Supreme Court Rejects “Scheme Liability” Theory for Extending Implied Rights of Action for Securities Fraud

January 16, 2008
The Supreme Court firmly rejected extension of the implied civil cause of action for federal securities fraud to secondary parties under the “scheme liability” theory in its decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. The decision, issued on January 15, 2008, provides considerable protection to secondary parties from exposure to the potentially significant damages associated with securities fraud class actions. It also represents the latest in a series of high court decisions that narrow the scope of potential private claims for securities fraud while raising the pleading bar to make out such claims. The Court’s decision also reflects an increasing sensitivity to extrajudicial policy concerns regarding the impact on the U.S. economy from litigation that places the domestic markets at a disadvantage in the global economy.