AP News, March 28th, 2007
Several Supreme Court justices challenged shareholder groups who were arguing Wednesday against standards that could make it tougher for investors' cases to go forward when they sue companies for fraud.
Appeals courts have been split on whether a stricter standard should be applied for initially making a case in such lawsuits. The Bush administration favors the tougher standard, but the investor groups say it would go too far in choking off suits.
Several justices suggested not only going along with the stricter standard for starting cases but raising the bar for proving cases later on to the same higher level.
The high court is being asked to clarify what legal hurdles investors must clear in a case with far-reaching repercussions for class-action lawsuits against public companies. Such suits have brought billions of dollars to shareholders in connection with the 2002 wave of corporate scandals.
Comments by several justices during oral arguments indicated the court may consider going further than the Bush administration and business interests are seeking.
A 1995 law intended to curb abusive litigation against companies "just established an entry qualification for (shareholders) getting into court," Justice Antonin Scalia said. In enacting the law, Congress was concerned about the expense of the pretrial process, he said, "and tried to set a high wall to get to the discovery stage."
Asked Harvard law professor Arthur Miller, representing shareholder groups such as public pension funds: "Now what kind of a wall was it? Was it a Dutch dike or the Berlin Wall?"
Thirty-two states and territories also came into the case on the side of investor interests _ opposing the Justice Department and the Securities and Exchange Commission and corporations _ arguing that the stricter legal standard prescribed by some federal appeals courts is unwarranted.
The arguments unfolded in a spirited exchange between justices and attorneys. While Congress intended with the 1995 law to restrain frivolous suits against companies, Miller urged, "Let's not throw the baby out with the bath water.."
If the stricter threshold is applied, he said, "I think we've got a stone rolling downhill" toward dismissal of investor cases.
Attorney Carter Phillips, one of those arguing the government's position, said that to be true to the law, courts must require shareholders in those cases to show a "high likelihood" of an intention to deceive on the part of companies or executives.
"Congress acted decisively to curb abuse of private securities litigation," Phillips said.
The case before the high court is Tellabs Inc. v. Makor Issues & Rights Ltd. Tellabs, a manufacturer of fiber optic equipment, was sued by shareholders over statements made in 2001 by its then-chief executive about its sales that turned out to be false. Shareholders lost millions when the stock price dropped after Tellabs corrected the CEO's statements.
Specifically, the case challenges the Supreme Court to resolve a split among federal appeals courts over how stringent a legal standard shareholders must meet in showing an intent to deceive on the part of companies or executives.
The case sits atop a pyramid of other closely watched cases involving class-action securities litigation by shareholders seeking damages, and the court will decide it later this year.
The opposing sides made their cases at a time when business interests are pushing for restraints on class-action lawsuits against companies and executives. They contend that laws and rules that came in response to the wave of corporate scandals nearly five years ago _ Enron Corp., WorldCom Inc. and the rest _ are onerous and costly and hurt the competitiveness of U.S. financial markets.
The issue looms large for the nine justices. On Monday, they agreed to consider whether shareholders of companies that commit securities fraud should be able to sue Wall Street investment banks, lawyers, auditors and others that allegedly participated in the fraud.
And on Tuesday, the court heard arguments in a case stemming from a suit by a group of shareholders seeking damages from 16 investment banks. The shareholders in that case charged that the banks violated antitrust laws in the late 1990s by conspiring to artificially inflate the prices of newly issued shares in nearly 900 companies that went public.
A number of public employee pension funds from several states, with an estimated $1 trillion in assets, intervened in the case in support of the Tellabs shareholders, as did the 32 states and territories and state securities regulators.
On the other side, with the government, are the U.S. Chamber of Commerce and Wall Street's biggest lobbying group, the Securities Industry and Financial Markets Association.
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The case is Tellabs Inc. v. Makor Issues & Rights Ltd., No. 06-484.
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