“Supreme Court Rules Against Investors in Securities-Fraud Case”

Posted by Marc Hodak on January 15, 2008 under Economics | Comments are off for this article

That was the headline I saw from the WSJ on a story about the Supreme Court’s decision to restrict lawsuits against corporations. The actual article explains that the Supremes decided that:

investors can’t bring private lawsuits against third parties in corporate-fraud cases unless they relied on actions by those parties when making investment decisions.

In other words, if the company suppliers did not contribute to the fraud*, they can’t be sued. Which means that company suppliers can continue to supply companies in good faith without fear that they might be subject to lawsuits when they did not contribute to the fraud, even if the company they’re supplying is otherwise engaging in fraud. Which means that suppliers don’t have price that risk of these nuisance lawsuits into their services to the companies. Which means that shareholders won’t have to bear this pointless cost. Which means, when you look at it through an economic lens, that the Supremes could very well be seen as having ruled in favor of investors.

* Part of the definition of fraud is reliance on information that led to harm. The Supreme court is simply upholding this age-old common law interpretation of what constitutes fraud.