Corporate issuers won a notable victory in the U.S. Supreme Court today, as the court ruled that investors can’t necessarily sue firms that did business with a company that engages in fraud.

Investors attempted to sue the firms (that were customers and suppliers) that agreed to arrangements that allowed another firm to mislead its auditor and issue a misleading financial statement affecting its stock price.

In a five to three decision, the court ruled against the investors noting that the firms had no role in preparing or disseminating the financial statement, and so investors did not rely upon their statements or representations.

Three of the more liberal members of the court dissented (John Paul Stevens, David Souter and Ruth Ginsburg), and Justice Stephen Breyer took no part in the decision. The majority opinion was written by Anthony Kennedy and joined by Antonin Scalia, Clarence Thomas, Samuel Alito and chief justice John Roberts.

In the dissent, Stevens noted that, “The Court seems to assume that respondents’ alleged conduct could subject them to liability in an enforcement proceeding initiated by the government… but nevertheless concludes that they are not subject to liability in a private action brought by injured investors because they are, at most, guilty of aiding and abetting a violation, rather than an actual violation of the statute.” It claims that this conclusion rests on two faulty premises.

The Securities Industry and Financial Markets Association applauded the Supreme Court’s decision. “In its decision the Court correctly concluded that shareholders cannot sue investment banks, attorneys, accountants, and other third-parties who did business with a company that engaged in fraud, where the investors did not rely upon any deceptive acts of the third parties,” it said.

“Had the Court ruled any other way, the outcome would have unnecessarily generated significant additional litigation, costing billions of dollars to American business, and putting U.S. companies at a competitive disadvantage to their foreign counterparts,” SIFMA claimed.

“The Supreme Court clearly made the right decision in this important case. This decision ensures that over zealous litigation does not derail the U.S. economy,” said Ira Hammerman, senior managing director and general counsel at SIFMA. “The wrong ruling would have unleashed a tsunami of damaging side effects, infecting the entire U.S. economy and harming investors. In reaching its decision, the court clearly recognized that investors already receive substantial protections under the law, and the SEC and other securities regulators are already equipped with all the necessary regulatory tools to recoup lost money for investors.”

In August 2007, SIFMA filed a friend of the court brief in the case that made many of the same arguments that the Supreme Court reiterated in its opinion, including the unacceptable burden that American businesses would suffer if the Court had reached a contrary result.