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Court weighs securities fraud case changes
Question of the Day
WASHINGTON (AP) - The Supreme Court on Wednesday seemed open to the possibility of making it harder for investors to join together to sue corporations for securities fraud - but maybe not as hard as companies that have to defend such lawsuits would like.
Any change in the standard for green-lighting class-action lawsuits could have a chilling effect on shareholders who bring the cases, which have generated an estimated $73 billion in settlements since 1997. Investor groups say class actions help curb corporate abuse and market fraud, while opponents claim they extort money from corporations and create a windfall for plaintiff’s lawyers.
During arguments in a closely watched case against Halliburton Co., most justices appeared unwilling to completely overturn a quarter-century-old decision that has helped investors launch class-action cases based on the effect misleading statements have on a company’s stock price.
But some conservative justices, including Justice Anthony Kennedy, who has often been a swing vote, suggested a middle ground that would force investors to show much earlier in a case that the alleged fraud actually caused a stock’s price to drop.
Halliburton is trying to block a class-action lawsuit claiming the energy services company inflated its stock price. A group of investors say 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 Supreme Court has been hostile to class-action lawsuits over the last few years, tossing out a massive employment discrimination lawsuit case against Wal-Mart and voiding a consumer class action against Comcast Corp.
Halliburton lawyer Aaron Streett referred to both of those cases on Wednesday as he urged the court to overturn its 1988 decision in Basic v. Levinson, a case that sparked a wave of securities-related class-action lawsuits against publicly traded companies and has led to billions in settlements.
The Basic case says shareholders who claim they were defrauded by false statements in securities filings don’t have to prove they actually relied on the statements. Rather, the court reasoned that any misrepresentation would be reflected in the current stock price. Even if investors are not aware of the misstatements, they are presumed to be aware of them because they affect the stock price.
This presumption, known as the “fraud-on-the-market theory,” has become the driving force for modern class-action securities cases. But Streett said “it was wrong when it was decided and it is even more clearly erroneous today,” because it doesn’t account for the sometimes random and arbitrary nature of modern stock trading.
Getting a judge to approve a class is a critical question in such cases because once that happens, pressure increases enormously and the vast majority of companies decide to settle.
But during the arguments Wednesday, Chief Justice John Roberts questioned whether overturning the case entirely was practical, saying different economists have opposing arguments over whether the Basic decision remains sound.
“How am I supposed to review the economic literature and decide which of you is right on that?” Roberts asked.
Kennedy suggested seeking a “midway position” that would leave the precedent largely intact but insert another hurdle for investors to certify a class. The compromise, proposed by a group of law professors in a friend of the court brief, would require a special “event study” before a court approves a class.
The study would determine whether the company’s alleged fraud actually had an effect on the stock price. If it did, then the class could be certified and the case could move forward. If not, then investors could not win class certification.
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