Court takes up shareholder rights
In its biggest business case of the term, the high court examines the scope of investors' rights to sue in the wake of corporate fraud.
from the October 9, 2007 edition
Page 3 of 3
In addition, they say, no investors relied on any information from the suppliers.
"Congress did not intend to turn product suppliers who do not speak to investors into watchdogs for the accounting practices of public companies," says Stephen Shapiro in his brief on behalf of Scientific-Atlanta and Motorola.
Divided on threat
The issue has led to a split among the federal appeals courts. Both the fifth circuit in New Orleans and eighth circuit in St. Louis have adopted the more restrictive approach favored by business. The ninth circuit in San Francisco has embraced the more expansive view of investors.
It is unclear how the justices will attempt to balance the substantial competing interests in the case. Unrestrained class-action suits could bring some companies to their knees. But some analysts discount this threat.
"One of the reasons we have the best capital markets in the world is when you invest in a company in the United States you take a risk, but the risk is a business risk – will the company succeed or fail," says Professor Brown of the University of Denver. You aren't taking a risk of investing in a fraudulent enterprise, he says.
"Enron was a Potemkin village, a house of cards," Brown says. "That wasn't supposed to be able to happen here. It wasn't supposed to be the kind of risk that investors took."
If SEC and Justice Department enforcement was enough, he says, the Enron scandal would have been impossible.
"Civil liability is really the only thing companies are afraid of," Brown says. "It is the civil suit that causes companies to be far more honest in their disclosure [to investors] than they might otherwise be."
But honesty isn't always a perfect shield. Class-action lawsuits can create strong pressures even for honest, well-run companies to settle lawsuits rather than endure litigation costs, analysts say.
"American businesses paid more than $42 billion in securities class-action settlements between 1996 and 2006," says former Solicitor General Kenneth Starr in a friend-of-the-court brief on behalf of the Washington Legal Foundation.
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