Supreme Court Ruling Limiting Lawsuits a Victory for Investors and Entrepreneurs

Contact: Jody Clarke, 202-331-2252

Washington, DC, June 21, 2007—Today’s Supreme Court ruling discouraging frivolous shareholder lawsuits will benefit both investors and entrepreneurs, says John Berlau, director of the Center for Entrepreneurship at the Competitive Enterprise Institute.

In the 8-1 decision in Tellabs v. Makor, Justice Ruth Bader Ginsburg wrote that federal law requires that class-action shareholder lawsuits must show “cogent and compelling” evidence of an executive’s intent to commit fraud.

“This ruling will prevent reams of frivolous lawsuits that drive up costs for honest entrepreneurs and prevent them from delivering a better return for shareholders,” said Berlau. “Plaintiffs lawyers may be disappointed, but investors concerned about their 401(k)s and other holdings should cheer.”

Berlau adds that setting a lower bar for fraud suits would have had a chilling effect on executives communicating with investors about company prospects. This would hit smaller companies the hardest, as they are the ones with the greatest need to inform investors about what they do.

“Genuine fraud should be punished, but we should recognize that executives have no crystal ball to see perfectly into the future,” said Berlau. “In discussing prospects and making future projections, company leaders must be free to communicate frankly with shareholders. Thanks to this ruling, shareholders will continue to be able to make informed decisions based on this communication.”

Berlau, the author of a new CEI study on Sarbanes-Oxley, SOXing it to the Little Guy, stresses that when excessive regulation and litigation discourage companies from going public, small investors are harmed as well because of the limits to their opportunities to grow wealth. 

CEI is a non-profit, non-partisan public policy organization dedicated to the principles of free enterprise and limited government.