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Wednesday, January 16, 2008

Stoneridge Decision is NOT Good for Investors

There’s a lot of propaganda circulating about the Supreme Court’s decision in the Stoneridge vs. Scientific Atlanta case. The court completed its trifecta of anti-investor decisions by deciding that third parties (investment banks, law firms, accountants, etc) are not subject to so-called “scheme liability.” In other words, investors cannot recover losses from third parties that contributed to securities fraud.

The decision is extremely unfortunate for the investors in Enron, many of which were employees whose pensions were mostly invested in the firm’s own stock. Because there’s nothing left of Enron, they will forever be left olding the bag regardless of the fact that investment bankers helped Enron managers create sham transactions that eventually led to the firm’s collapse.

Since the Supreme Courts decision yesterday, many pundits have been echoing the arguments of the business lobby. The argument goes that the Stoneridge decision is actually good for investors because litigation expenses drive down corporate earnings. Another creative argument is that diversified investors will be both victims and beneficiaries of fraud so it evens out.

Maybe, but it is the market’s integrity that is its strength in the long run. Not holding all the market’s participants accountable for fraudulent activities essentially grants a license to steal. Not matter how you slice it, that’s bad for investors. Second of all, allowing for investors to recover losses will not harm competition or corporate earnings. Rather it will even the playing field for those companies operating within the confines of the law.

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