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While far from an expert on securities liability laws, I’ve recently been made aware of a push by Senator Specter to essentially reverse a Supreme Court decision on the issue.  Since we’re expecting a nominee for retiring Justice Stevens’ spot on the court to be announced this week it seems like an issue that might start getting more scrutiny.

The decision in question is Stoneridge v. Scientific-Atlanta from 2007 where the court ruled that shareholders suing companies guilty of fraud could not target additional third parties that merely had business relationships with those responsible for the fraud.  Apparently, such lawsuits were the result of a legal theory called “scheme liability” and in the Stoneridge case shareholders where trying to sue Scientific-Atlanta and Motorola who were two vendors that had done business with Charter Communications which was accused of issuing a misleading financial statement.

Specter introduced legislation last summer to provide a legislative fix to the Supreme Court decision, but it hasn’t gotten out of committee yet.  Now he’s trying to attach the bill as an amendment to the financial reform bill pending in the Senate.

While some have alleged that Specter’s actions are intended to garner support from trial lawyers for his tough reelection fight, ultimately his motives matter less than the impact this legislation may have.  Widening the scope of securities fraud lawsuits will simply add more uncertainty and risk to the economy at a time when we’re struggling to recover from a damaging recession.

Additionally, it’s important to note that the SEC currently has the authority to seek criminal penalties for those who have aided and abetted fraud.  The legislative change sought by Senator Specter would simply open the floodgates to civil lawsuits.

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