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Court limits security fraud lawsuits

Investor claims must see intent to deceive

WASHINGTON -- Investors lost another round at the Supreme Court yesterday when the justices imposed a strict standard for shareholder lawsuits seeking to recover losses from companies accused of fraudulent business practices.

The 8-1 opinion written by Justice Ruth Bader Ginsburg will make it harder for groups of investors to file lawsuits alleging they lost money because company officials violated federal securities laws.

A lawsuit will survive only if the facts alleged in it are "cogent and compelling" in pointing to an intent to deceive investors, Ginsburg wrote. Those factual allegations must be at least as compelling as "any opposing inference" suggesting innocence, she added.

The standard will be applied at the very start of a securities fraud case, meaning many lawsuits may be tossed out at the earlier stages of a court battle.

The ruling came in a shareholders suit against 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 said the company's chief executive provided false assurances of robust demand for the company's products.

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 helped shareholders recover billions of dollars following the wave of corporate scandals.

The Supreme Court decision comes as corporations push regulators to roll back some safeguards put in place after the accounting scandals that brought down Enron Corp. and WorldCom Inc.

The business community says the Tellabs case is the kind of meritless claim that Congress intended to prohibit when it reformed securities law 12 years ago.

Under the 1995 changes, a securities fraud complaint must allege 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 allegations that defendants' conduct was intentionally deceptive.

"That one-sided approach, we hold, was erroneous," Ginsburg said in court.

The justices sent the case back so that 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," wrote Stevens.