In a 5-3 decision yesterday (opinion available here), the U.S. Supreme Court ruled against investors and in favor of certain customers and suppliers of publicly-held Charter Communications in Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc.  The investors “sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price.”  The Court, however, concluded that “the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.”

As summarized here by the WSJ, the case centered on the theory of “’scheme liability,’ i.e., whether third parties — investment bankers, lawyers, accountants and vendors — can be held liable under the federal securities laws for fraud committed by companies with which they do business.”  The Court’s ruling appears to rein that theory in by requiring actual reliance on a third party’s allegedly deceptive conduct.

A quick video analysis of the Court’s decision by the WSJ’s Ashby Jones is available below.

A Manhattan appeals court (NY Appellate Division, First Judicial Dept.) ruled December 27, 2007 that billionaire Sam Wyly, a major Computer Associates shareholder, was not entitled to obtain the work product of three plaintiffs firms in connection with his claim that the firms settled the CA securities class action for too little.

The court held that unlike a tradtional attorney-client relationship, in which the single voice of a client governs matters such as settlement terms, “the relationship between appointed counsel and an absent member in a class action differs fundamentally….”  The court added that:

In sum, while petitioner herein, as an absent class member in the federal action, was entitled to some of the benefits of the attorney-client relationship, such as the right to privileged communications with class counsel and the prohibition against attempts by defendants’ counsel to communicate with him, he had no right to direct the course of the litigation, testify at trial, participate in discovery, or dismiss class counsel. Moreover, petitioner was free to hire his own counsel to appear in the class action if he wished to employ a traditional attorney-client relationship, although his input into the litigation would still have been curtailed, or to opt out of the class action altogether if he was unsatisfied with his limited role.

The full opinion is available here.

On Friday, the U.S. Supreme Court granted cert. in the case of Tellabs Inc. v. Makor Issues & Rights (06-484).  The question presented in the case is framed as follows:

Whether, and to what extent, a court must consider or weigh competing inferences in determining whether a complaint asserting a claim of securities fraud has alleged facts sufficient to establish a “strong inference” that the defendant acted with scienter, as required under the Private Securities Litigation Reform Act of 1995.

Tellabs’ petition to the Court (available here on the SCOTUSBlog) argued that the Seventh Circuit held that "in ascertaining whether a ’strong inference’ of scienter has been adequately pleaded, it will not consider competing inferences of an innocent mental state that may also be drawn from the alleged facts."  Tellabs cited a four-way split amongst the federal circuits as to how to interpret the “strong inference” standard set forth in the PSLRA, with some circuits requiring a direct comparison of the plausibility of competing inferences followed by dismissal unless a culpable inference is the most plausible; other circuits refusing to consider competing inferences of an innocent mental state altogether and holding that a securities fraud complaint should survive “if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent;” and still other circuits falling on the spectrum somewhere in between these extremes.

The Court has ordered expedited briefing of the case, which SCOTUSBlog reports should permit the cases to be heard in the March session, which begins March 19.