Defrauding the American Dream
By Sergei Shev, Domestic Affairs Staff Writer

As more and more average Americans become investors in the U.S. economy, there is a greater need for their protection from corporate dishonesty. In a series of controversial decisions, the United States Supreme Court has slowly chipped away at the hopes of U.S. investors to achieve the American Dream. The Supreme Court’s recent decision in Tellabs INC. v. Makor and Rights LTD. weakened the inalienable rights essential to the pursuit of the American dream. First and foremost, this decision violates the right of average American citizens to petition the government for a redress of grievance, an essential component of the 1st Amendment to the United States' Constitution. In addition to this, the Supreme Court, through its decision to set a higher standard for the prosecution of corporate fraud, violated another essential component of the American Dream--the ability to strive for a more secure financial future. Corporations now have legal precedent on their side as they pursue limitless economic opportunity at the expense of the average American.

The decision was made on June 21, 2007 to interpret the meaning of the Private Securities Litigation Reform Act in a way that protected corporations from the inconvenience of discovery in “unmeritorious cases”. The Act, which passed in 1995, states there had to be “strong inference” that the defendant was purposely defrauding; it is that definition of “strong inference” that the Supreme Court altered to give corporations an unfair advantage over shareholders. According to Justice Ginsburg’s Opinion of the Court, “plaintiffs must ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind’ 15 U.S.C. §78u-4(b)(2) Under the new ruling, American investors would have to show that there was a stronger inference that their victimizer committed fraud knowingly and maliciously than the opposing inference of innocence merely to begin discovery.

The problem with this rigid interpretation is that in most civil fraud cases it is difficult to prove beyond “beyond the shadow of a doubt” that a defendant is guilty. It is even more difficult to do this when the investors are prevented from gathering evidence through discovery. Though it is reasonable to argue discovery is a financial inconvenience for a corporation, which weakens its competitiveness, it is unreasonable to prevent investors from inquiring into the loss of their funds. This new interpretation greatly undermines the average American’s ability to seek justice against corporate fraud, in effect curtailing their chances to achieve the American Dream.

It is difficult to understand how the Supreme Court even came to this ruling from the case that was brought before it. The CEO of Tellabs INC., Richard Notebaert was accused of making statements indicating that the TITAN 6500, Tellabs’ next-generation networking device was available for delivery, and that demand for the product was strong and growing, when in truth the product was not ready for delivery and demand was weak. He also falsely represented Tellabs’ financial results for the fourth quarter of 2000 (and, in connection with those results, condoned the practice of “channel stuffing”, under which Tellabs flooded its customers with unwanted products).

As the company’s deteriorating financial health became impossible to hide, the stock price plummeted from $67 to just below $16, costing misinformed investors millions of dollars. If this isn’t enough reason to investigate a corporation’s financial documents through formal discovery then what is? Do investors need to somehow obtain evidence beforehand to formally request evidence? That is indeed what would have to happen if the Supreme Court decision’s line of reasoning was followed by the plaintiff. The decision is unabashed corporate favoritism at its worst. Since when was saving a questionably fraudulent company discovery more important than ensuring the protection of the common citizen?

Traditionally, under U.S. law it is enough to prove, “preponderance of the evidence” in a civil case, while “beyond the shadow of a doubt” is required in a criminal case. This translates to meaning that in civil cases there is, “enough evidence as produces in your minds a reasonable belief that what is sought to be proven is more likely true than not true.” It seems this was the case with Tellabs. However, the Judges decided otherwise, and allowed the defense to get away with the weak argument that Mr. Notebaert did not have “pecuniary interests” in his dishonesty to the shareholders. They argued he did not sell his shares before the stock price plummeted. The obvious problem with this defense was strangely left unmentioned. What about the many indirect financial motivations for Mr. Notebaert to report false information such as: keeping his job, elevating the stock price of his company, “earning” that year-end bonus? All of these plausible motivations were conveniently unstated when the court was “balancing inferences”.

According to Justice Stevens, Congress left the definition purposely undefined in order to allow decisions to be made on a case by case basis, he wrote, “it is most unlikely that Congress intended us to adopt a standard that makes it more difficult to commence a civil case than a criminal case.” Justice Stevens continued his argument believing that this was not the intention of law:

There are times when an inference can easily be deemed strong without any need to weigh competing inferences. For example, if a known drug dealer exits a building immediately after a confirmed drug transaction, carrying a suspicious looking package, a judge could draw a strong inference that the individual as involved in the aforementioned drug transaction without debating whether the suspect might have been leaving the building at the exact time for another unrelated reason.

Despite Justice Stevens’ pragmatic argument, the Supreme Court ruled 7-1 in favor of heightening the plea requirement in fraud cases, giving dishonest corporations yet another safeguard from public accountability. This decision seems to ignore the fact that large corporations can easily deceive their investors. Companies like Enron and WorldCom still exist and continue to deceive their shareholders. Sometimes in the hope to raise economic competitiveness and growth, lawmakers give corporations too much, in so doing they protect the proverbial wolf from the inconvenience of the shepherd.

It seems like only a few are able to understand the real issue behind these corporate scandals. Linda Chatman Thomsen, Chief of Enforcement at the Securities and Exchange Commission said in a recent speech: [There] is a suggestion that overzealous law enforcement has contributed to the concerns about competition, and therefore we might be better off with less law enforcement.

You know what? Those of us in law enforcement want less law enforcement, too. Not as an end in itself though, but rather as a natural consequence of less law-breaking.

If corporations ceased to report questionable financial reports it would be reasonable to offer them some sort of protection from frivolous law suits, but in light of recent fraud scandals this is simply unjustified.

It is unfortunate that the current trend is to exempt corporate figures from their accountability to the American people, a trend that has been mirrored in the politics of the past decade. The danger this presents to the American Dream is severe, but whether partisan politics and interest groups will destroy this principle is yet to be determined. One thing is certain; today’s investors must not assume their government will ensure their right to pursuing the American Dream from corporate dishonesty as strongly as before.