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UPDATE 3-Top court makes US securities fraud suits harder
June 21, 2007 / 2:26 PM / 10 years ago

UPDATE 3-Top court makes US securities fraud suits harder

4 Min Read

(Adds comment from plaintiffs law firm, paragraphs 13-14)

By Peter Kaplan

WASHINGTON, June 21 (Reuters) - The U.S. Supreme Court on Thursday made it harder for investors to pursue securities fraud lawsuits in a big victory for network equipment maker Tellabs Inc. TLAB.O.

The high court overturned an appeals court ruling that had reinstated a class action lawsuit filed by Tellabs investors, who accused the company and former Chief Executive Richard Notebaert of misleading investors in 2000 and 2001 to keep the company's stock inflated when business was flagging.

The ruling is another blow to U.S. class-action lawyers who represent shareholders in securities fraud cases, following a Supreme Court decision earlier this week that said an antitrust case launched by investors against Wall Street underwriters could not go forward.

In the Tellabs case, a federal court in Illinois initially dismissed the lawsuit, concluding the allegations were too vague and did not raise a "strong inference" that the company intended to deceive shareholders.

The "strong inference" requirement was laid out in a 1995 law Congress designed to discourage frivolous securities fraud suits by making it easier for companies to get them thrown out of court.

The Tellabs lawsuit was subsequently reinstated by a U.S. appeals court.

The Supreme Court, by an 8-1 vote, ruled the appeals court was wrong, with the majority opinion written by Justice Ruth Bader Ginsburg.

"The appeals court drew inferences favoring plaintiffs, but declined to consider opposing inferences," Ginsburg said. "That one-sided approach, we hold, was erroneous."

Ginsburg said that to qualify as strong, an inference must be more than merely plausible or reasonable. It must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.

Tellabs praised the ruling. "We are confident that the complaint brought by Milberg Weiss against Tellabs will ultimately be found to be without merit," the company said in a statement.

Business groups also welcomed the decision.

"This decision reinforces legislation that was originally designed to curb nuisance filings and other vexatious litigation," the Securities Industry and Financial Markets Association said.

The lead counsel in the case, class action law firm Milberg Weiss & Bershad LLP, issued a statement saying, "Investors everywhere should be very comfortable with the Supreme Court's decision."

"We believe that the decision will not have an adverse impact on the prosecution of securities fraud cases, and that the Tellabs case itself will be allowed to continue when it is sent back to the lower court," Milberg Weiss said.

William McGuinness, a partner at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, agreed that the decision was aimed at making it more difficult to bring "abusive" cases. But McGuinness also said the ruling "didn't go as far as it could have."

McGuinness noted a separate opinion written by Justice Antonin Scalia, in which he advocated an even tougher standard. He argued that an inference should only be considered "strong" if were deemed "more (rather than equally) plausible than the inference of innocence."

Tellabs argued that under the 1995 reform law, federal courts must consider any facts that suggest any possible "innocent" motives, and that courts have to dismiss securities fraud cases that don't raise a "strong inference" of intentional wrongdoing.

Tellabs was supported by the U.S. Securities and Exchange Commission and the Justice Department.

Lawyers for investor plaintiffs had argued that their lawsuit laid out enough specific facts to show that Tellabs knew its best-selling product, a piece of networking equipment known as a cross-connect system, was in decline, but misled investors anyway.

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