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Justices rule against investors in important securities fraud case

    WASHINGTON — The Supreme Court on Tuesday ruled against investors who sue businesses for scheming to manipulate stock prices of publicly traded companies.
    In a 5-3 decision, the court gave a measure of protection from securities lawsuits to suppliers, banks, accountants and law firms that do business with corporations engaging in securities fraud.
    The ruling is likely to have an impact on a similar class-action lawsuit by shareholders who invested in scandal-ridden Enron Corp. Investors in Enron, once the nation’s seventh-largest company, are seeking more than $30 billion from Wall Street investment banks, alleging they schemed with Enron to hide its financial problems.
    ‘‘This is a very anti-investor opinion and it could severely impact the ongoing Enron case,’’ said Patrick Coughlin, lead attorney for Enron investors.
    In the case before the court, the justices ruled against investors who alleged that two suppliers colluded with Charter Communications Inc. to deceive Charter’s stockholders and inflate the price of the cable TV company’s stock.
    Charter investors do not have the right to sue because they did not rely on the deceptive acts of Charter’s suppliers, said the majority opinion by Justice Anthony Kennedy.
    ‘‘No member of the investing public had knowledge’’ of the suppliers’ deceptive acts, Kennedy wrote.
    Coughlin, the lawyer representing Enron investors, said the Enron lawsuit has somewhat different circumstances than the case against Charter’s suppliers.
    In the Enron case, ‘‘these investment banks did speak to the market about Enron’s operations in analysts’ reports and through underwriting, so we may be able to show that investors relied on that information,’’ said Coughlin.
    In dissent, Justice John Paul Stevens said the court is engaged in a continuing campaign to undercut investor lawsuits.
    Charter inflated its revenues by $17 million and ‘‘it could not have done so absent the knowingly fraudulent actions’’ of the two suppliers, Scientific-Atlanta Inc. and Motorola Inc., Stevens wrote.
    The lawsuit against Charter’s suppliers has been watched closely by business and industry, which argued that an adverse ruling would clear the way for a flood of lawsuits.
    ‘‘This is an important relief for manufacturers,’’ said Quentin Riegel, vice president for litigation at the National Association of Manufacturers. ‘‘It prevents creeping liability, attempts to expand primary responsibility from one party to third parties who were not involved in making misleading statements.’’
    In his opinion, Kennedy hit some of the same points business groups have been arguing.
    ‘‘Overseas firms with no other exposure to our securities laws could be deterred from doing business here,’’ Kennedy wrote.
    A liberal Supreme Court in 1971 endorsed investor lawsuits under antifraud provisions of securities law at issue in the current lawsuit. In 1994, a more conservative Supreme Court imposed limits on such lawsuits, prohibiting cases against third parties for aiding and abetting a company’s misstatements. The Republican-controlled Congress enacted the restrictions into law the next year.
    In a scheme allegedly designed to inflate the cable TV company’s revenue picture, Charter got Motorola and Scientific-Atlanta to buy advertising with money that Charter provided. Charter supplied the funds by paying a $20 premium on each of hundreds of thousands of cable TV set-top boxes, for a total of $17 million. The amount of the overpayments equaled the amount the two suppliers paid for the ads.
    Charter reported the advertising payments as revenue, a step that helped Charter meet Wall Street’s expectations for the fourth quarter of 2000.
    Motorola and Scientific-Atlanta allegedly backdated the contracts for the set-top boxes to make the advertising and the set-top boxes transactions appear unrelated. Scientific-Atlanta allegedly submitted documentation to Charter attributing the price increase to increased manufacturing expenses.
    Joining Kennedy in the majority were Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas and Samuel Alito. In his dissent, Stevens was joined by Justices David Souter and Ruth Bader Ginsburg.
    Justice Stephen Breyer disqualified himself from the case because he owns stock in Cisco Systems Inc., which now owns Scientific-Atlanta.

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