The U.S. Supreme Court on Monday imposed new curbs on securities class action lawsuits filed by investors against publicly traded companies while declining to overturn a key precedent that favors plaintiffs in such cases.
The court held on a 9-0 vote in a case brought by Halliburton Co that defendants can, at the preliminary class certification stage, rebut the plaintiffs’ presumption of reliance on an efficient market if they can show that an alleged misrepresentation did not affect the stock price.
In an opinion written by Chief Justice John Roberts, the court stopped short of overturning a key 26-year-old precedent, Basic v. Levinson, which kickstarted the securities class action industry.
In Basic, the court had embraced the “fraud on the market” theory. This assumes that public information about a company is known to the market. Plaintiffs do not have to show that they relied on a specific misrepresentation, only that they purchased shares before the truth came out.
Roberts wrote that Halliburton had failed to show a special justification for overturning the court’s precedent. But the court held that defendants, like Halliburton, should be able to introduce evidence on the lack of price impact at the class certification stage. Companies can already make such a showing after a class action is certified, but the change is noteworthy because most securities class actions settle once a judge allows the case to move forward.
Roberts wrote that the court’s ruling was consistent with the ruling in Basic because it allows “direct evidence when such evidence is available” instead of relying exclusively on the efficient markets theory.
“(W)e see no reason to artificially limit the inquiry at the certification stage to indirect evidence of price impact,” Roberts wrote. Halliburton shareholders, led by the Erica P. John Fund Inc, sued the company in 2002, 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. The company now has another opportunity to argue in lower courts that the class should not be certified. The case is Halliburton v. Erica P. John Fund, U.S. Supreme Court, No. 13-317.