WASHINGTON - A deadlocked Supreme Court yesterday let stand a lower court ruling that allowed the reopening of securities fraud cases dismissed as a result of a 1991 high court ruling.

After a 4-to-4 vote by the justices produced an impasse, the high court did not issue an opinion in the case, which raises legal questions about whether and to what extent the judgement sets a precedent for similar cases.

Justice Sandra Day O'Connor did not participate in the case.

The court's action affirmed a decision by the U.S. Court of Appeals for the Fifth Circuit in Morgan Stanley & Co., et al., v. Pacific Mutual Life Insurance Co. The action applies to municipal bond and other securities fraud cases.

James Benkard, an attorney with Davis, Polk & Wardwell in New York, who represents Morgan Stanley, said "we will be banging the books" to determine whether the judgment sets a precedent. Benkard said the circuit courts are split on whether the statute at issue, Section 27A(b) of the Securities Exchange Act of 1934, violates the separation of powers doctrine of the U.S. Constitution.

The Fifth Circuit held that the provision is constitutional, but the Sixth and Tenth Circuits have ruled the opposite in similar cases.

Morgan Stanley is considering its options, including petitioning for rehearing, because the issue is important and the court "is so obviously split," Benkard said.

Benkard and other attorneys said they did not know why O'Connor did not participate. If she recused herself because of the parties involved, she may participate in similar future cases if they involve different parties, Benkard said. In addition, a new justice may be appointed who could shift the balance on the court in favor of considering rehearing or of taking a similar case from another federal circuit.

A similar case in which a petition for review could be filed is Plaut v. Spendthrift Farms, Benkard said. In this case, he said, the Sixth Circuit ruled that Section 27A(b) is unconstitutional.

The Morgan Stanley case arose from the high court's 1991 ruling in Lampf v. Gilbertson. The ruling shortened to three years the period of time in which investors can file certain fraud suits from the date of the alleged fraud.

The case revolved around the constitutionality of legislation that Congress passed in response to the ruling. Legislators acted out of concern that investors would be deprived of an opportunity to present fraud claims that otherwise would have been procedurally valid under state statutes of limitations.

In response to the Lampf ruling, Congress added new provisions to the securities law, Sections 27A(a) and 27A(b), which preserved pending claims and reopened cases dismissed by lower courts.

The circuit courts have uniformly upheld Section 27A(b) preserving pending claims, but they are split on reopening dismissed cases as called for in 27A(b).

Morgan Stanley, which had been sued by Pacific Mutual Life Insurance Co. for its role in a fraudulent 1987 securities sale involving First Republic Bank of Texas, said reopening the case violated the doctrine of separation of powers between the legislature and the judiciary.

A federal district court dismissed the Morgan Stanley case in 1991 after the Lampf decision.

Securities law attorney Jonathan Eisenberg, of Kirkpatrick & Lockhart in Washington, said the high court's judgment in favor of the Fifth Circuit "is not really an affirmation."

"For other courts to come out the other way, they can continue to come out the other way," Eisenberg said. The high court also would have split if the case had come out of the Sixth or Tenth Circuits, which held that Section 27A(b) is unconstitutional, because the issue is the same, he said.

"But it's not as if the decision will have a gigantic impact" on litigation, Eisenberg said. Most cases affected by the congressional action fell under Section 27A(a), which was not challenged by Morgan Stanley, he said.

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