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Tighter rule for securities fraud lawsuits
Question of the Day
The Supreme Court today imposed a strict standard that investors must meet to keep alive their lawsuits charging securities fraud.
In an 8-1 decision, the justices said that courts must weigh possible innocent explanations for defendants’ conduct at the start of a securities fraud case. Doing so can lead to early dismissal of investors’ lawsuits.
The ruling came in a shareholders suit against the 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 says the company’s CEO provided false assurances of robust demand for the company’s products.
A lawsuit will survive only if the facts charged in it are “cogent and compelling” in pointing to an intent to deceive, wrote Ruth Bader Ginsburg. Those factual accusations must be at least as compelling as “any opposing inference” suggesting innocence, she added.
The Supreme Court decision comes as businesses push regulators to roll back some safeguards put in place after the accounting scandals that brought down Enron Corp. and WorldCom Inc.
Companies say the Tellabs case is the kind of meritless claim Congress intended to prohibit when it reformed securities law 12 years ago.
Under the 1995 reforms, a securities fraud complaint must charge facts giving rise to a “strong inference” that defendants acted with an intent to deceive investors.
The Seventh U.S. Circuit Court of Appeals had ruled against Tellabs, saying the complaint should survive if a reasonable person could infer from the accusations that the defendants’ conduct was intentionally deceptive.
“That one-sided approach, we hold, was erroneous,” Justice Ginsburg said in court.
The justices sent the case back so the lower courts can assess whether the lawsuit should survive.
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.
On Monday, the court dealt another setback to investors when it sided with Wall Street investment banks that purportedly colluded to drive up the price of 900 technology stocks in the late 1990s. Shareholders subsequently lost billions of dollars when the dot-com bubble burst.
In the fall, the court will consider a case that could make it impossible for Enron shareholders to recover money from Wall Street institutions that they say assisted the energy company in disguising its financial problems.
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