A Second Supreme Court Assault on Shareholders

The media today was alive with coverage of the Supreme Court decision on class action suits, and it even warranted the front-page lead in the New York Times. This was a bad decision, the second "drop dead" to investors from the Supremes in the past few days.

The high court ruling gave a ridiculously strict interpretation to the Private Securities Liitigation Reform Act 1995. This law requires that plaintiffs to demonstrate intention to deceive or "scienter." The law requires that the plaintiffs show a "strong inference" that the defendant "acted with the required state of mind."

The Wall Street Journal observed:

In her written opinion, Justice Ginsberg defined a new, stricter test to assess the viability of shareholder suits. The trial judge must "consider the complaint in its entirety," Justice Ginsburg wrote, specifically, "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter," or the intention to deceive. The judge must also consider "plausible opposing inferences," she wrote.

The effect of this will, of course, make it a lot tougher to bring class action suits. Putting aside the fundamental problem with class actions -- which is that they benefit the lawyers a heck of a lot more than investors -- what this means is that corporations have one less restraint against bad CEOs and bad companies.

That, added to a milquetoast SEC, means that Enron and the other corporate scandals of a few years back are a declining memory. It is business as usual in Washington, in its bear hug of Corporate America.

© 2007 Gary Weiss. All rights reserved.

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