SEC Presses Judge to Revisit Investor Lawsuits Ruling

The Securities and Exchange Commission is urging a federal judge to reconsider her earlier decision making it tougher for investor lawsuits against companies to go forward under a year-old U.S. law.

U.S. District Judge Fern M. Smith of San Francisco ruled in September that under the 1995 law that seeks to curb class-action suits, shareholders must show deliberate corporate intent to commit fraud.

The SEC filed a friend-of-the-court brief arguing that Smith misinterpreted Congress’ intent of the Private Securities Litigation Reform Act of 1995 and deviated from other court rulings on the issue.

“Proving a defendant’s actual knowledge of fraud in a securities case can be a daunting task, particularly when the evidence is entirely circumstantial,” said the SEC’s Jan. 31 brief, released Tuesday.

Congress, in passing the 1995 law, did not try to set a stricter standard than that established by the courts, but instead left to federal judges “the discretion to create their own standards,” the brief said.

Courts have typically required only that shareholders show that an accused company acted with recklessness, a legal term defined by the courts as “an extreme departure from the standards of ordinary care,” the SEC said.

The SEC brief was filed in an investor’s fraud suit against Silicon Graphics Inc., which was dismissed by Smith and refiled in October. The Mountain View-based technology company has filed another motion to dismiss.

The company did not respond Tuesday to a request for comment. Attorney John W. Avery, who helped file the SEC brief, said Silicon Graphics does not disagree with the SEC’s position.

Five other federal judges have ruled on suits under the 1995 law, and all have used the recklessness standard set by the 2nd Circuit Court of Appeals, Avery said. “This court seems to be all alone in saying the standard is something tougher,” he said.

The law, enacted by Congress over President Clinton’s veto, seeks to curb frivolous shareholder suits against companies when the company’s stock falls. A key provision requires that complaints state “with particularity” any facts that suggest corporations intended to commit fraud.

The refiled shareholder suit against Silicon Graphics argued that executives issued deceptive statements to inflate the price of company stock to sell it for a total of $13.8 million profit. The company has denied any wrongdoing.