Third party advisers to companies embroiled in sub-prime related claims cannot be sued

A US Supreme Court ruling will reduce the number of sub-prime-related claims to hit the London market, according to a top US law firm.

In the case of Stoneridge, the Supreme Court decided that third parties – such as investment banks, accountants and law firms – could not be sued if they had advised companies that became embroiled in sub-prime related litigation.

However, if a third-party company directly misleads investors, it would remain open to legal action.

Current US law allows shareholders to claim compensation if a company files false accounts or misleads them in other ways – as investors are currently arguing in the US sub-prime litigation.

London market insurers underwrite many of the directors’ and officers’ (D&O) and errors and omissions (E&O) policies that will be triggered by the litigation.

Timothy Bishop, partner at Mayer Brown in Chicago, said: “Insurance companies that write D&O and E&O policies for third parties are the main benefactors in this case. In cases where the issuer of securities – such as sub-prime securities – is bankrupt, investors will usually go to third parties in the search for deep pockets. As the law stands now, the more distant your relationship with the issuer, the less likely it is you can be sued.”

Bishop noted that after the Stoneridge decision, US congressman Barney Frank said he would seek to change the law should the Democrats come to power.

Frank could attempt to gain the support of other members of Congress to draft legislation overturning the Supreme Court’s decision.