Since the Enron hysteria of 2002 led to the imposition of draconian new regulation on publicly traded companies, Wall Street has gone into a kind of recession. More companies are switching to private sources of capital (such as "hedge funds"), and many other firms are choosing to have their shares listed overseas, in countries that impose fewer regulations.
So naturally, the Democratic Congress is reacting by attacking the hedge funds, proposing a massive tax increase targeting those funds.
In an opposite move, however, the Supreme Court has issued a welcome (but limited) ruling restricting the filing of harassing lawsuits by disgruntled investors who sue every time a company fails to deliver on the public promises made by its executives—that is, by those who want to regard the stock market as a source of entitlement income, rather than a private investment in which they are responsible for taking their own risks.
"Investors' Suits Face Higher Bar, Justices Rule," Stephen Lebaton, New York Times, June 22 The Supreme Court on Thursday dealt a blow to investors who want to sue companies and executives because of suspected fraud, setting a higher standard for class-action lawsuits to go forward.
The decision was the second one this week by the court that was a defeat for shareholders and a victory for the defendant companies. On Monday, the justices ruled that securities underwriters on Wall Street are generally immune from civil antitrust lawsuits.
It came as senior officials, led by Treasury Secretary Henry M. Paulson Jr., have been pushing for limits on shareholder lawsuits. Mr. Paulson, along with other administration officials and some senior lawmakers, have maintained that such lawsuits and regulations, written in the aftermath of corporate scandals like those involving Enron and WorldCom, may be discouraging investment and causing too many companies to look overseas to raise capital.
With only 18 months left until President Bush leaves the White House—and even less time for contentious policy issues to make their way through a capital that is preparing for elections—corporations and political supporters of the administration are pressing for a relaxation of some of those regulations and new restrictions on lawsuits.
The court on Thursday waded into the debate on the defendants’ side. By a vote of 8 to 1, it said that investors must show “cogent and compelling” evidence of intent to defraud—a standard that makes it easier for companies and their executives to get shareholder complaints dismissed.