June 21 (Bloomberg) -- The U.S. Supreme Court tightened the limits on fraud lawsuits by shareholders, saying investors filing cases must show more than the mere possibility that company officials knew they were engaged in wrongdoing.

The justices, voting 8-1, told a lower court to reconsider a decision allowing accusations that telecommunications equipment maker Tellabs Inc. fraudulently inflated revenue. The justices said the lower court misinterpreted a 1995 law that raised the bar for shareholder suits.

A lawsuit's suggestion that officials intended to engage in wrongdoing must be ``cogent and at least as compelling as any opposing inference one could draw from the facts alleged,'' Justice Ruth Bader Ginsburg wrote for the court.

The ruling gives companies a new tool to win early dismissal of shareholder suits and avoid the expense of mounting a full- scale defense. Already, courts are dismissing suits before trial twice as frequently as they were before the 1995 law took effect. It's the second setback for investor advocates this week at the Supreme Court.

The decision didn't go as far as two justices, Antonin Scalia and Samuel Alito, wanted. Scalia filed a separate opinion saying the suggestion of wrongdoing should be ``more plausible than the inference of innocence.''

The majority also stopped short of throwing out the investor suit, as Tellabs had sought.

`As Good a Result'

``This is probably about as good a result as the plaintiff's bar could have hoped for, realistically speaking,'' said Adam Pritchard, a securities-law professor at the University of Michigan in Ann Arbor and a former SEC lawyer.

The justices set aside a ruling, issued by the Chicago-based 7th U.S. Circuit Court of Appeals, that Pritchard said would have had a ``big impact'' and given investors considerably more ability to file lawsuits. Business groups hailed the Supreme Court ruling.

``It should go a long way in reducing abusive securities class actions, discouraging blackmail settlements and providing certainty for the financial industry and investors,'' said Robin Conrad, executive vice president of the U.S. Chamber of Commerce's litigation unit in Washington.

Investor advocates say the ruling actually will help many defrauded shareholders, making it clear what they must do get their cases into court.

Not `Impossible'

``They didn't make it impossible to do,'' said Jeffrey Robert White, a lawyer who filed a brief in the case for the American Association for Justice, which represents trial lawyers. ``This is not a green light for courts to start throwing out all these investor suits. You just have to do it according to the court's standards.''

Justice John Paul Stevens was the lone dissenter, saying he would have upheld the lower court ruling and let the case go forward.

The case marked the Supreme Court's first look at one of the linchpins of the 1995 law: its requirement that judges dismiss complaints -- without proceeding to the fact-gathering stage of litigation -- unless the allegations create a ``strong inference'' that company officials knew or had reason to know they were doing something wrong.

Ginsburg said judges applying that standard ``must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.'' At the same time, she said the inference ``need not be irrefutable'' or ``of the `smoking gun' genre.''

Richard Notebaert

Tellabs' lawyer, Carter Phillips of Sidley Austin in Washington, said the ruling adopted ``about as good a standard as we could have gotten.''

The shareholders' lawyer, Richard Weiss of Milberg Weiss & Bershad, didn't return a call seeking comment.

The class action suit accused Tellabs of improperly booking revenue for the fourth quarter of 2000 and making false projections for 2001. The suit said former Chief Executive Officer Richard Notebaert told analysts and the public in 2000 and 2001 that the market was strong for the company's top-selling Titan 5500, a device for managing phone-network traffic, even though he knew demand was evaporating.

The suit, which relies on 27 confidential sources, also said the Naperville, Illinois-based company deceived investors about prospects for its Titan 6500 product.

Tellabs shares, which reached a peak of $77.25 in November 1999, haven't topped $20 since June 2001. Today, shares rose 11 cents to $10.81 at 4:30 p.m. in Nasdaq Stock Market trading.

The Bush administration and Securities and Exchange Commission joined Tellabs in urging the nation's highest court to set aside the 7th Circuit decision and restrict shareholder suits.

The high court on June 18 gave investment banks a new shield from antitrust claims, throwing out investor lawsuits that accused the securities industry of rigging 900 initial public offerings.

The case is Tellabs v. Makor Issues & Rights, 06-484.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: June 21, 2007 16:43 EDT