Supreme Court may limit lawsuits by investors

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The US Supreme Court appeared likely on Wednesday to close the courtroom door on a form of big class action lawsuit brought by investors that US business groups say would impose "enormous liability" on American corporations.

The justices heard oral arguments on Wednesday in a case testing whether people who hold stocks – rather than buying and selling them – can be barred from bringing big class action lawsuits claiming that they have suffered losses because of a stock fraud.

The justices are expected to rule on the case by the end of June.

The case before them involved Merrill Lynch, the big brokerage house, which is being sued for providing allegedly fraudulent research during the internet stock bubble. The court will not be deciding the merits of that case but a much broader issue: do strict federal laws that impose limits on securities class action lawsuits apply only to cases where an investor bought or sold a stock and lost money or also to people who lose money because they hold on to stocks that are inflated by fraud?

Congress passed a law in 1998 forcing buyers and sellers of stocks into federal court with their big class action suits, where federal law sets a high bar to such lawsuits. The question before the court now is whether holders of securities can bring big class actions in more plaintiff-friendly state courts or whether Congress intended to force these suits into federal court, too – where they are in effect barred.

The AARP, a lobby group for retired people, says blocking such suits would hurt older people who tend to hold stocks for the long term. But the US Chamber of Commerce, the powerful business lobby, says such suits will "pose the danger of enormous liability" and allow plaintiffs in effect to blackmail companies to settle even meritless suits.

Business appeared to have several supporters among the justices. Justice Antonin Scalia said such suits "lend themselves to abuse much more than purchaser and seller claims", and Chief Justice John Roberts was even more blunt. "What your clients want to do is cash in on a fraud," he told the lawyer for the plaintiffs in the case.

"They are just complaining that they didn't get to sell their stock at an inflated price to somebody else who didn't know about the fraud."

But the plaintiffs' lawyer, David Frederick, countered that to bar such suits would allow Merrill Lynch to "assert immunity for a fraud" perpetrated against a "category of victim of fraud who has no federal remedy".

Justice Stephen Breyer said he was worried that permitting such suits in state court would allow investors to circumvent the limits imposed by federal securities laws on purchaser and seller suits. Mr Breyer said nothing would stop them from proceeding in state court, simply by filing their suits as holders rather than sellers.

Justice Ruth Bader Ginsburg asked: "Why would Congress with respect to this category want there to be a more plaintiff-friendly rule than it put in place for the purchaser-seller?''