High Court May Take Major Securities Suit

Article excerpt

When bad news strikes a company and the stock price plummets, no one suffers more than owners of call options to buy the stock.

Shareholders can hang on and hope for an eventual recovery; if they sell, they will end up losing only part of their investment. But options holders have no such luck. Their options are likely to expire worthless.

The shareholder has another edge. If he believes that the company put out false and misleading statements to prop up the price, the shareholder can turn to the courts for relief. But in the same circumstances, it is not clear whether an options holder can sue. Differing decisions have been reached by lower courts, and now the U.S. Supreme Court is deciding whether to resolve the issue.

The case in question was filed by Robert M. Deutschmann, a California investor who bought call options on Beneficial Corp. stock in late 1986, when it was trading close to its high, following a reassuring statement from Beneficial's chairman, Finn M.W. Caspersen, that the company's problems with its reinsurance business were behind it.

When it turned out he was wrong, the stock fell sharply. Deutschmann lost almost all the $14,229 he had invested in Beneficial options, and he filed a class action suit, contending that Caspersen and the company had made material misstatements of fact.

Had Deutschmann bought stock, the case would eventuall have proceeded to trial, at which time a judge or jury would have decided if the company and its officers had knowingly deceived investors.

But since he owned only options, the company tried to get the case thrown out, on the theory that as an options holder, he had no relationship with the company that made it responsible to him.

Federal District Judge Murray M. Schwartz ruled that options traders lacked standing to sue, and threw out the case.

But the United States Court of Appeals for the 3rd Circuit, in an opinion by Judge John J. Gibbons, concluded unanimously that options were securities like any other, and that options holders were thus protected from misrepresentations.

``By characterizing options traders as `gamblers,' the defendants hope we will draw the conclusion they are fair game for affirmative misrepresentation, while stock traders are not,'' the appeals court ruling stated. ``We are not persuaded that the difference between trading in the two types of securities should lead to different treatment.''

The Supreme Court, in one of its first actions of the current term, asked the Justice Department for its views on the case, which, in turn, has asked the Securities and Exchange Commission to provide its views. …