Supreme Court Rules You Can't Sue A Firm For Price Manipulation

Investors’ Suits Face Higher Bar, Justices Rule


By STEPHEN LABATON
Published: June 22, 2007

WASHINGTON, June 21 — The Supreme Court on Thursday dealt a blow to investors who want to sue companies and executives because of suspected fraud, setting a higher standard for class-action lawsuits to go forward.

Times Topics: Supreme CourtThe decision was the second one this week by the court that was a defeat for shareholders and a victory for the defendant companies. On Monday, the justices ruled that securities underwriters on Wall Street are generally immune from civil antitrust lawsuits.

It came as senior officials, led by Treasury Secretary Henry M. Paulson Jr., have been pushing for limits on shareholder lawsuits. Mr. Paulson, along with other administration officials and some senior lawmakers, have maintained that such lawsuits and regulations, written in the aftermath of corporate scandals like those involving Enron and WorldCom, may be discouraging investment and causing too many companies to look overseas to raise capital.

With only 18 months left until President Bush leaves the White House — and even less time for contentious policy issues to make their way through a capital that is preparing for elections — corporations and political supporters of the administration are pressing for a relaxation of some of those regulations and new restrictions on lawsuits.

The court on Thursday waded into the debate on the defendants’ side. By a vote of 8 to 1, it said that investors must show “cogent and compelling” evidence of intent to defraud — a standard that makes it easier for companies and their executives to get shareholder complaints dismissed.

The appeal involved a securities fraud complaint against Tellabs Inc., a maker of equipment for fiber optic networks, for financial statements made by senior executives that turned out to be overly optimistic.

Investors accused the company and top executives, including Richard C. Notebaert, then the chief executive, of overstating projections of revenues and demand for products. A federal appeals court in Chicago said cases should go to trial if “a reasonable person could infer that the defendant acted with the required intent.” But the Supreme Court ruling said the bar should be higher.

The decision was hailed by business groups and defense lawyers, although it did not go as far as some businesses had wanted.

“By adopting a standard that weeds out baseless allegations of securities fraud,” said Robin Conrad, executive vice president of the National Chamber Litigation Center of the United States Chamber of Commerce, “today’s Supreme Court decision will go a long way in reducing abusive securities class actions, discouraging blackmail settlements and providing greater certainty for the financial industry and investors.”

In the last few months, commissions formed by industry groups and allies in academia have urged the administration, Congress and regulators to make it harder for investors and consumers to sue companies. They have also sought to relax some of the provisions of the Sarbanes-Oxley Act of 2002, the law adopted after a series of accounting scandals shook the financial markets.

The administration and officials at the Securities and Exchange Commission have also been studying a request by large accounting firms to impose limits on their liability from lawsuits.

This week, Mr. Paulson told a Congressional panel that investors should not be permitted to sue third parties, including Wall Street firms accused of aiding a company engaged in fraud. Mr. Paulson, a former chief executive at Goldman Sachs, was responding to a question about a Supreme Court case that could determine whether investors will be able to sue law firms, investment banks and others that work with companies accused of fraud.

But critics of the Bush administration say that companies are using foreign markets for reasons having little to do with litigation and regulation. Moreover, they say significant limits have already been imposed on shareholders to prevent frivolous claims.

They cite the sharp decline in the number of shareholder class-action lawsuits filed in federal courts in recent years — from a high of 497 in 2001 to 57 this year — as evidence there is no compelling problem with frivolous cases.

Critics also say that the increasing number of restrictions imposed on such suits would deter investors from bringing meritorious claims, and they maintain that the threat of investor lawsuits discourages corporate misconduct and encourages companies to be more transparent

 

I think the problem is not so much in what a plaintiff must plead to state a case, but rather in the class action rules. The intent of class actions was to empower people who each lost relatively small amounts of money to the same defendant. By suing as a class, they could aggregate their small claims and have enough at stake to justify the cost of a lawsuit. In practice however, the cases are put together by avaricious lawyers who round up plaintiffs and stir up litigation. Then the cases end up getting settled, with the class lawyers getting hundreds of millions and the actual plaintiffs getting coupons giving them $1.25 off on their next purchase or something equally worthless.

Class actions are a good idea gone bad in practice. Abolish them. If a large number of consumers have been hurt by a company, it should be the government's responsibility to do something about it. Then there is at least some accountability.

 

yeah i agree..

 

pretty harsh I think//