Justices challenge shareholder groups

WASHINGTON - Several Supreme Court justices challenged shareholder groups arguing yesterday against legal standards that could make it tougher for investors to sue companies for fraud.

Appeals courts have been split on whether a stricter standard should be applied for initially making a case in such lawsuits. The Bush administration favors the tougher standard, but the investor groups say it would go too far in choking off suits.

Several justices suggested not only going along with the stricter standard for starting cases but raising the bar to the same level for proving cases.

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 brought billions of dollars to shareholders in connection with the 2001-02 wave of corporate scandals, including Enron Corp. and WorldCom Inc.

Comments by several justices during oral arguments indicated that the court might consider going further than the Bush administration and business interests are seeking.

A 1995 law intended to curb abusive litigation against companies "just established an entry qualification for [shareholders] getting into court," Justice Antonin Scalia said. In enacting the law, Congress was concerned about the expense of the pretrial process, he said, "and tried to set a high wall to get to the discovery stage" of a lawsuit.

Harvard law professor Arthur Miller, representing shareholder groups such as public pension funds, asked the justices: "Now what kind of a wall was it? Was it a Dutch dike or the Berlin Wall?"

Thirty-two states and territories joined the case on the side of investor interests, opposing the Justice Department, the Securities and Exchange Commission, and corporations. The states argued that the stricter legal standard prescribed by some federal appeals courts was unwarranted.

The case before the high court is Tellabs Inc. v. Makor Issues & Rights Ltd. Shareholders sued Tellabs, a Naperville, Ill., manufacturer of fiber-optic equipment, over statements made in 2001 by its chief executive officer about its sales that turned out to be false.

Shareholders lost millions when the stock price dropped after Tellabs corrected the CEO's statements. The shares traded at nearly $75 a share in the summer of 2000 but had fallen to less than $18 by the following June.

Specifically, the case challenges 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 case sits atop a pyramid of other closely watched cases involving class-action securities litigation by shareholders seeking damages, and the court will decide it later this year.

The opposing sides made their cases at a time when business interests are pushing for restraints on class-action lawsuits against companies and executives. They contend that laws and rules that came in response to the wave of corporate scandals nearly five years ago are onerous and costly, and hurt the competitiveness of U.S. financial markets.