The U.S. Supreme Court tightened the limits on class-action lawsuits by shareholders, giving a partial victory to Halliburton Co. (HAL:US) while stopping short of abolishing those suits altogether.
Halliburton and business groups had sought to overturn a 1988 precedent and effectively end class-action fraud suits over securities bought on public exchanges. A divided court today refused, with Chief Justice John Roberts saying Halliburton hadn’t shown “the kind of fundamental shift in economic theory” that would warrant overruling the precedent.
The court instead made it easier for defendants to prevent approval of a class action, a certification that can ratchet up the pressure on a company to settle. Roberts said a defendant can block a class action by showing that an alleged misstatement didn’t affect a company’s stock price.
The ruling will “weed out some of the weaker cases,” said Larry Hamermesh, a Widener University law professor who teaches about securities litigation.
Securities-fraud litigation has thrived in recent years even as Congress has tried to rein it in. More than 4,000 class-action suits have been filed since 1996, producing almost $80 billion in settlements, according to Nera Economic Consulting, a unit of insurance broker Marsh & McClennan Cos.
“The court today took a small first step in a long journey toward reducing the costs of securities class actions for investors,” Lisa Rickard, the president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in a statement. She said the group was disappointed the court didn’t go further.
The shareholders, led by the Erica P. John Fund and represented by David Boies, contend that from 1999 to 2001 Halliburton falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger. Boies told the justices that Halliburton stock dropped 42 percent on the day those statements were shown to be false.
Dick Cheney, later the U.S. vice president, served as chairman and chief executive officer of the Houston-based oilfield-services provider during part of the disputed period.
The 1988 ruling, Basic v. Levinson, said judges considering misrepresentation claims should presume that investors will take any public misstatement into account before buying shares.
That “fraud-on-the-market presumption” helps shareholders overcome two separate legal hurdles: the securities-law requirement that they show they relied on a company misstatement, and the class-action requirement that the plaintiffs’ claims have enough similarities to warrant a group lawsuit.
Without the presumption, each shareholder would have to show individual reliance on an alleged misstatement. That requirement, in turn, would preclude class actions because it would force judges to conduct a case-by-case inquiry into the circumstances of each shareholder.
Halliburton said the Basic ruling relied on the idea that securities markets operate efficiently, a premise that the company said has been shown by experience and research to be faulty. The company cited a litany of examples, including the 1998-2001 technology bubble and the “Black Monday” stock crash in October 1987.
Roberts said those types of examples didn’t undermine Basic’s “modest premise” that capital markets usually operate efficiently.
“Even the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices,” Roberts wrote.
Rather than overturn the presumption, Roberts said companies should have more of a chance to rebut it before the class action is approved. He said a company could try to show that the alleged misrepresentation didn’t affect the stock price.
Although companies already can make that showing to defeat a lawsuit, today’s ruling lets them use that evidence earlier in the litigation to argue against certification of a class action.
The ruling is a “big boon for the economists who serve as expert witnesses in these cases,” Wendy Couture, a University of Idaho professor who specializes in securities law, said in an interview today. “We are going to see some really sophisticated regression analyses presented at the class-certification stages of these cases in the future to establish price impact.”
In a concurring opinion, Justice Ruth Bader Ginsburg said the ruling “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”
That sentence offered reassurance to lawyers who represent plaintiffs in securities cases.
“Today’s ruling should not unduly restrict the rights of investors, and the conduct of securities class actions should not substantially change in the wake of this decision,” Cohen Milstein Sellers & Toll, a prominent class action law firm, said in a statement.
Justices Clarence Thomas, Samuel Alito and Antonin Scalia said they would have gone further and overturned the 1988 decision. Thomas wrote that “logic, economic realities and our subsequent jurisprudence have undermined the foundations” of that ruling.
Roberts said the concerns of lawsuit critics “are more appropriately addressed to Congress.”
The case is Halliburton v. Erica P. John Fund, 13-317.
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