Court curbs SGI investors action

Judge invokes reform act to prevent ?meritless? suits from shareholders

A court ruling against shareholders suing Silicon Graphics (SGI) will severely limit investors? ability to bring future class action suits against Silicon Valley companies.

Last week, San Francisco federal judge Fern Smith concluded that 1995 congressional reforms, aimed at curbing securities lawsuits, severely restrict how investors can sue for alleged securities violations.

Smith has twice thrown the SGI case out on the basis that the plaintiffs had not pleaded adequately under the terms of the new law. With the standard of proof raised significantly, it will be difficult for future class action suits to go ahead unless US Congress revises its legislation. Legal experts claimed this is now almost inevitable

The SGI case was filed last year following a sharp drop in the workstation maker?s stock in late 1995 and early 1996. The suit alleged company officials misled investors about performance and carried out insider trading before stock nosedived.

However, the 1995 Securities Litigation Reform Act sought to prevent ?meritless? class action suits by raising the requirements for the types of infor- mation investors must produce.

The act came in response to complaints from firms, particularly IT suppliers, whose stock is particularly volatile, that they were being constantly sued because of falling share prices.

Bill Lerach, the attorney acting on behalf of the investors, claimed his suit was ?as thorough and detailed as any ever filed?, and complained that the decision would keep nearly all securities fraud cases out of court, which was not the intention of the act.

In her ruling, Judge Smith interpreted the act as allowing suits to proceed if ?deliberate recklessness? and ?knowing and intentional misconduct? can be proved early in the legal process.