Supreme Court Decisions Make Major Strides in Litigation Reform

Article excerpt

WASHINGTON _ For several years, Congress has tried unsuccessfully to enact reforms concerning private securities fraud lawsuits.

While lobbyists and legislators have little to show from their fight, substantial headway has been made by another arm of government _ the Supreme Court.

The court this week issued its third major decision in recent years that effectively narrows the legal options to investors who claim they've been defrauded when purchasing stocks.

"The court is almost systematically restricting private rights under securities laws," said David Mahaffey, special counsel for the law firm of Gibson Dunn and Crutcher in Washington and a former Securities and Exchange Commission attorney.

Some securities attorneys believe the trend is substantial enough that investors in failed savings and loans might not be able to recoup their money through private lawsuits. Others disagree, saying the real world effects of the court's decisions may not have a substantial effect on investors.

On Tuesday, the Supreme Court voted 5-4 to limit the scope of a federal law that lets investors rescind stock deals if they had been misled.

The decision, Gustafson vs. Alloyd Co., would let investors rescind their purchases only if they bought stock directly from a company during an initial public offering, not if they bought stocks later in the market.

If the court had ruled the other way, the court would have given investors a potentially powerful weapon.

The case, while significant, isn't as important as two earlier Supreme Court decisions.

In April, the court ruled that the anti-fraud provisions of a securities law do not include a private right to sue a person accused of aiding and abetting others who misled investors. The Central Bank of Denver vs. First Interstate case was denounced by consumer advocates, saying it eliminated the right to sue attorneys, accountants and others who indirectly assist in a securities fraud.

In 1991, the court shortened the deadlines for investors to file a securities fraud suit in a case called Lampf, Pleva vs. Gilbertson.

Legal experts say the decisions, taken together, represent a retreat from a broader view of the securities laws. …