Securities class action suits are here to stay. That’s the result of the Supreme Court’s recent ruling in Halliburton v. Erica P. John Fund, a case that directors, officers, the companies they serve and the D&O insurance industry closely watched.
As I discussed in an earlier column for InsideCounsel, the Supreme Court’s decision to hear the case prompted many to predict that we were about to see the end of most securities class action lawsuits. Sadly, these hopes have been dashed by the Supreme Court’s decision.
At issue was whether the Supreme Court would overrule its 1988 ruling in Basic, Inc. v. Levinson. If the Supreme Court had done so, it would have been much more difficult for plaintiffs in Section 10(b) securities class action cases to certify a class, and it might have spelled the end of this type of suit. The defendants in Halliburton argued that Basic should be overturned because it relied on an economic theory, the “efficient market theory,” that is at least hotly disputed if not completely discredited today.
The new impediment to class certification would have required plaintiffs to show that each individual class member relied on the allegedly false statements that caused a company’s stock price to fall. Showing actual reliance is a lot more difficult than the presumption of reliance that plaintiffs have enjoyed since Basic—and still enjoy today after Halliburton.
There is, however, a possible silver lining for defendants in Section 10(b) securities class action cases. The Supreme Court has clarified that Basic’s presumption of reliance is a rebuttable one. This means that defendants are able to present evidence at the class certification stage that the alleged misrepresentations had no impact on the stock price of the company. If the defendants can rebut the presumption of reliance, the class would not be certified and that would be the end of the case.
The potential that weaker cases might be knocked out at an early stage may change the dynamics of which cases are brought in the first place. After Halliburton, it could be that weaker cases will not be brought because plaintiffs will not want to spend resources to bring a case only to see it knocked out by an event study. However, defendants that move forward with efforts to rebut the presumption of reliance by commissioning an event study are making a high-stakes bet. Consider the likely impact on a defendant who commissions an event study and then loses (i.e. the class is certified because the study showed that alleged misstatements did in fact impact the company’s stock price). That defendant might still be able to settle the case, but it will surely be a higher settlement than if there had been no event study that made much of the plaintiffs’ case for them.
Halliburton is an interesting case in part because it had the potential to radically change the D&O liability and D&O insurance landscape. Now, however, it’s clear that there will be no immediate change. In other words, in the shortterm, prices for D&O insurance will not decline precipitously as a result of Halliburton, and there’s also no reason to immediately lower your D&O insurance limits.
There is, however, one development of note. Even before the Halliburton case was decided, one of the major D&O insurance carriers, AIG, was out in front with an endorsement that would pay for event studies if recommended by defense counsel drawn from AIG’s list of pre-approved attorneys. It is first dollar coverage (no self-insured retention), and at this time AIG is not charging an additional premium for this endorsement. As you would imagine, other carriers are looking closely at AIG’s response. Some are already following AIG’s lead on this important coverage.