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updated 3/10/2004 4:49:34 PM ET 2004-03-10T21:49:34

A leading private U.S. business group has called on the Securities and Exchange Commission to investigate the role of  law firm Milberg Weiss in a class action suit led by an investment company that was also short selling the targeted company's stock.

The U.S. Chamber of Commerce said in a statement on Wednesday it had written to William Donaldson, SEC chairman, asking for an investigation "into whether the short sellers and Milberg Weiss had engaged in securities fraud."

Milberg Weiss is the most active U.S. law firm in class action securities law suits, while the  chamber of commerce has been active in lobbying on behalf of its private-business membership to limit legal liabilities under U.S. tort law.

The Chamber of Commerce move follows a ruling by a federal judge in California at the end of February in a class action suit brought against Terayon Communications, a maker of broadband cable equipment.

The original suit claimed that Terayon had misled the market over the prospects for its technology, blaming this for an eventual decline in its stock price in April 2000.

However, the order from chief judge Marilyn Hall Patel found that the lead plaintiff in the suit, Cardinal Investments, had been short-selling the company since August 1999. It had also taken out put sell options, undeclared in the class action suit, that expired the day after the class action suit was filed.

The judge also sharply criticized the role of Milberg Weiss in preparing the case, saying a number of issues "leave the court to speculate whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon's stock price".

The court also ordered Milberg Weiss to provide further information about the extent of its links with the plaintiffs, as well as related billings.

Copyright The Financial Times Ltd. All rights reserved.

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