Chief U.S. justice questions 3rd-party lawsuits

By Rachelle Younglai

WASHINGTON (Reuters) - The U.S. Supreme Court's chief justice questioned on Tuesday whether allowing investors to sue third parties in a fraud, such as banks and accountants, would "expand" the law -- a move opponents say should be left up to Congress, not the courts.

Currently, shareholders can sue the company that allegedly defrauded them but cannot go after third parties, or the aiders and abettors, who were involved in putting together fraudulent transactions.

The Supreme Court heard arguments on Tuesday in a case that could set a precedent for third party lawsuits, including one involving Enron shareholders who lost billions when the company collapsed in 2001.

Chief Justice John Roberts questioned if plaintiffs were asking for an expansion of the law and why shouldn't "we be guided" by what Congress did after a previous high court ruling involving aiders and abettors. More than a decade ago, Congress clarified that the U.S. Securities and Exchange Commission had the authority to sue third parties but stopped short of allowing shareholders to do the same.

At issue is a lawsuit filed by Stoneridge Inc on behalf of Charter Communications shareholders against Scientific Atlanta, a unit of Cisco Systems, and Motorola Inc. Stoneridge claimed the companies schemed to inflate Charter's revenues in 2000.

A lower court ruled in Scientific Atlanta's favor, saying the law only prohibited material misstatements and to rule otherwise could introduce far-reaching uncertainties for businesses. It also said decisions of this magnitude should be made by Congress.

In the Stoneridge case and a similar pending lawsuit involving Enron shareholders, plaintiffs are seeking money outside of the companies they invested in.

Investor advocates and plaintiffs lawyers say that all parties should be held accountable if they knowingly worked on a transaction that defrauded investors. Such lawsuits would act as a deterrence against wrongdoing, they say.