A U.S. Supreme Court decision is likely to have a disturbing chilling effect on investors who may have been victimized by corporate fraud or stock scams.
On June 18, 2007, the U.S. Supreme Court rejected an investor suit against Tellabs, a telecommunications equipment manufacturer. In an 8-1 decision the Supreme Court ruled that investors must show that corporate executives had a "cogent and compelling" intent to engage in misconduct. In so ruling, the Court rejected a lower court decision that held cases should go to trial if "a reasonable person could infer that the defendant acted with the required intent."
The Supreme Court ruling was a body blow to investors, who often must rely upon circumstantial evidence of corporate wrongdoing. On the other hand, corporate advocates must be giddy. The decision represents an unqualified victory for corporate lobbyists and their legislative supporters who have been fighting to limit the ability of investors to file class actions charging corporate fraud and challenging securities fraud. There is a real danger that investors will no longer challenge corporate conduct unless they have evidence of a "smoking gun."
The decision could have a significant impact on the ability of investors to find lawyers who will support their cause. Some plaintiff's class action lawyers, who work on a contingent-fee basis, could now discourage clients when corporate misconduct if "iffy"or shy away from litigation, even where there is credible evidence of corporate misconduct, because the Supreme Court has raised the bar for success.
Certainly there is no place for a glut of frivolous lawsuits. Not every failing company has been victimized by executive misconduct. Not every corporate leader is consciously steering the ship toward the iceberg. But executives should not now feel that they are insulated from liability when they engage in conscious misdeeds. Investors should remain vigilant, and must remain alert for signs that executives did have the requisite intent. Where that evidence exists, corporations and their executives must continue to be held accountable.
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