Supreme Court says third parties not necessarily on the hook for corporate fraud

A Supreme Court ruling in StoneRidge v. Scientific-Atlanta essentially says that third parties involved in corporate wrongdoing are not liable to investors if they did not directly mislead investors. Simply put, if you partake in corporate fraud as a third party but don't lie to investors, they can't sue you. Investors now will only be able to sue those who directly mislead them.

Third parties might include lawyers or consultants who provide services (and possibly participate in the fraud). It's easy to see how this might be important in a case such as Enron. Banks may have known of fraud at Enron and may have even helped the fraud to continue, but as long as they weren't involved in misleading investors, they might be off the hook with this ruling.

The majority opinion, authored by Justice Anthony M. Kennedy, says that the SEC is responsible for going after those who participate in corporate fraud, and that private litigants should not be the ones pursuing them.

Analysts say this decision is anti-investor, while others contend that this decision was necessary to protect the many companies that may be doing business with those engaged in fraud. The line must be drawn somewhere in determining who is responsible for fraud and misleading investors, and this ruling does so quite clearly.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.