Financial Crisis: Range of Defendants May Be Limited - Courts Have Curtailed Investors' Ability to Sue Beyond the Issuers

20 April 2009 Publication
Authors: Craig Florence

The National Law Journal

The financial crisis has shaken virtually everyone’s confidence in the security of our financial system. Although it is tempting to concentrate on institutional or regulatory failures, there are millions of honest investors whose financial security has been compromised or sacrificed by persons in whom they placed the highest trust – persons responsible for managing resources essential for education, housing, retirement and, in some instances, survival itself.

Since the crisis began, commentators have prophesied an avalanche of lawsuits against a wide array of potentially responsible parties. See, e.g., Jonathan D. Glater, “Financial Crisis Provides Fertile Ground for Boom in Lawsuits,” N.Y. Times, Oct. 18, 2008, at B1. Certainly, the brazenness of the schemes alleged against Bernie Madoff, Allen Stanford and others are astounding, and the network of people entwined in them is surely dense and complex. With a palette of financial institutions, custodians, advisers, investment managers, facilitators, lawyers and accountants to choose from as defendants, it seems that recompense is assured – or is it?

Unfortunately for investors, the range of potentially responsible parties may be narrower than they think. Congress and the judiciary have severely curtailed the ability of investors to bring securities suits generally and to extend liability outside the context of the issuing company. In 1995, Congress passed the Private Securities Litigation Reform Act, which required investors to have preliminary evidence of fraud before filing suit. Under this statute, suspicion of fraud does not justify a lawsuit; instead, investors must show that the defendants knew of the fraud or were recklessly indifferent to its existence. Recently, the U.S. Supreme Court tightened the statute’s requirements even further. In Tellabs Inc. v. Makor Issues & Rights Ltd., 127 S. Ct. 2499 (2007), the court ruled that plaintiffs would have to show a “cogent inference” of an intent to deceive or defraud, thereby raising the pleading requirements for securities litigation beyond a “merely plausible or reasonable” inference.

Read more.

Insights