A Reprieve

Europe's CFOs can breathe easy for a while after a US Supreme Court ruling makes it harder for shareholders to pursue class action lawsuits.

Europe’s CFOs ought to welcome the US Supreme Court’s ruling in June, which could make shareholders think twice before pursuing class action lawsuits. In Tellabs v Makor Issues & Rights, the Supreme Court raised the bar for securities fraud suits by determining that US courts must now consider whether a plaintiff’s allegations are “cogent” and “compelling” rather than merely “plausible” or “reasonable.”

Gerard Pecht, a securities litigation partner at US law firm Fulbright & Jaworski, says, “The ruling provides a filter for cases that don’t meet strict pleading requirements — the marginal cases won’t go forward.”

Tellabs has already been cited in eight cases, six of which were thrown out. None of these was European, but Pecht says Tellabs certainly will factor in the 17 securities class actions currently pending against European firms. One such is €4.8 billion French chemicals company Rhodia, which is awaiting a ruling from the Southern New York district court on allegations of overstating results.

Until now, companies have feared these cases might go to US juries, who can award huge damages. Many have settled. Dutch retailer Ahold, for example, made a record global settlement for a non-US company when it paid out $1.1 billion (€810m) in 2005 following an accounting scandal.

Tellabs is the latest pro-business move on the class action front. In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA) to tighten pleading standards — Tellabs is the first test of that. Other Supreme Court rulings have required plaintiffs to prove a link between fraud and a drop in share price, and to support allegations with facts.

The respite may be short-lived. As Grace Lamont, co-author of PwC’s annual Securities Litigation Study, observes, “If you look at the effect on class actions caused by the PSLRA in 1995, then you would conclude that any immediate reduction would most likely be followed by a business-as-usual volume of activity.”

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