Court Considers Investors' Rights in Stock Fraud The Supreme Court heard arguments Tuesday in a securities fraud case. The justices are being asked whether firms that help a publicly traded company look falsely attractive to investors can be held liable for damages.
NPR logo

Court Considers Investors' Rights in Stock Fraud

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Court Considers Investors' Rights in Stock Fraud


Court Considers Investors' Rights in Stock Fraud

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL: And I'm Robert Siegel.

At the Supreme Court today, arguments in what is being called the most important test of investor rights in decades. At issue is whether defrauded investors can sue third parties that were involved in stock manipulation. That could mean banks, accounting firms or insurance companies.

NPR legal affairs correspondent Nina Totenberg reports.

NINA TOTENBERG: At stake is billions of dollars and suits like the one brought by Enron investors against banks that allegedly helped Enron design phony transactions to cover up the company's perilous condition. The case before the court today involves somewhat similar allegations against a company called Charter Communications, which allegedly conspired with two of its vendors to make its balance sheet look better than it was.

The Securities and Exchange Commission alleged that in 2000, when Charter realized its cash flow would not meet projections, it offered to pay its set top-box vendors some $17 million more for their product than previously agreed to. And in exchange, the vendors would plow the money back into Charter, getting free advertising and making the company's balance sheet look more viable.

When Charter's stock finally tanked, the investors sued, not just Charter, but the vendors, too, alleging that they'd backdated documents and conducted sham transactions to facilitate a scheme to keep the stock price artificially inflated. A federal appeals court threw the case out, declaring the vendors were mere aiders and abettors. And under a 1994 Supreme Court decision, aiders and abettors cannot be held liable.

On the steps of the Supreme Court today, lawyer Stanley Grossman, representing the Charter investors, said that if the vendors can't be sued in this case, neither can lawyers, accountants, or banks who facilitated the Enron fraud. Any penalty imposed by the SEC, he noted, is a fraction of what can be recovered in an investor lawsuit. And the SEC depends on private lawsuits to help enforce the law. If, however, the Supreme Court rules there's no liability here he said...

STANLEY GROSSMAN: Unfortunately, you'll have people out there, like respondents here, who will be given a blueprint in how to defraud the public.

TOTENBERG: But Steven Shapiro, representing the vendors, said Congress never intended to allow such lawsuits.

STEVEN SHAPIRO: The Securities and Exchange Commission is supposed to bring these cases, not private trial lawyers.

TOTENBERG: Inside the high court, the investors' lawyer, Mr. Grossman, ran into a buzz saw of hostility. Chief Justice Roberts: nobody bought or sold stock based on the way the deal was structured. You're asking us to expand the rights of private investors to sue. Justice Kennedy: there are any number of kickbacks and petty frauds in business. I see no limitation to your proposal for liability.

Lawyer Grossman noted that the Securities and Exchange Commission has agreed with the investors in this case. That under the existing securities law, individuals and companies that actively and knowingly facilitate a fraudulent scheme to keep a stock price artificially high are themselves liable.

Justice Souter: are you making a distinction that doesn't exist in the real world? When would a third party engage in some fraudulent conduct not intended to affect the stock price? Lawyer Grossman said the limiting factors are that the third party has to engage in deceptive conduct and must do it knowingly and intentionally.

NORRIS: the question is, is there a middle category between an aider and abettor who does nothing deceptive and primary actors who make fraudulent statements to investors?

J: but Charter said, vendors, I need you to help us make a deceptive accounting. Justice Souter: do you take the position there would be no liability unless the vendors made a statement to the investors? Answer, yes. Justice Ginsburg: this fraud only works, though, if the vendors are silent. If the vendors communicate anything, then the whole thing fails.

Justice Kennedy: if we accept your position and we find an accountant or an attorney who prepares false statements, would they be liable? Answer, they would have to prepare false disclosure statements to investors. Independent actors who don't speak to markets are not liable for damages to investors.

Only eight justices heard today's argument since Justice Breyer is recused, presumably because he holds stock in one of the involved companies. That leaves eight justices.

And even Patrick Coglin, the lead lawyer representing Enron investors, couldn't count more than four votes for the proposition that defrauded investors can sue offending third parties to recover damages.

PETER COGLIN: Most likely a four-four vote is our best chance.

TOTENBERG: A four-four tie would mean the lower-court decision is upheld, the case against the vendors is tossed out, but there is no Supreme Court decision in the case. And the question would have to be reargued in a later case with a full court.

Nina Totenberg, NPR News, Washington.

Copyright © 2007 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.