Justices To Hear High-Profile Investor Lawsuit Case

With the Supreme Court back in session, Wall Street is looking with anticipation to a controversial case the justices will hear on Tuesday that could decide how far shareholders can go in seeking damages after being defrauded by companies.

At issue is "scheme liability," which would allow shareholders to sue third parties like investment banks, accountants and lawyers who helped companies deceive investors. A ruling in shareholders' favor by the Supreme Court could open the door for more such suits -- something banks and others would like to avoid.

This is one of the most important securities-related decisions that the Supreme Court will have handed down in a very long time. If it were to go the way of the petitioners you'd see a substantial increase in the amount of securities litigation.

The case -- Stoneridge Investment Partners v. Scientific-Atlanta Inc. -- has split the Bush administration and is the subject of intense political and industry-group interest. It also follows a spate of pro-business decisions from the high court.Moreover, the outcome of the case could affect a separate case pending at the court involving Enron shareholders' claims against big Wall Street banks. Those banks would basically be off the hook if the court rules in the defendants' favor in the Stoneridge case

The White House sided with investment banks and other parties in a brief in the Stoneridge case last summer, going against an argument from the Securities and Exchange Commission that shareholders should be allowed to sue third parties. Meanwhile, groups including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association have urged the high court to toss the case out, arguing that a victory for the plaintiffs would weaken U.S. competitiveness and jack up companies' litigation costs.

Top Democrats like Senate Banking Committee Chairman Christopher Dodd of Connecticut and House Financial Services Committee Chairman Barney Frank of Massachusetts have argued that plaintiffs should have the right to seek compensation from the third parties.

A ruling against the plaintiffs would continue a string of disappointments for investors.

In June, the justices ruled 8-1 that class action plaintiffs be required to show convincing evidence of fraud before initiating a lawsuit against a corporation. The case was Tellabs v. Makor Issues and Rights. Also in June, the high court sided with Wall Street banks in a case involving investors' ability to sue them for alleged antitrust behavior during the dot-com bubble of the 1990s. Investors alleged that banks including Credit Suisse Group manipulated initial public offerings of tech companies. Plaintiffs objected to the way banks shared information during the offering periods and said that they broke antitrust law. Justices disagreed, saying in a 7-1 ruling that allowing such suits would threaten the efficient functioning of the securities market.

A decision in the Stoneridge case is expected by the end of the year or early next year.