| WASHINGTON, June 23
WASHINGTON, June 23 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
Did Monday's Supreme Court decision change the Basic
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