WASHINGTON -- In a major defeat for investors' legal rights, the Supreme Court voted 5-4 yesterday to bar damage lawsuits against business executives, lawyers and accountants who help someone commit securities fraud but do not break the law themselves.
Wiping out scores of lower-court rulings issued over nearly three decades and rejecting the view long held by the Securities and Exchange Commission, the court ruled that the nation's toughest investment fraud law does not apply to those who "aid and abet" others who violate that law.
The decision was written in such broad terms that it not only prohibits damage lawsuits by investors in "aiding and abetting" cases but, according to the dissenting justices, also may have curbed the power of the SEC itself.
"The majority leaves little doubt" that the SEC could not go after aiders and abettors in civil enforcement cases, the four dissenters said. But the SEC disputed that, saying in a statement that the ruling is not expected "to affect fundamentally" its enforcement program.
Some 15 percent of all SEC civil cases include complaints against those who provided help to those who broke the law. The commission had warned the court that wiping out such complaints would "sharply diminish the effectiveness" of its enforcement actions.
Although helping others commit securities fraud under the law at issue in the new ruling -- the Securities Exchange Act of 1934 -- may now be largely free from challenges in civil court, the Justice Department retains power to bring criminal charges against those who aid and abet fraud.
The part of the 1934 law at issue in the new ruling outlaws all manipulation or deception in buying or selling stocks and other securities. Since 1942, the SEC has enforced that law through its "Rule 10-b-5." For more than 20 years, the Supreme Court has allowed investors to sue for damages under that law.
But the court had ruled only on private investors' lawsuits against those who themselves broke the 1934 fraud law, and it had left unresolved whether such lawsuits could be aimed at those who simply assisted violators.
Yesterday's ruling came as a major surprise, since the court had not signaled that it would use a case involving a default on development project bonds in Colorado as the basis for a broad declaration on the scope of the legal risks of aiding and abetting securities fraud.
The case was filed by investors who bought 1988 bonds that had been offered to raise money for public facilities in a housing and commercial project in Colorado Springs. The investors claimed that the bond offering was a fraud because those securities were sold without fully disclosing doubts about the collateral behind them.
The investors' lawsuit was aimed not only at those who supposedly committed the fraud, but also at Central Bank of Denver, on the theory that the bank had aided and abetted those who broke the law.
A federal appeals court allowed that claim against the bank. The bank took the case on to the Supreme Court, seeking to test what an aider and abettor had to have done to be subject to a lawsuit.
The Supreme Court took the case, leading to yesterday's ruling that insulated the bank from the lawsuit, declaring that nothing in the anti-fraud sections of the 1934 law applied to aiding and abetting a violation of the SEC's Rule 10-b-5.
The Securities Industry Association predicted that the ruling will head off lawsuits filed in hopes of forcing an aider or abettor into paying some settlement.