U.S. investors are heading into 2008 stung by a series of legal and regulatory setbacks, analysts say, with the latest the Supreme Court’s ruling in the Stoneridge case protecting businesses from securities-fraud lawsuits.
Tuesday’s ruling follows a decision late last year by regulators allowing companies to deny shareholders access to annual director-election ballots, and comes amid share dilution and dividend cuts at big banks hobbled by the mortgage crisis.
“It’s not a good time,” lamented Barbara Roper, director of investor protection at Consumer Federation of America.
As the stunning corporate scandals of 2002 recede from memory, Roper and other investor advocates say that recent developments in courtrooms, federal agencies and corporate boardrooms have eroded the interests and protection of Main Street shareholders.
“It’s like Enron and WorldCom never happened,” Roper said.
James Cox, a professor at Duke University who specializes in securities law, said that for investors, “We are seeing a piling-on.”
The Securities and Exchange Commission in November drew the ire of governance advocates and big shareholders like pension funds when its commissioners voted 3-1 to let companies deny investors access to public companies’ annual proxy ballots.
Critics say the move could make corporate America less responsive to investors. But SEC Chairman Christopher Cox has said the shareholder-rights rule was needed to provide clarity before the corporate proxy season begins.
Cox also has said he believes that shareholders should have a greater say in choosing company directors and has promised that the SEC will take up the rule again this year.
As the mortgage-market crisis has deepened, investors also have suffered from reduced dividends and diluted share value by investment banks that loss big on mortgage securities.
On Tuesday Citigroup Inc., the biggest U.S. bank, reported that it lost nearly $10 billion (euro6.72 billion) in last year’s fourth quarter and cut its dividend even as it lined up $12.5 billion (euro8.4 billion) in new investments from foreign-government wealth funds and existing shareholders. The company said the 41 percent cut in its quarterly dividend, along with the foreign investments and a stock sale of around $2 billion (euro1.34 billion), will help boost capital and buttress finances. The dividend was cut to 32 cents a share from 54 cents.
In the Stoneridge case before the Supreme Court, the justices ruled Tuesday against investors who alleged that two suppliers of cable TV set-top boxes, Scientific-Atlanta and Motorola, colluded with Charter Communications Inc. to deceive Charter’s stockholders and inflate the price of the cable TV company’s stock.
The decision is expected to have an impact on a similar class-action lawsuit by shareholders who invested in scandal-ridden Enron Corp. Investors in Enron, once the nation’s seventh-largest company, are seeking more than $30 billion (euro20.15 billion) from Wall Street investment banks, alleging they colluded with Enron to mask its financial problems.
Wall Street’s take on the high-court ruling was that it spared American businesses from billions of dollars in litigation costs that would have crippled their competitiveness and hurt the economy and consequently, investors.
“The court clearly recognized that investors already receive substantial protections under the law,” Ira Hammerman, senior managing director of the Securities Industry and Financial Markets Association, said in a statement.
The SEC itself had recommended that the government intervene in the case on the side of investors, but the administration, through the Justice Department’s solicitor general, rejected that position and filed a brief on the side of the companies.
The Stoneridge ruling also follows several recent Supreme Court decisions favoring business in cases related to securities-fraud lawsuits by shareholders. In two separate rulings last spring, the court imposed a strict standard for shareholders suing companies accused of fraud, making it easier for companies and executives to seek dismissal of investor suits at the start of a case, and sided with Wall Street investment banks that allegedly conspired to drive up the price of 900 high-tech stocks in the late 1990s.
In 2006, the court blocked state class-action lawsuits by investors who contend they were tricked into holding onto declining shares.