet in which he chastised the majority stating that he "respectfully dissent[s] from the Courts' continuing campaign to render the private cause of action under [s] 10(b) toothless.... A theme that underlies the Court's analysis is its mistaken hostility towards the [s] 10(b) private cause of action."
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