WASHINGTON (Reuters) - The U.S. Supreme Court on Monday made it harder for investors to band together to pursue securities fraud lawsuits against publicly traded companies, but stopped short of issuing a decision that could have effectively ended such litigation.
In a majority decision by Chief Justice John Roberts, the court agreed with Halliburton Co HAL.N that companies accused of misleading investors deserved a chance, before a class action is certified, to show that any alleged misrepresentation had no impact on the stock price.
Companies were previously allowed to make such showings after class certification, an event that often leads to settlements because the risk of large damage awards is greater. See FACTBOX (Full Story)
But the court refused to overturn a landmark 1988 precedent, Basic v. Levinson, that gave rise to the modern securities class action industry, and by a 6-3 vote left that precedent intact. See Q&A (Full Story)
The vote in favor of Halliburton was unanimous.
Supporters and critics said Monday’s middle-of-the-road decision imposes a new hurdle for securities fraud plaintiffs and their lawyers, but one they will often be able to overcome.
Justice Ruth Bader Ginsburg, in a concurring opinion, said this “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”
Aaron Streett, a lawyer for Halliburton who argued for broader limits, in an interview said: “It’s a significant win for defendants in restoring balance.”
David Boies, a lawyer for the Erica P. John Fund Inc, whose 2002 lawsuit prompted the case, said in a separate interview: “This could turn out to be a ‘be careful what you ask for’ ruling for defendants.”
The decision follows recent Supreme Court rulings that have made it harder for investors, consumers and workers to pursue class actions.
It could also prompt companies that already face certified securities class actions, such as drug makers Merck & Co MRK.N and Pfizer Inc PFE.N and British bank HSBC Holdings Plc HSBA.L, to demand that plaintiffs meet the new standard. Those companies had no comment or declined to comment.
Close to 200 U.S. shareholder class actions are filed each year. Sixty-seven settlements worth $4.77 billion won court approval in 2013, according to Cornerstone Research.
In Basic, the Supreme Court said investors could rely on a “fraud on the market” presumption that all public information about a company was reflected in its stock price, mirroring a view by many economists that markets are “efficient.”
The presumption meant that investors need not show they had relied on specific misrepresentations when buying securities, only that they bought the securities before the truth came out.
Roberts rejected Halliburton’s contention that investors must always prove direct reliance on misrepresentations.
He also said the Houston-based oilfield services company failed to show a “special justification” to overturn Basic, whether because of subsequent changes in economic theory or a lack of Congressional intent.
Roberts said the principle of “stare decisis,” or letting prior decisions stand, had “special force” when interpreting statutes such as federal securities laws, and that “Congress remains free to alter what we have done.”
John Donovan, a partner at Ropes & Gray, said the decision
adds a “modest, additional argument to a defendant’s arsenal,” and could prompt more cases targeting companies with smaller market capitalizations, where it may be easier to show the price impact of particular disclosures.
“Fraud on the market is alive and well,” he said. “The business community gets a modest victory, but it took a home run swing and got only a single.”
Justice Clarence Thomas, joined by Justices Antonin Scalia and Samuel Alito, agreed with the bottom-line holding for Halliburton, but said Basic should have been overruled.
“Basic took an implied cause of action and grafted on a policy-driven presumption of reliance based on nascent economic theory and personal intuitions about investment behavior,” he wrote. “The result was an unrecognizably broad cause of action ready made for class certification.”
In its lawsuit, the Erica P. John Fund had accused Halliburton of misleading investors by understating asbestos liabilities, overstating construction and engineering revenue, and inflating the benefits of a merger with Dresser Industries.
Monday’s decision returns the Halliburton case to lower courts to give the company a chance to meet the new standard.
The case is Halliburton v. Erica P. John Fund, U.S. Supreme Court, No. 13-317.
Reporting by Lawrence Hurley in Washington and Jonathan Stempel in New York; Additional reporting by Bill Berkrot, Alison Frankel and David Ingram; Editing by Howard Goller, Bernard Orr