U.S. Supreme Court Screws Investors -- Again

If Harvey Pitt -- the worst SEC chairman in recent memory -- was the Bush Administration's welcome gift to American investors, the Supreme Court decision today, undermining the right of investors to sue crummy companies, was a further reminder of how much investor rights have been eroded in this administration.

The ruling is mind-boggling in its stupidity. MarketWatch observes:

The Supreme Court's majority opinion said Scientific-Atlanta's "deceptive acts were not communicated to the public." Therefore, the petitioner "cannot show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability."

In other words, a corporate management can engage in the most disgraceful acts involving third parties, but if it didn't put out a press release announcing its chicanery, it gets off the hook. This ruling is particularly toxic for Enron investors, who were victims of a wide swath of wrongdoing reaching far beyond the company.

In June, the high court gurgled forth with two similarly wrongheaded decisions, both of which similarly gave a helping hand to inept corporate management. Needless to say, none of the presidential candidates have mentioned this latest assault on shareholder rights.

© 2007 Gary Weiss. All rights reserved.

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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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

Supreme Court Gives Investors the Shaft

The highest court in the land today gave a hardy "drop dead" to investors, tossing out lawsuits against the major Wall Street banks for pumping up tech stocks in the 1990s. Here's an AP dispatch on the bad news, and here's the opinion.

Investors had sued the banks under the antitrust laws. Justice Stephen Breyer said that the suits raise "a substantial risk of injury to the securities market." In a ruling filled with rationalizations and mumbo-jumbo, Breyer cited "a serious conflict" between applying antitrust law to the case and proper enforcement of the securities law.

Now that's interesting. Don't you think that the actions of the banks is what causes "substantial risk of injury to the securities market" -- not suits seeking restitution for fraudulent conduct by those banks?

It gets better. Breyer ruled:

We believe it fair to conclude that, where conduct at the core of the marketing of new securities is at issue; where securities regulators proceed with great care to distinguish the encouraged and permissible from the forbidden; where the threat of antitrust lawsuits, through error anddisincentive, could seriously alter underwriter conduct in undesirable ways, to allow an antitrust lawsuit would threaten serious harm to the efficient functioning of thesecurities markets.

If you wonder how Breyer wandered into the la-la land described above, note what he says in the next paragraph: "the SEC actively enforces the rules and regulations that forbid the conduct in question." Yeah, right.

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.