U.S. state regulators and the securities industry lobby are taking opposite sides in a pending U.S. Supreme Court case.

The Securities Industry and Financial Markets Association issued a statement Wednesday in response to the pending case, Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, indicating that the court’s ruling in the case could determine whether shareholders can collect damages from investment banks, attorneys, accountants, and other third-parties who did business with a company that engaged in fraud. “Such an outcome would unnecessarily generate significant additional litigation, costing billions of dollars to American businesses, and putting US companies at a competitive disadvantage to their foreign counterparts,” it said.

“Expanding the scope of class action lawsuits to include third-parties would send large ripple effects throughout the US economy,” said Marc Lackritz, SIFMA president and CEO. “The inclusion of third-parties would cause litigation costs to skyrocket at the expense of the American economy and its workers, by raising the costs for companies in the US and deterring foreign investment in our economy.”

“President Bush got it right yesterday in reiterating the administration’s policy of not expanding the scope of private shareholder litigation against third-parties,” added Lackritz. “As the President said, this is not a case concerning investor protection; it’s about overzealous litigation. The SEC already has all the necessary regulatory tools to recoup lost money for investors.”

However, the association of state regulators (the North American Securities Administrators Association) filed an amicus brief supporting an investor’s right to sue those who have participated in securities fraud through deceptive conduct, not just through misrepresentations and omissions. “NASAA and its members have an interest in the outcome of this appeal because it will profoundly affect the ability of investors to seek redress in cases where unscrupulous companies and individuals have actively participated with issuers in schemes to defraud the securities markets,” the brief says.

“As advocates for the rights of investors to seek redress, NASAA and its members have an interest in supporting reversal and restoring an interpretation of the law that is more in keeping with its language, intent, and underlying purposes,” it adds.

It also says that the court’s decision will also have a pivotal effect on the role of private actions as a deterrent against securities fraud. “Private actions by defrauded investors are an enormously important complement to regulatory enforcement actions as a means of policing the securities marketplace,” it says, noting that “private actions not only provide the principal means of compensation for victims of securities fraud, they also play a vitally important role in protecting the integrity of the marketplace through deterrence.”

“To the extent that the court erects unwarranted barriers to recovery in private actions — such as immunity for those who participate in fraudulent schemes through deceptive acts, not words — the court will undermine an important deterrent that benefits the marketplace as a whole,” it adds.