The following guest post is by Jonathan M. Plasse and Christopher McDonald, partners at Labaton Sucharow & Rudoff LLP.

Last week the Supreme Court heard oral argument in two class action cases, Tellabs, Incorporated v. Makor Issues & Rights, Ltd. and Credit Suisse v. Billing, the outcomes of which may impact in different ways the viability of future actions to recover investor losses. If decided adversely to shareholder interests, each case may impede shareholders' ability to recover losses caused by a company's fraudulent disclosures, collusion or other illegal practices.

The Tellabs case could significantly increase the burden that investors – public pension funds, retirement funds, individuals and others – face when attempting to recover losses caused by a company’s fraudulent activity. In Tellabs, the Court will decide whether to make it easier for federal courts to dismiss securities class actions at the pleading stage.

The background on the case is fairly straightforward. Tellabs manufactures and markets broadband access and optical networking equipment. The plaintiffs allege that Tellabs and its executives concealed from investors the fact that the company was experiencing a “dramatic slowdown” in sales from mid-2000 to mid-2001. During that same time, Tellabs’ CEO was repeatedly reassuring investors that, unlike its competitors, Tellabs was experiencing “robust growth.” Also during that period, Tellabs insiders profited by selling tens of thousands of Tellabs shares for more than $8 million. As a result of the defendants’ fraudulent acts and statements, Tellabs’ share price peaked at a high of $65.38, before plunging to $16.04 after the truth about the company’s financial condition was disclosed.

In Tellabs, the Supreme Court will be reviewing the Seventh Circuit’s interpretation of “scienter,” meaning a defendant’s intent, or culpable state of mind. To succeed on a fraud claim under the securities laws, a plaintiff must allege facts that create a “strong inference” of scienter – in other words, a strong inference that the defendants knew, or should have known, that their statements to the investing public were false or misleading. The Seventh Circuit found that a securities class action can proceed if, based on the facts alleged in the complaint, “a reasonable person could infer that the defendants acted with the requisite intent” – a standard consistent with rulings by several other U.S. Courts of Appeals, including the Second Circuit. On their appeal to the Supreme Court, the defendants contend that claims of securities fraud should be dismissed at the pleading stage unless the “facts alleged in the complaint strongly show the promise or substantial merit in a plaintiff’s claim of scienter,” which includes alleging facts that “meaningfully tend to exclude the possibility of innocence.”

The standards for scienter advanced by the defendants in Tellabs would make it extremely difficult for most securities class actions to proceed. Were the Supreme Court to adopt the position advanced by the defendants in the case, the impact would be dramatic, as many meritorious lawsuits would likely not survive. This is true because investors would be required to not only allege detailed, specific facts showing that the defendants intended to violate the law, but facts that also rule out any possible non-culpable explanations for the defendants’ conduct.

This unreasonably high standard, which would have to be met before the plaintiffs are permitted to engage in discovery on the issue of the defendants’ subjective state of mind, would result in many meritorious cases being thrown at the earliest possible stage of litigation. In turn, investors would increasingly be left with little recourse in the event of fraud.

One surprising aspect of the Tellabs case is that the federal government – in a break from its past policies that encouraged protecting investors and the public, rather than protecting wrongdoers – filed amicus curiae (friend of the court) briefs in support of the defendants. That said, representatives of a majority of the states, including the attorneys general of 24 states and territories, filed amicus briefs in support of the plaintiffs in the Tellabs case. The attorneys general warn that the standard advocated by the defendants and the federal government “carries the high price of blocking many meritorious claims . . . that protect the market, well-run businesses, and investors.”

Indeed. In the wake of Enron, WorldCom and other high profile cases of corporate fraud (including, most recently, the expanding options backdating scandal), the last thing this country needs is for the Court to further shield corporate wrongdoers from liability by sharply curtailing the number of private securities lawsuits seeking redress in instances where companies and their officers have not been truthful with the investing public.

In the Credit Suisse case, the Supreme Court will decide whether antitrust laws apply to Wall Street.

