Q&A-U.S. top court upholds basics of Basic v. Levinson decision
WASHINGTON, June 23
WASHINGTON, June 23 (Reuters) - The U.S. Supreme Court ensured a future for securities class actions on Monday by leaving intact a 1988 precedent, Basic v. Levinson.
Here are some questions and answers on what distinguishes Monday's ruling in the case of Halliburton v. Erica P. John Fund from the 26-year-old precedent.
What did the Supreme Court rule in Basic v. Levinson, and why did Halliburton ask the justices to overturn it?
Basic said lower-court judges considering a class-action certification could presume that a company's misrepresentation had affected its stock price and been relied on by purchasers who suffered a loss. The presumption arose from what is known as the "efficient market" hypothesis. Since Basic, the principle that a material misrepresentation (for example, inflating assets or concealing liabilities) inevitably distorts stock price has enhanced shareholders' ability to obtain certification for a class-action lawsuit against a public company. Halliburton contended the presumption was erroneous from the start, became more unworkable over time and led increasingly to meritless securities class actions.
Why did Halliburton contend Basic's "efficient market" presumption was flawed?
Backed by the Chamber of Commerce, Halliburton argued that markets do not efficiently incorporate all types of information into price and that investors do not rely on the integrity of the price when they purchase or sell a stock. It cited studies by economists and other scholars questioning a link between market information and stock price. With the increased complexity of securities markets and large-volume program trading since 1988, Halliburton insisted, the presumption of Basic is even less valid. Halliburton pointed to the Supreme Court's trend of tighter rules for class certification and said plaintiffs seeking certification should have to prove they relied on the alleged misrepresentation.
How did the Erica P. John Fund defend Basic?
Backed by the U.S. Justice Department, it argued that the scholarly debate is largely irrelevant and that common sense dictates stock prices respond promptly and reasonably to public information. Its lawyers stressed that the Basic v. Levinson presumption was more than 30 years old and that Congress had essentially accepted it. They said the rule was important to deterring securities fraud, and insisted that it would be difficult for plaintiffs at the certification stage to try to separate out the specific factors of a misrepresentation to show how they affected price. Twenty-one states backing the Erica P. John Fund told the justices that without the Basic presumption, the integrity of U.S. capital markets would drop and investor confidence would decline. "Simply put, investors fear fraud much more than they fear securities litigation," they wrote in their brief.
Did Monday's Supreme Court decision change the Basic presumption?
No, but it did give Halliburton and other companies some new protection against potentially meritless filings. Writing for the court, Chief Justice John Roberts said the academic debates and market realities have not refuted the core premise of Basic v. Levinson, and he stressed the high bar for reversing precedent. He said any policy concerns about the "harmful consequences" of securities fraud class-actions should be addressed to Congress. Reversing lower courts in the case, the Supreme Court said Halliburton and other defendants need not wait until trial to try to show that an alleged misrepresentation failed to affect stock price. The justices ruled that a company must be allowed at the class certification stage to offer evidence. (Reporting by Joan Biskupic; Editing by Howard Goller, Bernard Orr)