Standards

Supreme Court backs business

The US Supreme Court has refused to allow investors to proceed with a suit against investment banks they accused of violating antitrust laws when helping execute initial public offerings for technology companies in the late 1990s.

Plaintiffs accused the banks, acting as underwriters, of forming syndicates that agreed they would not sell newly issued securities unless the buyer committed to buying additional shares of that security later at escalating prices, pay unusually high commissions on subsequent security purchases from the underwriters, and purchase from underwriters other less desirable securities.

Following this, the Supreme Court ruled that for a case to proceed to court investors must do more than simply allege it was plausible that company officials carried out actions that they knew were wrong (FT, 22 June).

The Court’s majority decision found a lower court had used too low a threshold in allowing investors to pursue a lawsuit accusing Tellabs of fraudulently inflating revenue. The suggestion of wrongdoing, it was ruled, must be at least as compelling as innocent explanations for behaviour.

The editorial in the Financial Times (21 June) suggested that corporate America has found a powerful new friend in the Supreme Court. The FT described the first decision as very good news for the competitiveness of the US’ over-litigated markets, but added that the Supreme Court should do more to lighten the burden of litigation.

The Court, said the FT, needs to ignore criticism that it is anti-investor: for every shareholder that wins a suit, there is another that pays the price.

July 2007