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Court takes up shareholder rights

In its biggest business case of the term, the high court examines the scope of investors' rights to sue in the wake of corporate fraud.

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It is being called the most important business case in a generation. One legal analyst has referred to it as the Roe v. Wade of securities law.

The case is Stoneridge v. Scientific-Atlanta and it arrives on Tuesday at the US Supreme Court amid the kind of hyperbole usually reserved for high-octane cases about abortion or race.

"This is a big one, and lots and lots of money is riding on the outcome," says Georgetown Law Center professor Donald Langevoort.

Jay Brown, a University of Denver law professor, says the case is a "watershed event." It is likely to establish the rules and boundaries for a string of pending shareholder suits, including those that involve the Enron scandal.

At issue in Stoneridge is who can be sued by angry investors in the wake of a major financial fraud at a publicly traded company.

Securities laws and regulations make clear that company officials directly responsible for such fraud can be sued. But what about consultants, vendors, investment bankers, lawyers, accountants, and others who may have had knowledge of the fraud and engaged in deceptive actions that helped keep it quiet?

Possible effect on economy

The case is being closely watched and extensively lawyered, with more than 30 friend-of-the-court briefs filed. It could dramatically expand the legal liability of a significant cross-section of American business. Some analysts are warning that if the Supreme Court rules for investors it would inflict a substantial drag on the US economy by encouraging an avalanche of class-action lawsuits against lawyers, accountants, bankers, and others on behalf of investors.

At the same time, investors – both big and small – argue that corporations and their business associates should be accountable to the investing public when they engage in deceptive and illegal activities. Putting executives on notice that investors expect them to be honest and truthful is a boost to the economy, they say, not a drag on it.

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