The big business oriented majority on the U.S. Supreme Court has again asserted (this time in Stoneridge Investment Partners v. Scientific-Atlanta Inc.) the Court’s narrow view of the ability of investors to seek redress under the securities laws unless investors can show actual “reliance” on the behavior/communications of secondary actors such as banks and accountants. As already noted in the media, the decision may not bode well for a pending class action suit by Enron investors against investment banks. (see Linda Greenhouse, “Supreme Court Limits Lawsuits by Shareholders,” (N.Y. Times, January 16, 2008)).

In 1994, the Supreme Court began the process of unraveling investor initiated “aiding and abetting” cases under the 1934 Act in Central Bank of Denver v. First Interstate Bank of Denver. A number of cases since then have reached similar conclusions to the detriment of investors. In a high profile case decided in 2007, Tellabs Inc. v. Makor Issues and Rights, Ltd., the Court held investors to a higher burden to prove “intent” to defraud under the securities laws. Incidentally, the SEC filed an amicus brief adverse to the position of investors in that case.

Investors in securities arbitration fare no better. When investors sought redress for damages sustained in the “dot-com” bubble that peaked about eight years ago, they suffered a major setback as an unintended consequence of a seminal 2003 ruling by the late Judge Milton Pollack of the Southern District federal court in New York when he dismissed class-action lawsuits against analysts at Merrill Lynch (In re Merrill Lynch & Co. Inc.). In an oft-quoted diatribe against investors who had not met the court’s standard for proving “causation,” “the Judge blamed the plaintiffs for expecting federal securities laws ‘to underwrite, subsidize and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches.’” (Obituary for Judge Pollack by Damien Cave, N.Y. Times, August 16, 2004) That decision had a ripple effect that resulted in arbitrators not only limiting evidence of analyst wrongdoing but outright dismissing cases pending in securities arbitration based on the same reasoning.

Now more than ever, it seems that buyers must beware.