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Don't make investor lawsuits harder
The less the Bush administration has to say this week about fraudulent sales of cable TV converter boxes, the better -- not for cable customers, but for investors. In particular, the ability of California universities to recover funds lost in the Enron collapse could be undermined if the administration says the wrong thing.
At issue is a lawsuit brought by investors against Scientific-Atlanta Inc. and Motorola Inc. for helping cable operator Charter Communications Inc. embellish its financial reports with bogus advertising revenue. Charter paid Scientific-Atlanta and Motorola extra for set-top boxes in return for the companies buying commercials on its systems. Under federal securities law and Securities and Exchange Commission rules, it's illegal to use manipulative or deceptive devices or contrivances to harm investors. The set-top box makers, however, persuaded the U.S. 8th Circuit Court of Appeals to dismiss them from the case because Charter had been the one putting out misleading financial statements, not them.
The Supreme Court is scheduled to hear the investors' appeal in October. If allowed to stand, the appeals court's ruling would shield any firm that remains mum while enabling another company to commit securities fraud. The Supreme Court's decision, in turn, will determine whether the University of California system and other investors can continue their multibillion-dollar lawsuit against investment banks that helped Enron cook its books with sham transactions.
The SEC sought to throw its support behind investors in the set-top box case, but Solicitor General Paul D. Clement rejected its brief. This week, the administration may do just the opposite and back the box manufacturers. Treasury Secretary Henry M. Paulson Jr., a former investment banker, reportedly wants to limit such investor lawsuits because he believes that the risk for businesses is bad for the economy.
Congress has already made it harder to file lawsuits based on securities fraud. The Bush administration shouldn't prod the courts to go further on behalf of those who serve as knowing partners in that fraud. Unwilling to do the right thing for investors in June, the solicitor general should refrain from taking the wrong side now.