Following an active two weeks, with decision on some of the most pressing cases it heard this session, the Supreme Court of United States handed down its decision in Halliburton v. Erica P. John Fund on June 23. The much-awaited decision will change the way investors bring class action lawsuits against companies when their value takes a hit.
The case asked the Supreme Court to reconsider its ruling on Basic v. Levinson, a 1988 case that found investors did not need to show they relied on a misleading statement by the company when filing suit seeking to recover investment losses. The 1988 ruling sided with the fraud-on-the-market theory, which holds investors rely on efficient stock market and presume stock prices are accurate when they make investment decisions. They should therefore be allowed to bring suit when a company has been found to have filed misleading statements.
In its decision, the court took a middle-of-the-road tack, saying that investors who cannot demonstrate reliance on financial statements should not be completely excluded from a class, but that companies should have the opportunity to demonstrate that their statements did not affect the price of the stock. If that demonstration were successful, it could potentially stop a lawsuit in its tracks.
In the opinion, which was delivered by Chief Justice John Roberts, the court said “Halliburton urges us to overrule Basic’s presumption of reliance and to instead require every securities fraud plaintiff to prove that he actually relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock. Before overturning a long-settled precedent however, we require special justification, not just and argument that the precedent was wrong decided….Halliburton has failed to make that showing.”
But while Halliburton may have been unable to totally eliminate the Basic precedent, the changes to it could level the playing field for corporations, which typically see a deluge of class actions following a large dip in stock prices.
Aaron Streett, head of the Supreme Court and Constitutional Law practice group at Baker Botts L.L.P., who argued the case for Halliburton, says, “We are pleased that the Supreme Court restored a measure of rationality and balance to securities class actions in the Halliburton Co. et. al. v. Erica P. John Fund 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.”
We’ll have more from Streett and other experts, on how the ruling could affect securities litigaition later this week.