Lifting the Lid-Top US court weighs scope of fraud suits

By Rachelle Younglai

WASHINGTON, Oct 5 (Reuters) - The U.S. Supreme Court hears a case next week that could clear the way for investor lawsuits against banks and other third parties, including one from shareholders that lost billions when Enron imploded in 2001.

The outcome of the case, known as Stoneridge versus Scientific Atlanta, could determine whether banks, auditors and others can be held liable for fraud even when they are not directly involved in it.

In the Stoneridge case, and a pending suit involving Enron, plaintiffs are seeking money from outside entities rather than the companies in which they invested. The plaintiffs argue that those other entities' actions helped the companies defraud them.

Often the company at the center of a scandal goes bankrupt, leaving shareholders with few options. One way to recover money is to go after deep-pocketed "third parties" such as banks and other entities that worked with the company.

"This is a critical case to see whether shareholders who are victims of the most complicated fraud can recover their money," said Pamela Gilbert, a lawyer with Cuneo, Gilbert & LaDuca who is working on the Enron case.

Stoneridge Inc (SRI.N: Quote, Profile, Research), on behalf of Charter Communications (CHTR.O: Quote, Profile, Research) shareholders, sued Scientific Atlanta, a unit of Cisco Systems (CSCO.O: Quote, Profile, Research), and Motorola (MOT.N: Quote, Profile, Research), saying the companies participated in a scheme to inflate Charter's revenues in 2000.

But a lower court ruled in Scientific's favor, saying the law only prohibits the making of material misstatements and to rule otherwise would introduce potentially far-reaching uncertainties for day-to-day business dealings. The court also said decisions of this magnitude should be made by Congress.

An appeals court upheld the ruling and now the case is before the Supreme Court, which will hear one hour of arguments on Tuesday. It is not known when the court will rule.