WASHINGTON -- The Supreme Court has declined to review an appeals court ruling that makes it easier for shareholders to accuse bankers of securities fraud over loan-reserve disclosures.
Expensive Defenses Feared
The case, in which UJB Financial Corp. allegedly failed to reserve adequately for real estate loans that later soured, now returns to a lower court, leaving the banking industry vulnerable to a costly war of legal attrition, if not defeat.
While lawyers for Princeton, N.J.-based UJB expressed confidence they would ultimately prevail, they said the high court's unwillingness to hear the case would force UJB and others to spend millions of dollars defending themselves.
The Supreme Court "has done a disservice to the economy by refusing to take up this case," Dennis J. Block, a lawyer with Weil, Gotshal & Manges in New York, said Tuesday. He said the courts do not understand the relevant accounting issues.
In the UJB suit, a group of investors had charged that its lead bank should have known that certain loans required additions to loss reserves.
UJB -- along with a cadre of supporters that eventually included the American Bankers Association and Securities Industry Association -- argued that the investors' claims could be substantiated only with hindsight.
A federal district court threw most of the case out. But the U.S. Court of Appeals for the Third Circuit in Philadelphia reversed the ruling, putting in place what Mr. Block said was a "relaxed standard" for proving securities fraud.
"They said you could plead fraud by saying what the mistakes are, who uttered the mistakes, and where," the UJB lawyer said. "But they forgot to say you have to prove |how' the statements are fraudulent."
"It is impossible to run a bank if honest and reasonable business judgments are made into guarantees of positive investment results -- or guarantees of costly litiation from shareholders charging that those judgments were faulty," the ABA said in its brief to the Supreme Court.
The ABA added, "it is extremely important that courts be able to dismiss such suits which fail to plead fact demonstrating the fraudulent activity being charged, as opposed to simply showing that management failed to predict the future.'
The Securities Industry Association and two of its members backed the bank position, arguing that such lawsuits "allege, with little or no factual elaboration, that the reserves established in the earlier period were understated."
Michael F. Crotty, a lawyer who handles litigation for the American Bankers Association, said he was confident the industry would turn back a spate of cases similar to UJB v. Shapiro, the case the high court would not hear.
"The industry will begin to defend itself, and sooner or later that will make it unprofitable for the plaintiff lawyers, and they'll go on to something else," Mr. Crotty said.