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Supreme Court Rejects Scheme Liability in Securities Fraud Litigation
January 15, 2008 Full PDF
In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., No. 06-43, the Supreme Court today ruled that private plaintiffs may state securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 only against defendants upon whose representations they relied. Parties who allegedly enabled or participated in a company's fraud on investors, but did not commit acts or make statements upon which investors relied, are not liable under that statute. This ruling rejects the legal theory - known as "scheme liability" - by which the plaintiffs' securities bar had attempted to circumvent earlier actions by both the Supreme Court and Congress eliminating "aiding and abetting liability" in private lawsuits under Section 10(b). It will be enormously consequential with respect to pending and future litigation against major financial market participants such as investment banks, and reflects the Court's most forceful reiteration to date of its intent to prevent judicial expansion of the scope of that statute.