High Court Decision Could Protect Subprime Players

A decision by the U.S. Supreme Court could make it more difficult for investors to sue over the collapse of the subprime mortgage market.

Yesterday's ruling puts strict limitations on when lawyers, accountants, and other professionals can be sued in securities fraud cases. The 5-3 decision in Stoneridge Investment Partners v. Scientific-Atlanta Inc. means that in many lawsuits over stock prices, only the "primary violators" of the alleged fraud can be sued. The court said private plaintiffs couldn't bring such suits against defendants for "aiding and abetting" fraudulent bookkeeping.

While the decision's most immediate effect is expected to be felt in lawsuits by Enron's investors against investment banks, the decision could also put limits on suits by investors in mortgage-backed securities over the ongoing subprime mortgage crisis.

"There are a lot of people, credit rating agencies, mortgage consultants, and others who are immunized by this decision," an expert on corporate governance at Columbia Law School, John Coffee, said.

"The importance of this decision to the subprime mortgage crisis is that professionals, whom we call 'secondary actors,' are less likely to be dragged into expensive litigation," a co-chairwoman of the securities litigation practice at Foley Hoag LLP, Lisa Woods, said. Other legal experts questioned whether the decision would hinder investors holding mortgage-backed securities. Yesterday's decision deals only with suits brought under federal securities laws.

"This doesn't mean that there couldn't be other common law fraud claims that you could bring," the director of the Manhattan Institute's Center for Legal Policy, James Copeland, said.

At the center of the Stoneridge case were sales deals between a cable television company, Charter Communications, and its suppliers that were allegedly conducted to pad Charter's books. The majority opinion, written by Justice Kennedy, notes that the alleged fraud "took place in the marketplace for goods and services, not in the investment sphere."

That seeming distinction between the "marketplace for goods" and the "investment sphere" could mean the effect of the decision is relatively narrow and wouldn't apply to some securities fraud cases.

"That could make all the difference," a class action attorney, Edward Labaton of the firm Labaton Sucharow LLP, said. The effect of the case, Mr. Labaton said, will be "how broadly or narrowly the courts read the 'investment sphere.'"