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Court Case May Impact Shareholder Suits
Wednesday March 28, 3:27 am ET
By Marcy Gordon, AP Business Writer
Case Before Supreme Court Wednesday Could Make It Harder for Shareholders to Win Suits


WASHINGTON (AP) -- Echoes of the 2002 business scandals reverberate through a case before the Supreme Court that could make it tougher for shareholders to win lawsuits against public companies.
It also pits the Bush administration and corporate America against public pension funds, investor advocates and 32 states and territories.




At stake: untold billions of dollars in shareholders' suits against corporations, executives and directors for alleged fraud.

"It would put a padlock on the courthouse doors for shareholders," said Chris Mather, a spokeswoman for the American Association of Justice, a group representing trial lawyers.

The Securities and Exchange Commission has come into the case on the side of the Bush Justice Department and business interests, a move that prompted criticism from shareholder advocates who questioned the market watchdog agency's commitment to investor protection. SEC Chairman Christopher Cox has insisted that the agency's stance is in the best interest of investors because it seeks to restrict what he calls "fraudulent lawsuits."

Worthy suits against companies by investors "are an essential supplement" to the government's prosecutions, the Justice Department and the SEC say in their brief filed in the case.

At the same time, they say, "Congress has recognized a potential for such actions to be abused in ways that impose substantial costs on companies that have fully complied with the applicable laws. The United States has a strong interest in seeing that the principles applied in private actions promote the purposes of the securities laws."

The opposing sides were making their case before the high court Wednesday, 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.

The court will decide the case, Tellabs Inc. v. Makor Issues & Rights Ltd., later this year. It sits atop a pyramid of other closely watched cases involving class-action securities litigation by shareholders seeking damages.

On Monday, for example, the Supreme Court 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 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 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.

The Tellabs case calls on 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 Justice Department and the SEC say their brief supports the stricter standard upheld by the greatest number of appeals courts, and that a 1995 law governing securities litigation requires shareholders to demonstrate "a high likelihood" of intent to deceive.

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.

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 32 states and territories are Alaska, American Samoa, Arkansas, California, Connecticut, Delaware, Idaho, Illinois, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, Rhode Island, South Dakota, Tennessee, Utah, Vermont and West Virginia.

The case is Tellabs Inc. v. Makor Issues & Rights Ltd., No. 06-484.

Supreme Court: http://www.supremecourtus.gov/