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Court Narrows Stock Fraud Law : Securities: Justices rule 5 to 4 that protection applies only to initial public offerings of shares.

March 01, 1995|From Associated Press

WASHINGTON — The Supreme Court on Tuesday limited the scope of a federal law that allows people who believe they were misled before buying stocks to rescind the deal if the sellers cannot prove their innocence.

The justices ruled 5 to 4 that such legal rights are available only to people who buy a stock directly from a company during its initial public offering, not to those who buy later on the stock market.

One section of the Securities Act of 1933 states that anyone who offers or sells stock "by means of a prospectus" that was misleading may be sued by buyers. Such prospectuses are usually sent out by companies selling shares for the first time, in so-called public offerings.

The same section of the law allows buyers to rescind sales, or to collect damages if they no longer own the stock. It also places on the sellers the burden of proving they did not knowingly mislead anyone.

Other fraud provisions of the law are less friendly to buyers.

Writing for the court Tuesday, Justice Anthony M. Kennedy said, "The intent of Congress and the design of the statute require that . . . liability be limited to public offerings."

Chief Justice William H. Rehnquist and Justices John Paul Stevens, Sandra Day O'Connor and David H. Souter agreed with Kennedy.

Justices Clarence Thomas, Antonin Scalia, Ruth Bader Ginsburg and Stephen G. Breyer dissented.

Thomas wrote in the dissenting opinion that the disputed section of the law "applies to secondary or private sales of a security as well as to initial public offerings."

The ruling stemmed from the 1989 sale of stock in Alloyd Co., a manufacturer of clear plastic packaging and automatic heat-sealing equipment.

The buyers, a venture capital partnership called Wind Point Partners II, later sued Alloyd in federal court in Chicago.

They accused the three former Alloyd shareholders who sold them the stock of misleading them in a written profile of the corporation.

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