WASHINGTON (AP) - A business-friendly Supreme Court, with encouragement from
the Bush administration, has strengthened the hand of companies wanting to turn
away lawsuits by investors who claim they lost money because of corporate
misconduct.
In the coming year, the court is expected to decide at least one case that
will further determine the course of class-action lawsuits alleging securities
fraud, like the one filed by investors who lost billions in the Enron scandal.
Some lawyers say the tide has turned. As evidence, they cite two recent
decisions showing that justices -- who are ideologically split on social issues
-- generally share concerns about class-action lawsuits.
Class-action lawsuits have long been controversial because the financial
stakes for the defendant companies are huge, as are the potential financial
rewards for the lawyers who bring such cases. Once a judge certifies a class of
alleged victims -- such as stockholders -- their lawyers have tremendous
leverage in negotiating often costly settlements with corporate defendants.
A study by Stanford Law School found several companies -- including WorldCom
Inc., i2 Technologies Inc., Gemstar-TV Guide International Inc., Centennial
Technologies Inc. and Homestore Inc. -- paying nine to 10 times more to
investors in private class-action lawsuits than to federal regulators. From
WorldCom alone investors won $6.2 billion while the Securities and Exchange
Commission collected $750 million.
Since 2000, investors filing federal class-action lawsuits alleging
securities fraud have won $42 billion in damages from the business community,
according to research by the Stanford Law School Securities Class Action
Clearinghouse. The Stanford study also found that in the past two years the
number of class-action lawsuits filed by investors has declined.
"Clearly the environment now is difficult because many conservative judges
have a negative view philosophically of class-action lawsuits," said Steven J.
Toll, a plaintiffs attorney in Washington, D.C. "I hope for the benefit of
investors that the pendulum shifts back again to a more rational and objective
review of these cases."
One of the business community's criticisms of the court under Chief Justice
William Rehnquist was that the justices did not have the interest or the
appetite to take on contentious business issues. These kinds of cases have
become regular fixtures on the court's docket under Chief Justice John Roberts,
whose career as a private attorney had him often representing business interests
before the Supreme Court.
The change is already apparent, says New York plaintiffs attorney Fred
Isquith.
The court has "overturned decades of precedent to erect barriers making it
more difficult for claimants to get in the courthouse door," says Isquith. "The
result is that much misconduct is going to go unchallenged."
The impact of a 1995 securities law aimed at weeding out frivolous lawsuits,
combined with recent court decisions, has made it more difficult for plaintiffs
to sue and win, says attorney Greg Markel, who has defended many companies in
class-action lawsuits.
"Given the newest members of the court it is clearly a more unfriendly place
for plaintiffs," said Markel. "Even the liberals and moderates on the court are
expressing some skepticism about class-action lawsuits."
Earlier this year, moderate Justice David Souter authored an opinion for the
court blocking customers from pursing allegations of anticompetitive conduct
against the nation's largest telephone companies, a decision that could have
implications for stockholder cases. The second ruling, by liberal Justice Ruth
Bader Ginsburg, could ease the way for business executives to win dismissal of
securities fraud lawsuits by shareholders at the very start of a case.
While Ginsburg's decision requires "cogent and compelling" factual
allegations that a company intended to deceive investors before their lawsuit
can proceed, plaintiffs' lawyers say that in most cases they can meet that
standard. These attorneys view the Ginsburg ruling with some relief, pointing
out that Justices Samuel Alito and Antonin Scalia favored an even tougher
standard.
"The conservative part of the court wanted to kill the plaintiffs' bar, and
the remaining liberals and moderates were trying to strike a balance," said
Toll.
People like retired Houston chemical engineer Stephen Smith say a
class-action suit against Enron's investment banks offers the only hope for more
than 1 million investors who lost money when the firm collapsed in 2001 after
years of accounting tricks.
"There are a lot of frivolous lawsuits and I've even donated to groups
against lawsuit abuse, but I feel like this one is justified," said Smith, who
considers himself fortunate because he lost only $18,000.
"There appears to be proof to show the banks actually helped dream up the
schemes that enabled Enron to cook the books; it would be up to a jury to
determine whether they're liable," said Smith.
The Bush administration and the Supreme Court have stepped gingerly around
the Enron investors' lawsuit.
Although the court has not decided whether to hear arguments in the Enron
case, justices have agreed to review a similar suit by investors against
suppliers to one of the nation's largest cable TV companies.
If the court rules against investors in the cable TV suit, it could mean
that other cases -- like the Enron shareholders' lawsuit -- would not be able to
go forward.
The issue in the Enron case and others is whether third parties such as
accountants and lawyers or -- as in the case of Enron -- Wall Street investment
banks can be found liable for scheming with companies that allegedly deceive
investors.
In the cable TV case, two suppliers including Motorola Inc. allegedly
engaged in sham transactions with Charter Communications Inc. to boost Charter's
cash flow and meet the expectations of Wall Street.
In the Enron case, Wall Street banks allegedly entered into partnerships
enabling Enron to keep liabilities off its books at critical times so that it
could report revenue from the transactions when it was actually incurring debt.
The Bush administration decided not to side with investors in the cable TV
case, even after the Securities and Exchange Commission -- the government
regulator of the securities industry -- unanimously recommended that it do so.
President Bush personally weighed in with his views, telling the Justice
Department's solicitor general -- who was tasked with arguing the
administration's position -- that it is important to reduce unnecessary lawsuits
and that federal securities regulators are in the best position to sue.
The administration's decision provoked a strong retort from one of Bush's
former appointees to the chairmanship of the SEC, William Donaldson, who joined
two other former SEC officials in filing documents in the case.
The SEC's powers "are limited, and will generally cover only a fraction of
the damage done to investors by serious securities fraud," Donaldson, former SEC
chairman Arthur Levitt and former commissioner Harvey Goldschmid said in
documents filed with the Supreme Court. "Most often, the larger the frauds, the
greater investors must rely on private cases to recover their losses."
The former regulators pointed to the fact that in the Enron scandal, the SEC
and the Justice Department were able to recover only $440 million for investors
out of total claimed losses of $40 billion.
The lawsuit over the cable TV suppliers is "one of the most important
securities cases to be heard by this court in many years," said the three former
regulatory officials.
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