Posted on: Wednesday, April 20, 2005

Suit rule for stock fraud tightened

By David G. Savage
Los Angeles Times

WASHINGTON — The Supreme Court yesterday made it harder for investors and pension funds to sue and win back the money they lost after the bursting of the stock market bubble of the late 1990s, ruling that the nation's anti-fraud laws are not "insurance against market losses."

The justices used a failed lawsuit against a small San Diego pharmaceutical company to issue a warning against open-ended lawsuits claiming stock fraud.

A plunge in a stock's prices does not show there has been fraud, even if investors were lured to buy the stock by a company's inflated claims, the justices said.

Sometimes, a steep drop in a stock's price "may reflect changed economic circumstances, changed investor expectations, new industry-specific ... facts, conditions or other events," said Justice Stephen G. Breyer.

To sue successfully for stock fraud, the investors and their lawyers must show that a company's false statements caused the plunge in the stock price and caused the investors to lose money, he said.

The 9-0 ruling set a strict standard for bringing into court lawsuits claiming stock fraud. It applied the Private Securities Litigation Reform Act of 1995, a measure designed to curb lawsuits that alleged stock fraud.

The decision reversed a more lenient standard set by the 9th U.S.Circuit Court of Appeals in San Francisco. That ruling allowed investors to sue on the basis of their claim that a company's overly optimistic statements had inflated its stock price.

Experts in securities law feared that if the 9th Circuit ruling were upheld, companies could be held liable for the billions of dollars in losses that followed the bursting of the Internet bubble five years ago.

"This sends the strong message that the Supreme Court will not allow losses caused by economic conditions to be swept into a cause for lawsuits. Market bubbles are not fraud," said Richard Bernstein, a Washington lawyer who represented the Securities Industry Association.

Deborah Zuckerman, a lawyer for the AARP, called yesterday's decision a setback for older Americans who were hurt by losses in the stock market.

"This means people who have experienced losses in the market because of misrepresentations will not be able to recoup their losses," she said.