Supreme Court Justices Consider Limiting Shareholder Suits Against Investment Bankers
The Associated Press Published: March 28, 2007
WASHINGTON: 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 U.S. 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.
By CHRISTOPHER S. RUGABER
Several Supreme Court justices expressed skepticism Tuesday about eliminating the immunity from U.S. antitrust laws Wall Street investment banks generally enjoy.
The court heard oral arguments in a case stemming from a class-action lawsuit by a group of investors seeking damages from 16 securities firms and institutional investors. The investors charged that the banks violated antitrust laws in the late 1990s by conspiring to artificially increase the prices of newly issued shares in almost 900 initial public offerings.
The case has attracted significant attention from Wall Street and corporate America. Allowing such suits would “increase … the cost of capital for companies offering shares to the public,” the Chamber of Commerce and other groups said in a court filing, and could “damage … the competitiveness of the United States’ capital markets.”
The investment banks, including Credit Suisse Group and Merrill Lynch & Co. Inc., argue that their IPO methods – including banding together to spread the risk of underwriting share offerings and discussing potential prices for the shares with interested investors – are already regulated by the Securities and Exchange Commission.
Applying antitrust laws on top of SEC rules would lead to a “danger of inconsistencies and conflicts,” argued Stephen Shapiro, a lawyer representing the banks.
But investors alleged that banks violate antitrust law in a practice known as “tie-ins,” in which customers have to buy shares in an unpopular IPO in return for being able to buy shares of sought-after IPOs.
The investors also complained that the banks engage in “laddering,” or requiring customers to purchase newly issued shares at escalating prices after an IPO begins trading to help boost the stock’s price.
Both practices are violations of securities laws. As a result, the investors’ group claimed they paid “inflated prices” for shares in tech-bubble companies, such as Amazon.com Inc., eBay Inc., and Priceline.com Inc.
Christopher Lovell, representing the investors, argued that the Wall Street firms should not receive antitrust immunity for illegal activity.
However, Chief Justice John Roberts and several other justices noted that complex securities laws make it difficult to distinguish between legal and illegal conduct. They questioned whether an antitrust trial would be the best venue for making such distinctions.
Justice David Souter asked whether a jury trial would be the best process for determining the difference between the legal price-setting of an IPO by investment banks and the illegal price manipulation of new shares once they begin trading.
“The problem is that … (the banks) are to some extent … in the business of fixing prices,” Roberts said. “If you didn’t understand the context, it would look an awful lot like an antitrust violation.”
Besides Credit Suisse, the suit names Bear Stearns Cos. Inc., Citigroup Inc., the Goldman Sachs Group Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Morgan Stanley, among others., among others.
A federal district court had dismissed the suit, ruling that illegal practices are immune from antitrust liability because of the SEC’s “broad general authority to regulate IPO allocation and underwriter commission practices.”
But the New York-based 2nd Circuit Court of Appeals said the suit could proceed because Congress didn’t provide antitrust immunity for tie-ins, laddering or other practices.
The Bush administration, meanwhile, staked out a position between the two courts. The Solicitor General, the government’s lawyer, said in court briefs that conduct by the investment banks can be protected from antitrust lawsuits if it is legal or “inextricably intertwined” with legal activity.
During consideration of the case in lower courts, the administration was split. According to a court filing by the banks, a letter from the SEC “advocated immunity from these antitrust actions in the most emphatic terms,” while the Justice Department said it opposed immunity.
The case is Credit Suisse Securities v. Billing, 05-1157. Justice Anthony Kennedy recused himself from the case.