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Washington, D.C., Oct. 9, 2007— The U.S. Supreme Court today heard arguments in a securities lawsuit that will impact business and investors. The case, Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc, involves investors who lost money in a company’s accounting-fraud scandal, with plaintiffs arguing that federal securities laws grant them the right to seek damages from third-parties that unknowingly participated in fraudulent transactions.
John Berlau, director of CEI’s Center for Entrepreneurship , issued the following statement:
Today, the Supreme Court is hearing arguments in Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc. Commentators have called this an important case for business and investors. That characterization is correct, but not for the usual given reasons.
A ruling in this case that allowed broad "scheme liability" would hurt businesses and investors alike. Investors are harmed as excessive litigation hurts legitimate companies, and liability costs deprive shareholders of greater returns.
Companies should be punished for participating in fraud, whether alone or with other businesses. But firms cannot be expected to know if every firm they do business with is committing fraud at a given time.
A ruling for the defendants that clearly rejects this broad form of liability would be good for entrepreneurs and investors alike.
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