A court ruling against shareholders suing Silicon Graphics (SGI) could severely limit investors' ability to bring class action suits in future against Silicon Valley companies.
San Francisco federal judge Fern Smith concluded that 1995 congressional reforms, aimed at curbing securities lawsuits, severely restrict how investors may sue for alleged securities violations. Smith has twice thrown the SGI case out on the basis that the plaintiffs had not pleaded it adequately under the terms of the new law. With the standard of proof raised significantly, it will be difficult for future class action suits to go ahead, unless US Congress revises its legislation. Some legal experts believe this is now almost inevitable.
The SGI case was filed last year following a sharp drop in the workstation maker's stock in late 1995 and early 1996. The suit alleges that company officials misled investors about performance and carried out insider trading before the stock nosedived.
However, the 1995 Securities Litigation Reform Act sought to prevent "meritless" class action suits by raising the requirements for the types of information investors must produce. This Act was in response to complaints from companies, particularly IT suppliers whose stock is particularly volatile, that they were being constantly sued purely because of a fall in share prices.
Now, the attorney representing the investors, Bill Lerach, has claimed his suit was "as thorough and detailed as any ever filed" and complained that the decision would keep nearly all securities fraud cases out of court - not, he argued, the intention of the Act.
In her ruling, Judge Smith interpreted the Act as allowing suits to proceed only if "deliberate recklessness" and "knowing and intentional misconduct" can be proved early in the legal process. This contrasts with pre-1995 cases, which could be filed based on "information and belief" only and could proceed if executives were accused of "acting recklessly". Both these were vague standards constantly debated in court.
The class action suit can now be taken to appeal.
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