ASSOCIATED PRESS
A stringent legal standard should be set for shareholders when they accuse public companies of fraud and sue them for damages, attorneys representing the government and business interests argued before the Supreme Court yesterday.
But in a case that brought to mind a series of corporate scandals in 2002, an attorney for public pension funds and 32 states and territories contended that it would be wrong to choke off shareholders’ claims at the initial stage of their cases by applying the tougher standard prescribed by some federal appeals courts.
Congress intended in a 1995 law to curb abusive litigation against companies, said Harvard law professor Arthur Miller. But, he also told the justices, “Let’s not throw the baby out with the bath water.”
If the stricter threshold is applied, Mr. Miller said, “I think we’ve got a stone rolling downhill” toward dismissal of investor cases.
Lawyer Carter Phillips, one of those arguing the position of the Justice Department and the Securities and Exchange Commission and corporations, said that to be true to the 1995 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,” Mr. Phillips said.
At stake in the case before the high court, Tellabs Inc. v. Makor Issues & Rights Ltd., are untold billions of dollars in shareholders’ suits against corporations, executives and directors for reputed fraud.
It involves Tellabs Inc., a manufacturer of fiber-optic equipment, which 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.
A ruling for the company “would put a padlock on the courthouse doors for shareholders,” said Chris Mather, a spokeswoman for the American Association for Justice, formerly known as the Association of Trial Lawyers of America.
The opposing sides are making their case at a time when business interests are pushing for restraints on class-action suits 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.
Shareholders have received billions of dollars in suits against those companies and others, which also have been sued by the SEC.
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