In a case heavily watched by both business and investor advocates, the Supreme Court this week dealt a blow to big business in their efforts to try to get rid of investor class action lawsuits.
In the Halliburton decision, decided this week, the Court preserved the continuing vitality of the “fraud on the market” theory. This is tremendously important to protect U.S. investors because it permits investors to substitute actual reliance on a false or misleading statement by a company with a “presumption of reliance” on the “integrity” of the market.
In other words, investors can “certify” class actions and establish liability without proof that any investor saw, heard, read or even was aware of a fraudulent representation, such as a miscalculation buried in a footnote of a company’s quarterly report.
Large corporations have attempted to pick away at this fundamental element of class actions lawsuits for years. Investment fraud attorneys around the country erupted with relief as big business failed to deal a death blow to investor class actions, one which would have allowed them to escape liability for fraudulent statements.
The Court in Tuesday’s decision confirmed a prior Court decision, Basic v. Levinson, which, following the 1987 stock market crash, allowed the “presumption of reliance” to be asserted by investors in class action cases.
That landmark case, decided only months after the crash of October 1987 that was dubbed Black Monday, “found it unrealistic to require investors to prove that they had relied on any specific misleading statement by a company before getting a class action in to court,” according to the Wall Street Journal’s Jess Bravin and Brent Kendall.
“Instead, investors could rely on the integrity of share prices, which efficient markets were presumed to set in light of company statements,” according to the Journal report.
Chief Justice Roberts, who wrote the Halliburton opinion, “disappointed business interests,” according to the Journal. Justice Roberts “embraced the fundamental principles of a 1988 decision laying out what plaintiffs must allege to proceed in an investor class action,” according to the Journal.
An investor group cited by the Journal stated that the Court precedent was “indispensable to institutional investors and their ability to recover some portion of their beneficiary’s losses resulting from securities fraud.”
The decision came as part of Halliburton’s asbestos liabilities.
Halliburton had argued to the Court that the economic theory of “market efficiency” has been widely discredited by economists and that the Court should eliminate the presumption that fraudulent information materially affected a stock market’s price.
Business critics of the Basic ruling claim the decision is faulty in part because investors buy or sell on the speculation the market has mispriced a particular stock or bond.
Justice Roberts flatly rejected that argument in the decision. “Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent on the grounds that it misunderstood, or has since been overtaken by economic realities,” he stated.
The Court did throw a bone to U.S. corporate interests, holding that defendants in these cases can rebut the “fraud on the market” theory at the class certification stage instead of having to wait until the merits of the claim are being decided. As the Journal reported, this is “a step that companies say puts pressure on them to settle even questionable claims, rather than risk a jury verdict.”
Three Supreme Court Justices—Scalia, Alito, and Thomas—wrote in a concurring opinion that the Basic decision should have been overturned altogether. Stock investors and their investment fraud lawyers can breathe a sigh of relief that the rest of the Court, led by the increasingly moderate Justice Roberts, rejected that result.
The class action lawsuit is fundamental to protect investors because it allows them to ban together and sue a giant corporation. Without it, individual investors would essentially be locked out of court because they couldn’t afford the legal costs of fighting giant corporations. The Basic decision from 1988 has thankfully been upheld and withstood yet another assault from business interests.
The Supreme Court’s decision preserves the crucial class action vehicle for investment fraud recovery.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.