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Shareholders Face Uphill Battle in Recovery of Losses From Securities Fraud

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This week the United States Supreme Court issued an opinion which affirms the heightened standards that shareholders must meet in order to prove securities fraud against a publicly held corporation or its officers in the sale of its securities. Investors that want to sue companies like Enron, Worldcom, Tyco and others who have left investors high and dry after making false and misleading statements about the success and outlook for the company will continue to have their hands tied in efforts to obtain recourse against these wrongdoers.

The court on Thursday waded into the debate on the defendants’ side. By a vote of 8 to 1, it said that investors must show “cogent and compelling” evidence of intent to defraud — a standard that makes it easier for companies and their executives to get shareholder complaints dismissed.

The appeal involved a securities fraud complaint against Tellabs Inc., a maker of equipment for fiber optic networks, for financial statements made by senior executives that turned out to be overly optimistic.

Investors accused the company and top executives, including Richard C. Notebaert, then the chief executive, of overstating projections of revenues and demand for products. A federal appeals court in Chicago said cases should go to trial if “a reasonable person could infer that the defendant acted with the required intent.” But the Supreme Court ruling said the bar should be higher.

The decision, which is consistent with the Bush administration’s attempt to limit shareholder lawsuits, has been hailed as a victory for big business by the National Chamber of Commerce. The Chamber Litigation Center has suggested that “the opinion will go a long way to reducing abusive securities class actions. ” Yet these entities still believe the court did not go far enough and will continue to fight to bar shareholders from obtaining accountability from 3rd parties such and banks and brokerage houses complicit in a corporations scheme to defraud the investing public.

Surprisingly, as restrictive as this opinion is, for those of us living in the 6th Judicial Circuit, including Ohio, Michigan, Kentucky and Tennessee, the court’s decision explicitly has rejected a stiffer standard adopted in this circuit which had previously all but eliminated any shareholder right of accountability and recovery for securities fraud.

Thus, on the heels of a decade of corporate greed and deception, the Enron bubble has been burst, and we are once again on the path towards protecting corporate misconduct, eliminating transparency in publicly traded institutions and restricting the accountability owed to investors.