WASHINGTON - The Supreme Court yesterday declined to review a federal appeals court ruling in a case that some bank and securities executives complain could lead to a flood of so-called fraud-by-hind-sight cases.

The case, UJB Financial Corp. v. Shapiro, arose after the bank's stock value declined substantially in 1990. Shareholders charged that the bank deliberately overstated the adequacy of its lending practices and provided inadequate loan loss reserves from 1987 through 1989.

Further, they alleged that the bank's 1990 announcements of increased loan loss reserves and written-off loans showed that the bank's earlier assurances about its loan policies were false.

The high court offered no explanation for its decision not to review the case. When the court declines review, no national precedent is set. Rather, the lower court ruling is binding only within the circuit in which it was issued.

Such cases, derided by financial firms as "fraud by hindsight," have proliferated during the current recession.

Initially, a federal district court dismissed the case against UJB Financial, ruling that the shareholders had not provided the court with an adequate basis for their claims against the bank.

But the U.S. Court of Appeals for the Third Circuit announced a relaxed standard for pleadings in securities fraud cases and reversed the district court's dismissal. The circuit includes Pennsylvania, New Jersey, Delaware, and the Virgin Islands.

Under the Federal Rules of Civil Procedure, which outline ground rules for filing suits in federal courts, plaintiffs generally are required when pressing fraud charges to describe how the fraud was carried out. But under the circuit court's ruling, plaintiffs are allowed to proceed without such a description if they claim to have been unable to uncover the facts before filing their complaint.

In its brief filed before the Supreme Court urging review of the case, UJB said the appeals court's ruling could subject banks and securities firms to lengthy and costly pretrial discovery proceedings, especially in cases involving the loans and lending practices of multi-billion dollar financial institutions.

During discovery, defendants are required to provide all documents plaintiffs say they need to substantiate their claims. Financial firms claim that in most fraud-by-hindsight cases, the discovery phase will demonstrate that no fraud was committed and that the case should be dismissed. Consequently, they say, they will bear heavy costs in cases that should have been dismissed before discovery.

Dean Witter Reynolds Inc., Morgan Stanley & Co., Paine Webber Inc., and Wertheim Schroder & Co., joined by the Securities Industry Association, filed a friend-of-the-court brief on behalf of UJB.

The firms and trade group argued that underwriters could be hit up with analogous claims. For example, they said, investors may go after underwriters when companies whose securities they underwrite perform poorly, claiming that the prospectuses and other disclosure documents were fraudulent.

Even though the Supreme Court declined to review this case, a similar dispute may eventually come before the high court. Other circuit courts of appeal could issue contrary rulings in such cases, and the Supreme Court may decide to review one in order to establish uniformity among the circuits.

However, UJB's brief to the justices urging review noted that the circuit court's ruling conflicted with the standards for filing suits in several other circuits. Consequently, it is unclear what, if any, action the high court will take on the issue.

In other developments yesterday, the Supreme Court declined to review whether lower courts erred when they refused to grant full refunds to taxpayers in Kansas City, Mo., following the high court's 1990 ruling that federal judges may not impose tax increases to fund desegregation orders.

In 1987, a federal district court overseeing desegregation in Kansas City ordered a doubling of a school property tax levy to $4 per $100 assessed valuation.

The Supreme Court, ruling in Missouri v. Jenkins in 1990, said federal judges may order localities to increase taxes but may not order tax increases directly. Following that ruling, a number of Kansas City taxpayers sought refunds of the illegally imposed taxes.

The federal district court in the case granted refunds of $10.7 million taxpayers who paid the increase in 1987 under protest, but denied refunds totaling $23.1 million to taxpayers who did not pay under protest. The court also denied refunds of $34.3 million to all taxpayers who paid the court-ordered increase in 1988.

The refund rulings in the case, Clark v. Jenkins, were upheld by the U.S. Court of Appeals for the Eighth Circuit.

The lower court rulings were based on a Missouri law that sets up standards for taxpayers to collect refunds. But the Kansas City taxpayers alleged in their brief to the Supreme Court that the state law should not have been presumed to apply because the illegal tax increase was imposed by a federal judge.

The Supreme Court justices also asked the solicitor general yesterday to provide the views of the federal government in a dispute over whether states may exempt some property from property tax levies while not providing a similar exemption for railroad owners.

The case, Oregon Department of Revenue v. ACF Industries Inc., hinges on interpretation of the Railroad Revitalization and Regulatory Reform Act of 1976, which generally prohibits discriminatory taxation of railroad properties.

The key question before the court is whether it is discriminatory, as the U.S. Court of Appeals for the Ninth Circuit ruled, for states to allow exemptions for nonrailroad property while at the same time taxing railroad property. The appeals court held that "any exemption not also available to railroads violates the statute..."

The Multistate Tax Commission, a compact of states that seeks to promote compatibility of state tax systems, warned that failure to overturn the Ninth Circuit Court's ruling would provide ammunition for other firms to attack state tax systems.

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