Client Alert

The Supreme Court Rejects Securities Fraud Scheme Liability for Secondary Actors

January 17, 2008

William F. Sullivan, Peter M. Stone and D. Scott Carlton

On Tuesday, January 15, 2008, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the United States Supreme Court held that third parties are not liable under the federal securities laws for fraud committed by companies with which they do business even if they know or are reckless in not knowing that their business partner is using their transaction to commit fraud. This very important decision eviscerates securities plaintiffs attempt to sidestep, via claims of scheme liability, the Courts prior ruling in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. that companies cannot be liable for aiding and abetting securities fraud. Stoneridge likely sounds the death knell for scheme liability. As a result, the Courts decision should provide substantial comfort for companies, such as investment banks, law firms, accounting firms and vendors, engaging in business with high technology and other public companies particularly susceptible to federal securities lawsuits.

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