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Shareholder suit nixed again

Analysts say a judge's second dismissal of a shareholder class-action case against Silicon Graphics could set a precedent.

In what analysts say could be a precedent-setting case, a federal judge in California dismissed for a second time a shareholder class-action case against Silicon Graphics (SGI).

The closely watched case is among the first to interpret the new, more rigorous standards of evidence set by the sweeping federal Private Securities Litigation Reform Act. If upheld, it would require shareholders to meet higher standards of evidence in securities class-action suits.

High-tech companies face a disproportionately large number of such suits because of the cutting-edge nature of their products and the resulting volatility of their stock prices. According to a Stanford law school study, 34 percent of securities class-action suits filed in federal court involve high-tech companies.

Shareholders alleged that SGI and individual defendants, including chairman and CEO Edward McCracken and eight other senior officers, had issued false and misleading information about the company after a disappointing first quarter. Their goal was to inflate the price of SGI stock for the purpose of selling their own stock at a profit, the suit alleged.

After hearing another round of evidence by the plaintiffs, U.S. District Judge Fern Smith dismissed the complaint for the second time last week, citing Congress's adoption of a more stringent pleading standard. Judge Smith reiterated her earlier decision that the new law requires plaintiffs to "state with particularity facts giving rise to a strong inference" that the defendant deliberately acted fraudulently, rather than simply allege false or misleading statements.

"Motive, opportunity, and non-deliberate recklessness may provide some evidence of intentional wrongdoing, but are not alone sufficient," Smith wrote in her decision.

Bruce Vanyo, an attorney with Wilson Sonsini Goodrich & Rosati who defended SGI in the case, said that the ruling will have a big impact in reducing frivolous lawsuits.

"Her ruling says that recklessness isn't good enough, it has to be wrongdoing," Vanyo said. "Anything short of that is not good enough."

He added that courts have disagreed on the standards in the past. "Some lower courts deemed that gross negligence was enough. But that's not what Congress meant [in the 1995 Securities Reform Act], that is what the reform is about."

Representatives for the plaintiffs could not be reached.

But at least one legal analyst says that even if the ruling is upheld, it will take time for the number of shareholder cases to drop.

"This is probably a decision that is worthy for the court of appeals to address, and maybe for the Supreme court as well," said Michael Perino, a law professor at Stanford University who specializes in securities class-action cases. "It will take a number of years to find out exactly what the statute means."

Judge Smith has given the plaintiffs the opportunity to file another amended brief with additional evidence that they filed to the court in private, but they are reportedly more likely to file an appeal. The plaintiffs were given a window of ten days to refile.