Supreme Court Limits Triple Damages in Fraud Suits; the Ruling Could Hamper Government Efforts to Recover Damages in Bank and Thrift Cases Where Racketeering Is Alleged

Article excerpt

WASHINGTON - The Supreme Court ruled this week that the company insuring securities investors against fraud cannot recover triple damages in its pursuit of wrongdoing under federal racketeering law.

The ruling, in a case involving the Securities Investor Protection Corp., could hamper government efforts to recover damages in bank and thrift cases. The Federal Deposit Insurance Corp. has filed a number of racketeering suits alleging securities fraud.

The Supreme Court's unanimous ruling, written by Justice David H. Souter, said plaintiffs must suffer direct harm from securities fraud before being allowed to make use of the triple-damages provision of the Racketeer Influenced and Corrupt Organizations Act.

SIPC Harmed Indirectly

The court reasoned that the securities industry insurer suffered only indirect harm because its losses in Holmes v. Securities Investor Protection Corp. were contingent on the collapse of two broker dealers, which went out of business after alleged stock manipulation.

But in a 5-to-4 split, the court declined to rule on whether plaintiffs must be buyers or sellers of securities in order to suffer direct harm and, thus, to be authorized to assert claims under the federal racketeering law.

Four justices said plaintiffs should not have to be buyers or sellers in order to sue. But while the court's majority did not rule on the issue directly, they strongly hinted their commitment to the buyer-seller rule.

Opening a Can of Worms

"Allowing suits by those injured only indirectly would open the door to massive and complex damages litigation, which would not only burden the courts but also undermine the effectiveness of treble-damages suits," Justice Souter wrote.

He said that allowing people who do not buy securities to sue would require courts to determine how much a plaintiff suffered because of fraud, as opposed to "poor business practices" or failure to anticipate market movements - a difficult proposition.

Under Securities and Exchange Commission Rule 10b-5, sanctioned by the high court in a 1975 case, plaintiffs may sue for relief from fraud only if they bought or sold securities. The issue before the court in the current case was whether that rule applies when plaintiffs allege that securities fraud was accomplished through a "pattern of racketeering activity. …