The U.S. Supreme Court, which in recent years has ruled for business in a string of high-profile cases, agreed on Friday to hear a case that could herald a dramatic decline in securities class action litigation.
The case will give the justices an opportunity to re-appraise a 25-year-old precedent, Basic v. Levinson, that made it easier for securities class action cases to go beyond the preliminary certification stage.
Shareholders, led by the Erica P. John Fund Inc, sued Halliburton Co (HAL.N), saying the company understated its asbestos liabilities while overstating revenues in its engineering and construction business and the benefits of its merger with Dresser Industries. Halliburton sought Supreme Court review after losing in lower courts.
In the 1988 case, the court ruled that investors did not have to prove that their loss could be directly traced to the alleged fraud. Instead, the court held that any misrepresentation about a security would be incorporated into the market price. Any investor who purchased the security at that time could be presumed to have been directly affected by the misrepresentation.
The ruling effectively launched the securities class action industry that exists today, according to Adam Pritchard, a professor at the University of Michigan Law School.
"Overruling 'Basic' would scale back securities class actions tremendously," he said.
Jay Brown, a professor at the University of Denver, Sturm College of Law, said it would be bad news for investor plaintiffs if the court required them to show they actually relied on false statements when making investment decisions.
"It will make securities class actions almost impossible to pursue," he said.
Several former members of the U.S. Securities and Exchange Commission filed a friend-of-the-court brief asking the court to take the case.
"At issue in this case is the viability and scope of the most powerful engine of civil liability ever established in American law," their attorney, George Conway, wrote in reference to the "fraud-on-the-market" theory.
There were 3,050 private securities class action cases between 1997 and 2012 leading to settlements worth more than $73.1 billion, the brief stated.
Conway said in an interview that the court's decision to hear the case was a consequential development.
"It's simply unlikely that the Supreme Court took this case with an eye to leaving 'Basic' in place," he said.
The U.S. Chamber of Commerce and the National Association of Manufacturers also asked the court to hear the case.
Aaron Streett, one of Halliburton's lawyers, said in an email that his team is "confident that we will prevail" after the court hears oral arguments, likely in February.
Lead plaintiffs' attorney David Boies declined to comment.
Four of the nine current justices have indicated concerns about the "fraud-on-the-market" theory. Justice Samuel Alito said the court should consider overruling the 1988 case in a separate opinion he wrote after concurring with the majority in a securities class action case decided in February in favor of plaintiffs, Amgen v. Connecticut Retirement Plans.
Three other justices dissented in that case. Alito wrote in his opinion that there was recent evidence the "fraud-on-the-market" theory "may rest on a faulty economic premise."
The Halliburton case returns to the court for a second time. In January 2011, the court unanimously ruled that a U.S. appeals court erred in rejecting class certification.
The lawsuit was filed in 2002 on behalf of all buyers of Halliburton stock between June 1999 and December 2001.
The alleged misstatements artificially pumped up Halliburton's stock price, the lawsuit said, adding that the Houston-based company eventually made corrective disclosures that caused its stock price to fall.
After the first Supreme Court ruling, Halliburton argued that the class could still not be certified because the alleged fraud did not affect the stock price. In January 2012, a federal district judge rejected that argument, as did an appeals court in an April 2013 ruling.
A ruling is expected by the end of June. The case is Halliburton Co. v. Erica P. John Fund, U.S. Supreme Court, No. 13-317.
(Reporting by Lawrence Hurley in Washington and Jonathan Stempel in New York; Editing by Howard Goller, David Gregorio and Andre Grenon)