Washington, D.C., February 20, 2008—The Supreme Court this session has made two important decisions that will greatly benefit investors. Both today’s ruling in LaRue v. DeWoolf and the ruling earlier this year in Stoneridge v. Scientific-Atlanta, for different reasons, are decisions that should be characterized as pro-investor.
Today’s case, from the facts as stated in the decision, involved a clear breach of fiduciary duty. The plaintiff, LaRue, directed the administrator of his 401(k) to change the investment options in his plan. Those directions, however, were never acted upon, costing LaRue thousands in potential gains to his portfolio. The unanimous court correctly interpreted the Employee Retirement Income Security Act of 1974 (ERISA) to allow reasonable suits from individuals wronged by such breaches.
Stoneridge, by contrast, involved no such breach of fiduciary duty, but actions by “secondary actors” who participated in a transaction that defrauded investors. In this case, the defendants were suppliers of cable television set-top boxes to a company that was manipulating its official costs and earnings. Thus, if this suit were allowed to proceed, lawsuits in similar cases could involve anyone who has a remote and unknowing connection to a company committing fraud. The court wisely refused to read into federal law such a broad standard for lawsuits, which would have had a devastating effect on U.S. capital markets and competitiveness and would have harmed shareholder returns.
I’m pleased that in both LaRue and Stoneridge, the Court interpreted federal law correctly to allow legitimate lawsuits for clear breaches of fiduciary duties, but discourage frivolous suits that would drive up costs for the majority of investors.
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