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Court upholds securities fraud rule

WASHINGTON - Investors who bring corporate fraud lawsuits must show a link between the alleged illegal activity and a drop in stock prices, the Supreme Court ruled Tuesday in a victory for business groups and the Bush administration.

The justices ruled unanimously for Dura Pharmaceuticals Inc., a division of Ireland's Elan Corp., which was sued for fraud after a November 1998 disclosure that its asthma drug dispenser didn't get federal approval. The news sent stock prices lower.

The decision means that investors, who lost trillions of dollars in stock market wealth after accounting scandals at companies such as Enron Corp. and WorldCom, could have a tougher case in court should they sue.

That will depend in part on how stringently lower courts interpret what constitutes an adequate "link."

Backing Dura were the Bush administration, the U.S. Chamber of Commerce and the Securities Industry Association, which feared a wave of fraud claims from investors who bought shares "too high."

"This is going to cut off and eliminate a number of frivolous securities class-action cases based on artificially inflated stock prices," said Robin Conrad, senior vice president of the National Chamber Litigation Center, a division of the Chamber of Commerce.

"The ability to close the door on that is a big win for the business community," she said.

Justice Stephen Breyer, writing for the court, said the San Francisco-based 9th U.S. Circuit Court of Appeals was wrong to loosen the standard for proving securities fraud, pointing to a basic legal principle that a corporate wrong must cause a loss.

"It should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind," Breyer wrote.

Investors were seeking to recover in part for a 47 percent stock drop on Feb. 24, 1998, on unrelated news of an earnings shortfall due to weak sales of an antibiotic.

[Last modified April 20, 2005, 02:56:36]