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University of Iowa News Release


Jan. 18, 2008

Law professor Sale: Supreme Court decision a blow to shareholders' rights

University of Iowa law professor Hillary Sale said a U.S. Supreme Court decision earlier this week is a blow to shareholders who lose money as a result of corporate deception.

The case, Stoneridge Investment Partners v. Scientific-Atlanta, was decided Tuesday by the high court. In a 5-3 ruling, the justices said a company's shareholders who lost money because of a fraud committed by the company cannot sue third parties that assisted in the fraud.

Sale is an expert on corporate governance and securities law in the College of Law who helped to write an amicus curiae brief urging the court to uphold the shareholders' rights. She said the ruling severely limits shareholders' options when they lose money as the result of a fraud that reduces or wipes out the value of their stock.

"The decision means that a person has to be publicly identified as a speaker for the company and is making fraudulent statements," said Sale. "But the only people who have to be publicly identified according to federal law are the company officials who sign the financial statements and the auditors who approve them. This decision means shareholders have no access to secondary actors, such as banks, that knowingly help the fraud but say nothing deceptive publicly."

The case was seen by analysts as the most important business law case of the current court term because it determined who can be held legally liable for a fraudulent statement that causes investors to lose money. Current law says a person or company needs to make an intentionally deceptive misstatement or omission to be sued for fraud.

But Sale and the other signers of her amicus brief argued that some people can participate in the making of a misstatement without actually speaking.

Sale and her co-signers worry that as result of the decision, third-party companies might be more willing to participate in another company's fraud if they know they cannot be held liable by investors.

"We worry this could seriously impair the integrity of our securities markets by diminishing the deterrence value of securities litigation by prohibiting litigation against all of those responsible for fraudulent schemes," she said. "With this decision, investors can recover against only one company engaged in a fraud, even though frauds are frequently committed by multiple actors."

She said the case also means Enron-related lawsuits are likely dead. The suits are being brought by Enron shareholders against companies that helped the utility company engage in the massive accounting frauds that caused its collapse in 2001. Those companies, by Sale's analysis, are now probably protected from further litigation.

Sale said she hopes Congress responds to the Supreme Court's decision by passing a new law that makes it easier for shareholders to seek damages from third parties that help the company engage in fraud.

STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500.

MEDIA CONTACT: Hillary Sale, UI College of Law, 319-335-9225; Tom Snee, 319-384-0010,