WASHINGTON--The Supreme Court yesterday issued a decision thatplaces restrictions on securities lawsuits, an action welcomed byinsurers who provide directors and officers liability coverage.

In Stoneridge Inv. Partners, LLC vs. Scientific-Atlanta Inc.,No. 06-43, the court in a 5-3 decision threw out a lawsuit byCharter Communications Inc. shareholders against two of thecompanies' suppliers, Motorola Inc. and Scientific-Atlanta Inc.

The plaintiffs in the case had sued Motorola andScientific-Atlanta, two cable television equipment suppliersinvolved in a deceptive transaction that helped Charter, a cabletelevision company, inflate its earnings and hide its failure toachieve its financial goals.

The majority opinion upheld a federal district court inMissouri, which had dismissed the suit, and the 8th U. S. CircuitCourt of Appeals, which had upheld the dismissal.

Kevin M. LaCroix, of Beachwood, Ohio, an attorney and a directorof OakBridge Insurance Services, a brokerage which specializes indirectors' and officers' liability insurance, reacted by saying:"The position that the investors urged, if successful, would havehad a dramatic impact on the cost of liability insurance."

The decision was controversial, with Democrats in Congresscriticizing it. Sen. Chris Dodd, D-Conn., chairman of the SenateBanking Committee, said, "As the author of the Private SecuritiesLitigation Reform Act, I stand second to none in my commitment toprotect American businesses from frivolous litigation.

"But today's decision goes beyond that common-sense law," hesaid. "Instead of protecting innocent businesses, it would protectwrongdoers from the consequences of their actions. Such a misguidedstandard will do nothing to strengthen the competitive position ofAmerica's businesses and capital markets."

Earlier, Sen. Dodd and other Democrats in Congress had urged theBush administration, including President Bush and Solicitor GeneralPaul Clement, to voice disappointment that the Solicitor Generalchose not to file a brief with the Supreme Court expressing theviews recommended by the U.S. Securities and Exchange Commission(SEC) in the case.

Sen. Dodd wrote to SEC Chairman Christopher Cox in May of lastyear to inquire whether the SEC would continue its support of"scheme liability" in the case and to voice his endorsement of theSEC's position.

In its decision, the majority said the shareholders didn't showthat they relied on the alleged deception by the suppliers inmaking investment decisions.

The cable company arranged with the two suppliers to inflatetheir prices on cable boxes and then use the excess cash toadvertise on the cable system. The inflated prices were listed as acapital expense and the advertising was added to revenues helpingthe company meet securities analysts' expectations.

The term of art involved in the case was "scheme liability,"according to lawyers active in the business of insurance againstdirectors' and officers' liability.

That is the idea that third parties could be held liable forsecurities fraud committed by companies with whom they do business.This would have made investment bankers, accountants, law firms andsuppliers liable for fraud committed by their public companyclients.

The directors' and officers' liability insurance industry hadbeen awaiting the decision with bated breath.

Mr. LaCroix said a critical part of the majority opinion wasthat if investors' position were recognized, "then companies wouldseek to protect against the threats, which would raise the cost ofdoing business."

Further, he said, if companies had been forced to get insuranceto protect against not only the securities liability arising fromtheir own conduct but also with respect to every company to whomthey are a customer or vendor, "the cost of liability insurancewould have soared."

Moreover, he continued in comments on his blog, "the burden oftrying to underwrite this exposure would have been enormous aswell, not to mention extremely challenging."

Mr. LaCroix noted, "These same points could also be made withrespect to liability insurance for third-party professionals aswell."

He added that "these practical considerations support the viewthat the Stoneridge case is a defense victory and represents arejection of an expanded reading of Section 10(b) of the SecuritiesAct.

"But the more expansive possibilities may never really have beenin the cards, given the lineup of the court," he said.

"Yes, the decision could have changed things, but in the end, itdid not," he said. "In effect, Stoneridge represents a 5-3 vote forthe status quo. So while a decision for the investors could haveincreased the cost of insurance, the actual outcome on behalf ofthe vendors is unlikely to impact the cost of insurance."

American International Group, whose National Union FireInsurance Company of Pittsburgh, based in New York, is a majorplayer in the D&O market, agreed.

"While this is an important decision thwarting an attempt tobroaden management liability, it's unlikely to have any impact onD&O claims trends," said Chris Winans, a company spokesman. "AtAIG, our underwriting already assumed that the case would bedecided this way, so it doesn't affect our book of business."