June 17, 2010 / 12:48 AM / 8 years ago

Senators nix plan to widen scope of fraud suits

WASHINGTON (Reuters) - Senators on Wednesday beat back a House measure giving shareholders the power to sue third parties such as banks and accountants not directly involved in securities fraud.

Earlier on Wednesday, Democratic House lawmakers agreed to make it easier for shareholders to sue those that aid and abet in securities fraud.

The House move would have reversed the Supreme Court’s 2008 decision in a case known as Stoneridge that protected third parties not directly involved in securities fraud.

“What we have in many of these cases of securities fraud, is those referred to as gatekeepers and others who assist in the fraud,” said Representative Maxine Waters, a Democrat who offered the proposal. “Our citizens should have the ability to bring actions against them.”

But that measure was ultimately rejected by senators crafting the final financial regulation bill, leaving House members to conduct a study of the issue first instead. A source familiar with the matter said senators ultimately decided not to support the House measure because the final bill would not have won support in the full Senate.

Senator Christopher Dodd, who shepherded the financial regulation bill through the Senate, proposed the study.

“The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point,” Dodd said at a conference committee meeting to merge the Senate and House bills.

The financial revamp of the U.S. financial system attempts to make Wall Street more accountable.

Widening the scope of fraud suits would harm the U.S. economy by introducing new liability risks to every aspect of doing business with public companies, opponents say.

But often the company at the center of a scandal goes bankrupt, leaving shareholders with few options. One way to recover money is to go after deep-pocketed “third parties” such as banks and other entities that worked with the company.

Shareholder activists say it would serve as a deterrent and allow investors to seek recourse from parties that knowingly engaged in fraudulent activity.

The Securities and Exchange Commission can sue third parties and make them repay ill-gotten gains, but it cannot sue for damages.

Editing by Chizu Nomiyama, Andrew Hay and Bernard Orr

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