Earlier this week the U.S. Supreme Court ruled in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. that stockholders cannot sue third parties that participate in a securities fraud scheme because the stockholders have not directly relied on the advice of the third parties. Such third parties potentially include banks, accountants, and law firms. The law that allows stockholders to sue for fraud requires that they actually rely on the misinformation they receive. The Court determined that even if a third party such as an investment bank contributes to fraudulent activity in connection with the sale of securities, the third party does not directly communicate misinformation to stockholders, and therefore the stockholders have no fraud claim against the third party.

The case will have direct implications for Enron stockholders who have been waiting for the Stoneridge decision to determine whether they can sue Enron’s former bankers. Unless Congress creates a private right of action against third parties, the Supreme Court has determined that stockholders only have claims against the fraudulent issuer.

Not surprisingly, investor-advocate groups have criticized the decision as anti-investor. The ruling eliminates one theory of third party liability; however, the SEC continues to have authority to pursue claims against any party that participates in securities fraud.