court case to decide fate of shareholder suits
Friday, March 23, 2007
Next week, the Supreme Court will consider the truthfulness of
Richard Notebaert, one of Chicago's best-known corporate chief
Oral arguments are scheduled for Wednesday in a class-action
shareholder suit arising from the collapse of Tellabs stock in
the first half of 2001, while Notebaert headed the Naperville
company. (Losses continued, as shares lost 95 percent of their
value from August 2000 through September 2002.)
Notebaert is now CEO of Qwest Communications International in
Denver, but he maintains an active presence in Chicago through
various charitable endeavors and a seat on the board of Aon.
At stake in the case is the hurdle that all shareholders must
overcome if they want to present an executive's false statements
to a jury as a violation of securities laws.
A win by Notebaert could dim the prospects of disgruntled
shareholders suing company executives for fraud. A loss could
restore a looser standard for shareholder complaints that
existed before a 1995 securities law was enacted by Congress to
curtail abusive shareholder suits.
A great deal of pressure is being applied to the Securities and
Exchange Commission and Congress to roll back the financial
reporting requirements of the Sarbanes-Oxley Act of 2002.
Critics claim the law undermines U.S. business competitiveness
in the world and erodes the appeal of the U.S. stock market for
entrepreneurs seeking to raise capital.
A decision in the Notebaert case likely will be portrayed on a
similarly grand scale, as a benefit or deterrent to U.S.
competitiveness. But the case is really just about one man and
his bullish statements about Tellabs that turned out to be false
and misleading, a much more commonplace issue investors face
every day in taking the word of CEOs.
The central question is whether the shareholder-plaintiffs, in
their complaint, established a "strong inference," as mandated
by the 1995 law, that Notebaert knew he was lying when he puffed
his company, even as sales of a key product were going south and
a new product faced delays in getting to the market.
The 7th U.S. Circuit Court of Appeals in Chicago ruled last year
that the Tellabs shareholders met the standard and a jury should
hear the case. The particulars of the complaint, subject to
proof before a jury, establish that "a reasonable person could
infer that the defendant acted with the required intent" to
defraud, said the opinion by Judge Diane Wood.
Other circuit courts have endorsed different standards,
apparently making the controversy ripe for the Supreme Court.
Notebaert's lawyers, led by Sidley Austin's ace Supreme Court
litigator, Carter Phillips, argue that the 1995 law requires the
shareholders to present specific claims of what Notebaert knew
and when he knew it, instead of vague indications that he should
have known. The apparent absence of a financial motive for
Notebaert's misstatements also should weigh in his favor, the
Generally, the Supreme Court has not been friendly to investors
who lose money in the stock market. But it does seem wrong that
an official of a public company should enjoy greater immunity
from facing a jury on fraud charges than an official of a
company not protected by the securities laws. The issue could
boil down to the intent of Congress in writing the 1995 law.