Jan. 15 (Bloomberg) -- The U.S. Supreme Court put new limits on shareholder suits against a company's banks and business partners in a ruling that may thwart efforts to recoup billions of dollars lost in frauds at Enron Corp. and HealthSouth Corp.

The justices, voting 5-3, threw out a lawsuit by Charter Communications Inc. investors against two of its suppliers, Motorola Inc. and Scientific-Atlanta Inc. The court said the shareholders didn't show they relied on the alleged deception by the suppliers in making investment decisions.

The ruling is a triumph for business groups in what they called their highest priority in the court's 2007-08 term. Trade groups representing banks, accounting firms and law firms took an especially keen interest, saying their members might present tempting targets for shareholder lawyers.

``It is a complete and thorough victory for the defendants,'' said Donald Langevoort, a securities-law professor at Georgetown University in Washington. He previously called the case ``securities law's Roe v. Wade.''

The ruling will bolster efforts by Merrill Lynch & Co. and other banks to block a lawsuit by Enron investors and by UBS AG to defeat claims by HealthSouth shareholders and bondholders.

Ideological Split

The case split the court along ideological lines. Justice Anthony Kennedy wrote the court's majority opinion, which Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joined.

Kennedy wrote that allowing additional shareholder lawsuits ``may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.''

Justices John Paul Stevens, Ruth Bader Ginsburg and David Souter dissented. Stevens wrote that Congress enacted the federal securities laws ``with the understanding that the federal courts respected the principle that every wrong would have a remedy.''

Justice Stephen Breyer didn't participate in the case. He owns stock in Cisco Systems Inc., which is now Scientific- Atlanta's parent company.

The decision reinforces a 1994 Supreme Court ruling that federal securities law bars suits for ``aiding and abetting'' another company's wrongdoing. Congress changed the law in 1995 to permit aiding-and-abetting suits by the Securities and Exchange Commission, but not by private shareholders.

Scheme Liability

Investors said the 1994 ruling left room for accusations that outsiders took part in a scheme to deceive shareholders, while business groups said those types of claims were barred. The Bush administration supported the companies, though using different reasoning.

Kennedy's reasoning largely tracked that of the administration. He said so-called scheme liability suits ``would undermine Congress's determination that this class of defendants should be pursued by the SEC and not by private litigants.''

The ruling is a ``reaffirmation of law that the Supreme Court has stated previously and a reaffirmation of Congress's intent,'' said Stephen Shapiro, a lawyer with Mayer Brown Rowe & Maw who helped represent Motorola and Scientific-Atlanta.

The investors' lawyer, Stanley M. Grossman, said the court blocked the lawsuit ``based on limitations that Congress never enacted.''

Kennedy stopped short of declaring that companies can be held liable only if they make deceptive public statements or have some special duty toward shareholders. He said that ``conduct itself can be deceptive.''

Dodd Criticism

The decision drew criticism from one of the authors of the 1995 law, Senator Christopher Dodd, the Democratic chairman of the Banking Committee. Dodd said the decision will ``protect wrongdoers from the consequences of their actions.''

The suit before the court said that Charter overpaid Motorola and Scientific-Atlanta by $17 million for television set-top boxes. The two vendors allegedly then returned the money by buying advertising at inflated rates on Charter's cable systems.

Charter then added the $17 million in phony revenue to its books, the suit said. The set-top box contracts allegedly were backdated to make the two sets of transactions appear unrelated. Charter wasn't involved in the Supreme Court case.

Kennedy wrote that Charter, not the suppliers, ``misled its auditor and filed fraudulent financial statements.'' Charter wasn't involved in the Supreme Court case.

Enron Issue

Shapiro predicted the ruling would doom the lawsuits being pressed by Enron and HealthSouth investors. He said the Enron investor appeal presented the ``same issue'' that the court resolved in the Motorola case. The high court may act as soon as next week on that appeal.

Patrick Coughlin, a lawyer who represents both Enron and HealthSouth investors, said those cases are different because the banks were more deeply involved in the frauds than were Motorola and Scientific-Atlanta. He also said that Enron investors relied on Merrill Lynch's reports.

Still, today's ruling was ``a pretty anti-investor decision,'' Coughlin said. ``It's hard to understand how you could rely on deceptive conduct that was undertaken to deceive you behind the scenes.''

The lawyer for the HealthSouth bondholders, Sean Coffey, said today's ruling ``actually helps HealthSouth investors since it refutes UBS's argument that non-verbal conduct cannot give rise to securities fraud liability.''

UBS's lawyer, Robert Giuffra hailed the court for refusing to give trial lawyers ``the weapon of open-ended 'scheme' liability to exact huge and disproportionate settlements.'' Giuffra declined to comment on the impact the ruling might have on the HealthSouth case.

The case is Stonebridge v. Scientific-Atlanta, 06-43.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: January 15, 2008 17:47 EST