Washington – The U.S. Supreme Court on Monday stopped short of ringing a death knell for securities fraud class actions, tinkering with but not reversing a precedent that business advocates wanted the court to overturn.
By a unanimous vote, the court increased the ability of defendants to rebut the presumptions that have allowed plaintiffs to mount class actions based on company misstatements. Specifically, it ruled that defendants can introduce evidence at the class certification stage directly rebutting the presumption that misstatements affected share price.
But, acting in Halliburton Co. v. Erica P. John Fund, 13-317, the justices rejected industry arguments that the 1988 precedent Basic v. Levinson, 468 U.S. 224—an anathema to class action defendants—should be scrapped altogether.
“According to Halliburton, the Basic presumption contravenes congressional intent and has been undermined by subsequent developments in economic theory,” Chief Justice John Roberts Jr. wrote for the court. “Neither argument, however, so discredits Basic as to constitute ‘special justification’ for overruling the decision.”
The ruling, however, gives defendants significant relief in litigating class actions, allowing them to rebut—before a class is certified—the presumption under Basic that misstatements had an impact on stock prices. The Fifth Circuit Court of Appeals had declined to consider such evidence at the class certification stage.
That presumption supports a “fraud on the market” theory holding that investors rely on an efficient market, and that share prices reflect information or misinformation that is available to the public. The theory has allowed plaintiffs to sue for securities fraud without the costly burden of having to prove specifically that individual investors read company statements and were misled and harmed by them.
In a concurring opinion, Justice Ruth Bader Ginsburg expressed her view that this aspect of the ruling “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”
Halliburton’s lawyer before the court, Aaron Streett, a partner at Baker Botts, issued this statement on the ruling: “We are pleased that the Supreme Court restored a measure of rationality and balance to securities class actions in the … decision issued today by holding that defendants may defeat class certification with evidence that the alleged misstatements did not distort the stock’s market price.”
John Coffee, a professor at Columbia Law School, called the decision “essentially a Pyrrhic victory for plaintiffs.”
“Plaintiffs dodged the bullet on the fraud-on-the-market doctrine being overturned, but defendants have gained a measurable advantage,” said Coffee, a Law Journal columnist.
In the past, he said, defendants have felt pressure to settle to avoid presenting complex economic arguments on loss causation to a jury of lay people who may not be able to understand them. Now that they can present those arguments to the judge at the class certification stage, he said, the balance has shifted slightly in their favor.
“Class actions are dying a death of a thousand cuts, and here’s another cut,” he said.
Jonathan Richman, co-head of Proskauer Rose’s securities litigation group, which represents defendants, also said that the decision cut in defendants’ favor by giving them more of a chance to avoid class certification.
“It puts a much bigger focus on class certification,” he said. “The defense bar had always felt that if you lose class certification, you’re basically done and you have to settle.”
Salvatore Graziano, a partner at Bernstein Litowitz Berger & Grossmann who represented a group of investors that filed an amicus brief on the plaintiff’s side, did not agree that the ruling was a significant victory for defendants.
“It reaffirms what Basic said 26 years ago,” he said. “This is really nothing new. It’s a strong stare decisis decision that keeps Basic.”
“I think the other side was so poised for a game-changer … that now they can’t confine themselves to the words that are in the opinion,” he added.
Investors in Halliburton stock claimed they were harmed by misleading statements from the company that underestimated its exposure to asbestos liability claims and other business setbacks. Halliburton sought dismissal, and after a lengthy appeals process—including a previous decision by the Supreme Court—the U.S. Court of Appeals for the Fifth Circuit allowed certification of the class, with the help of the 1988 Basic decision.
Basic breathed life into securities fraud class actions and, in the view of its critics, also pushed defendants into costly settlements to end frivolous lawsuits. Business advocacy groups saw the Halliburton case as a vehicle to ask the Supreme Court to overturn Basic in favor of a process that makes securities class actions more difficult to bring.
In a recent report on the case, the New York City Bar Association’s committee on securities litigation said, “The Supreme Court’s decision … whatever that decision may be, will be a landmark event in the world of class action securities litigation.”
At oral argument in March, David Boies of Boies, Schiller & Flexner represented the plaintiffs. The Obama administration sided with the plaintiffs.
@|Tony Mauro covers the U.S. Supreme Court for ALM, the Law Journal’s parent company. He can be reached at email@example.com. Twitter: @Tonymauro. Brendan Pierson of the Law Journal contributed to this story.