The Supreme Court has heard some long-winded arguments this week in a case involving Halliburton Co. that has attracted a great deal of attention. The court seems to be open to the possibility of making it more difficult for investors to join together to sue corporations for securities fraud, but maybe not as difficult as companies that have to defend such lawsuits would like.
In 1988, the Court said it was enough that investors alleging fraud rely on the integrity of stock prices, which in well-developed markets should be a reflection of public information. That legal doctrine, known as "fraud on the market," has provided a basis for allowing investors to pool their claims into one class-action lawsuit. Investors have to prove that a company's statements are misleading, but if the court abandons its precedent, investors could have difficultly bringing class actions at all.
Conservative justices have expressed unease with the court's 1988 decision in Basic v. Levinson. However, by the end of the arguments, even some critics of that ruling suggested there was a way to improve it without abandoning the ruling altogether. "I call it the midway position," Justice Anthony Kennedy told The Wall Street Journal.
Justice Elena Kagan and other liberal justices have suggested there was no justification to overrule precedent. Congress has been active in passing securities-law reforms and "has had every opportunity" to overrule or alter the court's Basic decision, but hasn't done so. Additionally, the Wall Street Journal reported that Justices Antonin Scalia and Samuel Alito are skeptical of the premise behind the court's earlier decision, suggesting it had made it too easy for investors to have their lawsuits certified to proceed as class actions.
Justice Kennedy, however, asked questions that sought a compromise in deciding the case. While citing a legal brief filed by law professors, he asked whether companies defending against securities-fraud allegations should have a chance before a class action is certified.
The dispute focuses on a decade-old lawsuit covering investors who bought Halliburton shares between 1999 and 2001. The plaintiffs allege that Halliburton misled the public about its asbestos liabilities, about revenue on construction contracts, and about the benefits of its 1998 merger with Dresser Industries. Halliburton argued that any misrepresentations alleged by the plaintiffs had no actual impact on the company's share price.
According to Halliburton's lawyer Aaron Streett of Baker Botts LLP, the 1988 decision has been undermined by later developments. Investors don't all rely on market prices in the same way as hedge funds, and volatility traders follow investment strategies that do not rely on the integrity of the market price whatsoever.
Meanwhile, David Boies of Boies, Schiller & Flexner LLP said the Basic decision was now "embedded" in the law and that Basic's presumption about stock prices reflecting market realities made even more sense today.
"In 1988, people were still sitting home reading Barron's to try to figure out what was happening in the stock market. Today you have real-time information," he said.
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