The justices of the U.S. Supreme Court have an opportunity to dramatically change the landscape of securities fraud class action litigation by limiting, or perhaps overruling altogether, a decision upon which plaintiffs have relied for decades.
During oral arguments Wednesday in Halliburton Co. v. Erica P. John Fund Inc., No. 13-317, the attorney for a company accused by investors of securities law violations asked the court to strike down or rein in its 1988 ruling in Basic v. Levinson, which allowed for a presumption of class-wide reliance on defendants’ alleged misrepresentations in fraud-on-the-market claims. That presumption, which can be rebutted by the defense, allows class members to be certified without proof of individual investors’ detrimental reliance on alleged misrepresentations in their decision to purchase or refrain from selling stock.
The defendant in this case, energy services company Halliburton, is seizing on the expressed willingness of at least four justices to revisit the holding in Basic. Their views were expressed in concurring and dissenting opinions in the 2013 securities fraud decision Amgen v. Connecticut Retirement Plans and Trust Funds.
In that case, Justice Samuel A. Alito Jr. wrote in a concurrence that Basic’s “presumption may rest on a faulty economic premise,” and that reconsideration of the Basic presumption may be appropriate.”
Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas echoed Alito’s sentiment.
Though the Halliburton case has been before the high court before — resulting in a unanimous ruling in 2011 that securities fraud plaintiffs need not prove loss causation in order to obtain class certification — the subsequent ruling in Amgen spurred the company to ask the court to take another look with an eye toward re-examining precedent.
Complex issues of valuation and reliance
Aaron Streett, a partner in the Houston office of Baker Botts LLP, argued on Halliburton’s behalf that “Basic’s judicially-created presumption preserves an unjustified exemption from Rule 23 [class action requirements] that benefits only securities plaintiffs.”
“Are you just saying Basic is wrong, or are you saying something has changed since Basic?” asked Justice Elena Kagan.
“We’re saying both,” said Streett, arguing that the court misinterpreted federal securities law when deciding Basic and adding that the way stock is valued in a new, high-tech age when a number of factors can affect market prices in an instant undercuts “the premise that investors rely in common on the integrity of the market price.”
As a result, plaintiffs have been able to look solely to market theories, not actual facts upon which they allegedly relied, to get over the class certification hurdle.
“Economic theories should not serve as a stand-in for actual reliance,” Streett said
David Boies, chairman in the Armonk, N.Y. office of Boies, Schiller & Flexner LLP, argued on the shareholders’ behalf that the premise upon which Basic rests “wasn’t created by the court. It was created by Congress.”
Chief Justice John G. Roberts Jr. pointed out that in reality, once a class action is certified it is usually quickly settled, meaning plaintiffs rarely have to actually prove reliance after receiving the benefit of Basic’s presumption at the class certification stage.
“You usually don’t get to the merits stage once the class has been certified, do you?” Roberts asked.
Boies said that the majority of fraud-on-the-market claims are resolved at the summary judgment stage, whether in favor of plaintiffs or defendants.
“It goes both ways,” he said.
Far reaching effect
The decision in this case, expected later this term, will have a major impact on securities class actions. Plaintiffs’ advocates say that the presumption of reliance is crucial because shareholders often don’t have access to the information needed to prove meritorious cases of fraud until they are able to obtain it through discovery. If cases are knocked out before class certification, it could close the courtroom doors to plaintiffs with valid claims.
“The legal issues extend far beyond this single case,” said Nan Aron, president of Washington, D.C.-based advocacy group Alliance for Justice, in a statement. “Halliburton is asking the Supreme Court to overturn settled law, abandon a 26-year-old precedent, and add still another barrier to the ability of Americans to join together as a class to fight for their rights.”
Ann Yerger, president of the Washington-based Council of Institutional Investors, said a decision rolling back or overturning Basic would have a ripple effect that goes beyond securities fraud class actions.
“If the Supreme Court overturns the fraud on the market presumption, institutional investors will face serious impediments to pursuing securities-fraud lawsuits, whether class actions or individual suits,” Yerger said after the argument in a statement.
But business groups say the Basic ruling relies on outdated principles of market efficiency. According to an amicus brief filed by the U.S. Chamber of Commerce, in today’s more complex and nuanced world of securities valuation, Basic only serves to give plaintiffs “a near free pass to class certification, and the easy certification of plaintiff classes has predictably led to excessive securities fraud litigation and the in terrorem settlement of insubstantial claims.”Follow @dcdicta