Securities Class Actions Alive, but on Life Support

On June 23, 2014, the U.S. Supreme Court issued a decision that dealt a near-fatal blow for plaintiffs in securities class action suits by making it harder for investors to collectively sue corporations for fraud. In an opinion written by Chief Justice Roberts, the court unanimously held that defendants at the preliminary class certification stage could refute the plaintiffs’ presumption of reliance on an efficient market if they can show that an alleged misrepresentation did not affect the company’s stock price.

In its decision, the court stopped just short of overturning the 26-year-old precedent set in the case, Basic v. Levinson, in which the Supreme Court adopted the “fraud-on-the-market” theory. Under the fraud-on-the-market theory, the presumption is that if public information is known to the market, then plaintiffs in securities actions do not have to show that they relied on a specific representation, only that they purchased shares prior to learning of the truth about those shares. Without the presumption, to gain class certification shareholders will have the burden of proving that they actually relied on a company’s misrepresentation to make an investment decision, and that their reliance was similar to other class members.

Halliburton, who had sought Supreme Court review after losing in the lower courts, deemed the ruling a partial victory. Since 2002, the energy services company has been vigorously trying to defend the class action suit brought by shareholders who claimed they lost money when Halliburton’s stock price dropped after revelations that the company misrepresented revenues, minimalized its liability in asbestos litigation, and exaggerated the benefits of a merger. Now, with the court’s ruling, the company has another opportunity to argue in lower courts that the class should not be certified.

While the long-term implications of the Supreme Court’s decision are not yet known, one thing is sure: it will be harder for investors to obtain class certification in securities litigation. Under the standard set by the court, Plaintiffs must introduce evidence of the lack of price impact at the class certification stage, rather than after a class has been certified, which may result in more time and effort, as well as higher costs spent, by plaintiffs at the initial stages of litigation. For this reason, some commentators have deemed the decision as pro-business. On the other hand, the court did preserve the precedent set in Basic. Justice Ginsburg, in her concurring opinion, made it clear that the ruling “should impose no heavy toll on securities-fraud plaintiffs with tenable claims,” and certain plaintiffs’ attorneys have opined that the decision will not “come up all that much,” but will just allow defendants to raise this particular defense earlier in the proceedings.

The Case is: Halliburton Co. et al., v. Erica P. John Fund, Inc. f/k/a Archdiocese of Milwaukee Supporting Fund, Inc., No. 13-317 (June 23, 2014).

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