Decision stops short of tossing out decades-old legal theory
By Sam Hananel
Associated Press
WASHINGTON (AP) — The Supreme Court on Monday made it tougher for investors to join together to sue corporations for securities fraud, a decision that could curb the number of multimillion dollar legal settlements companies pay out each year.
But the unanimous ruling was only a modest step. It stopped short of tossing out a quarter-century-old legal theory that might have ended securities class action lawsuits altogether.
Writing for the court, Chief Justice John Roberts said that companies should have a chance in the early stages of a lawsuit to show that any alleged fraud was not responsible for a drop in the company’s stock price.
The change is expected to make it more expensive and time consuming for plaintiffs at the early stages of litigation. That gives corporations a better chance to mount a defense and could discourage lawyers from bringing weaker securities cases.
The decision is a victory for business groups that complain the growth of such class actions is a drain on corporate profits and a windfall for plaintiff lawyers. Investor groups say the lawsuits help deter corporate fraud and abuse.
The ruling is a partial victory for Halliburton Co., which is trying to block a class-action lawsuit claiming the energy services company inflated its stock price. But the justices rejected Halliburton’s broader request to overturn the court’s 1988 decision in Basic v. Levinson, a case that sparked a surge in securities class-action lawsuits against publicly traded companies and has led to an estimated $73 billion in settlements since 1997.
Under Basic’s “fraud on the market” theory, shareholders who claim fraud don’t need to show they actually relied on specific false statements. The theory presumes a company’s false statements inflated its stock price.
Business groups including the U.S. Chamber of Commerce and the National Association of Manufacturers had urged the court to overturn Basic. They argued that the doctrine has led to significant costs for investors and businesses and bred confusion in the courts. But the Obama administration asked the court not to overrule the precedent, saying its premise remains sound.
The case involves a group of investors who claimed they lost money when Halliburton’s stock price dropped after revelations the company misrepresented revenues, understated its liability in asbestos litigation and overstated the benefits of a merger. The case now goes back to the lower courts, where Halliburton will have another chance to block the investors from joining together as a class.
While the court’s judgment was unanimous, Justice Clarence Thomas wrote a separate opinion saying that Basic should be overruled because economic realities have undermined its premise. He was joined by Justices Antonin Scalia and Samuel Alito.
The case is Halliburton Co. v. Erica P. John Fund Inc., 13-317.
