The U.S. Supreme Court wrapped up its session for the year on Monday. As is typically the case, there was a flurry of decisions issued in the final weeks. Included on the list was one that came down June 22 and which practitioners in securities law are surely still mulling over. As is also fairly typical in such instances, there doesn't seem to be any clear consensus about exactly what effect the decision will have on cases going forward.
The matter before the justices was an appeal by Halliburton Co. seeking to scuttle a suit by one investor group that seeks to win approval as a class action claiming investor losses. The allegation is that Halliburton committed fraud by misrepresenting its revenue projections and liabilities, driving up its stock price and that the losses were suffered by the potential class when corrective statements were made and the stock price fell.
What Halliburton specifically asked the court to do was to throw out a 1988 decision that has been used successfully to mount class actions on behalf of individual investors who seek to recover investment losses.
That ruling found that individual investors didn't need to prove that the misstatements by a company affected their stock buying or selling decisions. Instead, the justices said the misleading disclosures could be presumed by courts to have been a "fraud on the market."
Halliburton's argument in the appeal was that each plaintiff should have to prove that they actually had relied on the erroneous information to make their decisions. Such a move would effectively make it much harder for individual investors to form a class action.
In its June 22 decision, the court refused to dismantle the "fraud on the market" theory. What it did do was make it possible for corporations to try to prove earlier in the legal process that their misstatements had no effect on share prices.
Analysts say the result is that creating a class might be harder. But, as three of the court's justices observed in an accompanying opinion, the ruling should still allow plaintiffs with reasonable securities fraud claims to proceed with their cases.
Source: Los Angeles Times, "Opinion Supreme Court trims, rather than gutting, investor class actions," Jon Healey, June 23, 2014