Credit Suisse is one of ten investment banks named as defendants that allegedly rigged the initial public offerings (IPOs) of approximately 900 Internet and technology stocks in the 1990s. The plaintiffs allege that in the course of underwriting IPOs, the banks and certain institutional investors to which they allocated IPO shares manipulated aftermarket (stock market) share prices by tie-in arrangements such as "laddering." With laddering, institutional investors agree to purchase an allocation of IPO shares directly from the underwriter, but also agree to purchase shares in the aftermarket at pre-arranged ever increasing prices. These pre-arranged purchases create the illusion of demand in the market, which artificially drives up the share prices that ordinary investors pay. By then selling their shares at the artificially high prices, tie-in participants illegally profit because their collusion – rather than competitive market forces – is what caused share prices to skyrocket. The plaintiffs – who bought shares at the allegedly “laddered” prices – claim that the defendant banks and participating institutions used tie-in arrangements to line their pockets with billions of dollars in illegal collusive profits in violation of federal and state antitrust laws.

The question before the Supreme Court is not whether laddering violates the antitrust laws (in our opinion this is not a seriously debatable point: it does). Rather, the question is whether the antitrust laws can be used by victims of laddering to seek redress for their losses. The plaintiffs and the Second Circuit Court of Appeals say the defendants’ conduct is actionable under the antitrust laws. The State of New York and the American Antitrust Institute, both of which submitted amicus briefs in support of the plaintiffs, agree. The defendants, on the other hand, along with several securities industry and pro-business organizations submitting amicus briefs, contend that since they operate within a market closely regulated by the Securities and Exchange Commission, they should have immunity from civil antitrust liability. The United States, backtracking somewhat from a position the Department of Justice took before the Second Circuit, found fault with the standard the Second Circuit applied and advocated that the case be remanded to permit the plaintiffs the opportunity to re-plead their complaint.

The legal doctrine the defendants invoke is that of “implied repeal,” which means essentially that the regulatory scheme enforced by the SEC has supplanted, or repealed, the antitrust laws insofar as the conduct of regulated entities like investment banks is concerned. According to the defendants, because (a) the securities industry is so highly regulated, and (b) laddering is unlawful under the securities laws, any shareholder remedies ought to be pursued by application of the securities laws (which do not allow for treble damages or the awarding of attorneys’ fees to successful plaintiffs), rather than the antitrust laws (which do). Importantly, private plaintiffs are not the only ones who would be divested of the ability to pursue antitrust remedies under the defendants’ proposal. New York’s amicus brief in support of the plaintiff shareholders points out that while the defendants "purport to oppose only private class actions, the sweeping doctrinal change they advocate would equally curtail the ability of governmental antitrust enforcers, including the Justice Department and the State Attorneys General, to protect investors and businesses from anticompetitive conduct in the securities industry."

The problem with the defendants’ argument, as we see it, is that implied repeal is appropriate when the application of antitrust law to a highly regulated industry could result in regulated entities having potentially inconsistent obligations. Indeed, there are many practices permitted or encouraged by the securities laws that would be unlawful under the antitrust laws. As the defendants correctly point out, the SEC needs to balance other policy considerations – capital formation, market efficiency, investor protection and general public interest – in enforcing and interpreting the securities laws. We agree that for those practices where the SEC has allowed (or may in the future allow) anticompetitive conduct that, on balance, benefits the functioning of the Nation’s capital markets, the doctrine of implied repeal is eminently sensible.

Laddering, however, is not justifiable under any of the policies the SEC is tasked with balancing. And for all the ink spilled warning that a lack of immunity would chill capital formation and damage the Nation’s capital markets, neither the defendants nor any of their amici ever plausibly suggest how laddering could conceivably foster, rather than frustrate, the SEC’s policy goals.

Thus, in our view, application of the antitrust laws to combat laddering would not be an “end run” around the securities laws, but an instance where application of antitrust law is completely consistent with the policy goals of the SEC. The only conduct that might be “chilled” is future laddering that picks the pockets of investors.

Both the Tellabs and Credit Suisse cases may impede shareholders' ability to recover losses caused by a company's fraudulent disclosures, collusion and other illegal practices. Should these cases be decided in favor of the defendants, the impact on the investing community could be devastating.