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Investors lose another round at Supreme Court

Investors who already had lost money on their stocks lost again at the Supreme Court Thursday when the justices imposed a strict standard for shareholders suing companies accused of fraud.
/ Source: The Associated Press

Investors who already had lost money on their stocks lost again at the Supreme Court Thursday when the justices imposed a strict standard for shareholders suing companies accused of fraud.

The 8-1 opinion written by Justice Ruth Bader Ginsburg makes it easier for companies and business executives to seek dismissal of investor lawsuits at the very start of a case.

A lawsuit will proceed only if the facts alleged in it are “cogent and compelling” in pointing to an intent to deceive investors, Ginsburg wrote. Those factual allegations must be at least as compelling as “any opposing inference” suggesting innocence, she added.

Plaintiffs attorneys said almost all cases already meet the standard the court adopted.

And investors “can breathe a sigh of relief” that the justices did not embrace a more stringent rule favored by Justices Antonin Scalia and Samuel Alito in a concurring opinion, said attorney Barbara J. Hart, who represents institutional investors in major securities fraud cases.

Class-action lawsuits against public companies have helped shareholders recover billions of dollars following the wave of corporate scandals. The corporate world is pushing regulators to roll back some safeguards put in place following those scandals, which brought down companies such as Enron Corp. and WorldCom Inc.

Thursday’s ruling came in a shareholders suit against high-tech company Tellabs Inc.

The firm misled investors by engaging in a scheme to inflate Tellabs’ stock price from December 2000 to June 2001, according to the lawsuit. It said the company’s CEO provided false assurances of robust demand for the company’s products.

The business community says the Tellabs case is the kind of meritless investors’ claim that Congress intended to prohibit when it changed securities law 12 years ago.

Under the 1995 changes, a securities fraud complaint must allege facts giving rise to a “strong inference” that defendants acted with an intent to deceive investors.

The 7th U.S. Circuit Court of Appeals had ruled against Tellabs, saying the complaint should go forward if a reasonable person could infer from the allegations that defendants’ conduct was intentionally deceptive.

“That one-sided approach, we hold, was erroneous,” Ginsburg said in court.

The justices sent the case back so that the lower courts can assess whether the lawsuit should stand.

In dissent, Justice John Paul Stevens suggested the court had adopted too high a standard.

“There are times when an inference can easily be deemed strong without any need to weigh competing inferences,” he wrote.

The way the court of appeals ruled in the Tellabs case “is the way lawyers have been looking at complaints for 50 years, and that’s to give all plausible inferences to the plaintiff and virtually never to dismiss a complaint,” said Washington attorney Carter Phillips.

“What the Supreme Court has done now is made it clear that most securities claims ought not withstand a motion to dismiss,” said Phillips, who represented Tellabs in the Supreme Court case.

That view is “ridiculous,” responded Hart, the plaintiffs attorney.

“The defense bar is totally overstating the ramifications of this decision and there is unlikely a single case brought by an institutional investor that doesn’t articulate a ’cogent and compelling inference,”’ said Hart. “Indeed, the district court may find the Tellabs case is in that category.”

In a separate securities fraud case last year, the Supreme Court blocked state class-action lawsuits by stockholders who contend they were tricked into holding onto declining shares. One lawyer viewed the combined impact of the two rulings.

“If you take these two decisions together, they reflect the court’s attempts to give effect to congressional restrictions on groundless lawsuits,” said attorney Jay B. Kasner, who successfully argued last year’s case on behalf of defendant Merrill Lynch & Co.

On Monday, the court dealt another setback to investors when it sided with Wall Street investment banks that allegedly colluded to drive up the price of 900 technology stocks in the late 1990s. Shareholders subsequently lost billions when the dot-com bubble burst.