U.S. Supreme Court

Court, Business Back Securities-Suit Limits

A U.S. Supreme Court decision yesterday setting a high pleading standard for investor lawsuits comes as corporations are pressing for even more restrictions on securities litigation.

The court ruled that plaintiffs suing for securities fraud must plead “cogent and compelling” facts showing the defendants had an intent to defraud. Tellabs v. Makor Issues & Rights, No. 06-484 (PDF).

Large accounting firms have asked for limits on liability, writes Stephen Labaton of the New York Times. The White House and the Securities and Exchange Commission are studying the request. Business is also seeking relaxation of some provisions of the Sarbanes-Oxley Act of 2002, a corporate accountability law passed in the wake of Enron’s collapse.

This week Treasury Secretary Henry Paulson Jr. told a congressional committee that investors should not be allowed to sue third parties such as accounting firms that help companies misrepresent their financial status. The issue is currently before the U.S. Supreme Court in Stoneridge Investment Partners v. Scientific-Atlanta Inc.

A similar suit filed by Enron investors may hinge on the outcome in Stoneridge.

Paulson said liability would have “enormous implications for the U.S. economy,” the Washington Post reports.

He said he told the U.S. Solicitor General he opposed liability, a position at odds with that of the Securities and Exchange Commission.

The Justice Department did not file an amicus brief in the case.

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