WILL FEDERAL SECURITIES laws protect you from one of the worst business nightmares -- a fraudulent deal -- when you buy a company?
For more than 50 years, those laws have protected buyers against false claims in public and private stock sales. But a pending U.S. Supreme Court decision could change that, throwing jurisdiction over certain fraud cases back to the state courts. Such a ruling would make buying a company a lot riskier. Inconsistencies among state codes and clogged dockets would make it more expensive and protracted to litigate fraud complaints. And in most state courts, it would also be much more difficult to prove that a seller intended to deceive a buyer.
The case, likely to be decided by July, involves the sale of all the stock in a small private company to an investor who now claims fraud. Although such private stock sales require no registration with the Securities and Exchange Commission, they fall under the same antifraud provisions as do public stock deals. A lower federal court ruled against the new owner, however, because a previous Supreme Court decision had been construed to mean that stock purchases to gain control of a company don't have the same protection as passive investments.
The SEC sides with the buyer, arguing that federal law applies whether you buy 1% of a company or the whole thing. But if the High Court disagrees, look out. Says Rosalind Cohen, an SEC assistant general counsel, "We'd be very concerned about setting off a climate of enormous commercial uncertainty."