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Court Decision Limits Investor Lawsuits

A ruling from the U.S. Supreme Court Tuesday limited the recourse investors have in securities fraud cases.

A ruling from the U.S. Supreme Court Tuesday limited the recourse investors have in securities fraud cases.

The ruling came in a class action lawsuit filed by investors against Charter Communications for allegedly issuing misleading statements about its financial health. The case was initially filed in federal court in Missouri by Stoneridge Investment Partners LLC.

The ruling said that third-party companies are not liable in securities fraud cases because they are not directly involved in financial dealings that might influence investors.

In particular, the court said it had concerns about two other specific respondents named in the case, Motorola Inc. and Scientific-Atlanta Inc.

Both companies were identified in the opinion as suppliers and eventual customers of Charter Communications. The original lawsuit was filed when Charter's stock fell after it revealed that it had manipulated quarterly reports by changing some of its interactions with Motorola and Scientific-Atlanta.

The 5-to-3 ruling affirmed an earlier Court of Appeals decision. The majority opinion, written by Justice Anthony Kennedy, said that "the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations."

Justice Kennedy was joined in his opinion by Antonin Scalia, Clarence Thomas and Samuel Alito. The dissenting opinion was filed by John Paul Stevens. David Souter and Ruther Bader Ginsberg joined the dissenting opinion.

The U.S. Chamber of Commerce released a statement applauding the court's decision as "pro-investor" because it would limit the number of "frivolous lawsuits" filed against American companies.