• News
  • SAN DIEGO
  • Finance

Supreme Court declines to loosen standard for proving securities fraud

Related Special Reports

WASHINGTON -- Investors who bring corporate fraud lawsuits must show a link between the alleged illegal activity and a drop in stock prices, the Supreme Court ruled Tuesday in a victory for business groups and the Bush administration.

The justices ruled unanimously for Dura Pharmaceuticals Inc., a division of Ireland-based Elan Corp. (NYSE: ELN), which was sued for fraud following a November 1998 disclosure that its asthma drug dispenser didn't receive federal approval as expected. The news sent stock prices lower.

The decision means that investors, who lost trillions of dollars in stock market wealth following accounting scandals at companies such as Enron Corp. (PNK: ENRNQ) and WorldCom, could have a tougher case in court should they sue. That will depend in part on how stringently lower courts interpret what constitutes an adequate "link."

Backing Dura were the Bush administration, the U.S. Chamber of Commerce and the Securities Industry Association, which feared a wave of fraud claims from investors who bought shares "too high."

"This is going to cut off and eliminate a number of frivolous securities class-action cases based on artificially inflated stock prices," said Robin Conrad, senior vice president of the National Chamber Litigation Center, a division of the Chamber of Commerce.

"The ability to close the door on that is a big win for the business community," she said.

Justice Stephen G. Breyer, writing for the court, said the San Francisco-based 9th U.S. Circuit Court of Appeals was wrong to loosen the standard for proving securities fraud, pointing to a basic legal principle that a corporate wrong must cause a loss.

"It should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind," Breyer wrote.

The 9th Circuit let Dura investors proceed with their lawsuit under the corporate fraud theory of "loss causation." The court reasoned that investors need not show the disclosure of fraud caused a stock drop, so long as they can point to share prices that were artificially high at the time of purchase because of misleading statements.

But in the ruling Tuesday, Breyer said normally in fraud cases "an inflated purchase price will not itself constitute or proximately cause the relevant economic loss."

Federal law "expressly imposes on plaintiffs the burden of proving that the defendant's misrepresentations caused the loss for which the plaintiff seeks to recover," he said.

About 190 class-action lawsuits alleging securities fraud are filed each year. Because companies fear large judgments, many are forced to settle such suits before trial.

Public pension funds, AARP, the National Association of Shareholder Consumer Attorneys and the University of California -- the lead plaintiff in a class-action suit against Enron -- had countered that the 9th Circuit's standard was needed to deter a repeat of recent corporate scandals.

"We're disappointed," said Deborah Zuckerman, senior attorney for AARP. "Investors should have been allowed to go forward and prove the misrepresentation caused the loss, particularly since older people rely on stock investments to augment their retirement income."

In the Dura case, investors said they bought shares from April 1997 to February 1998 at inflated prices, following false statements from the company about sales of its products and the multimillion-dollar potential of a new drug delivery device.

Investors were seeking to recover in part for a 47 percent stock drop on Feb. 24, 1998 - nine months before its disclosure that the delivery device wouldn't receive federal approval - on unrelated news of an earnings shortfall due to weak sales of an antibiotic.

The case is Dura Pharmaceuticals v. Broudo, 03-932.

--- On the Net:

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

User Response
0 UserComments