Shareholder class action lawsuits have been a point of contention amongst pro-business groups ever since the 1988 ruling in Basic V. Levinson that allowed investors to sue for damages resulting from misinformation distributed by companies about the prices of shares. Some business lawyers have never been happy about it, and according to this in-depth article in the Economic Times, two professors have worked to change the way companies can be sued by submitting friend-of-the-court briefs in Supreme Court cases.
Securities attorneys representing the shareholders in class action suits are often criticized for charging more than the damages awarded, and business lawyers like Dwight Williams are all too aware that these fraud suits have been “the bane of many business” ever since Basic V. Levinson made it so easy to sue. The stakes are high: the Supreme Court case in which professors Dr. Adam Pritchard and Dr. Joseph Grundfest submitted vying opinions has already “generated more than $80 billion in settlements and untold billions more in legal fees.” Interestingly, both professors submitted briefs siding with Haliburton, but with different rationale.
If “justices do rein in securities fraud litigation,” the securities attorneys familiar with the current ways of representing class action suits will have to become acquainted with the arguments made by the two professors, both of which are aimed at limiting law suits against companies. Currently, Basic v. Levinson has set a precedent that does not require shareholders to demonstrate that they “relied on corporate misstatements” in order to sue. Business lawyers like Williams understand that this means that any investor can bring litigation against a company for errors and misinformation, without having to prove they were personally injured from the wrongful information: the “fraud on the market” perpetrated by the company releases the plaintiffs in the suit from that obligation.
Which is a hard line to swallow for companies and their business lawyers alike—corporate defendants and pro-business groups like the U.S. Chamber of Commerce have decried this theory in the past, such as when “the number of filings tripled between 1988 and 1991.” And while proponents of the class action cases argue that they enable deceived shareholders access to compensation “and provide a necessary private complement to the SEC’s regulatory enforcement,” opponents claim that the suits don’t actually benefit shareholders, just their securities attorneys. The boom in securities fraud lawsuits has continued despite the misgivings vocalized by interest groups, but the briefs submitted by Grundfest and Pritchard may finally be able to change some of that.
Pritchard’s brief suggests that the Supreme Court can interpret one of the provisions in the Securities Exchange Act of 1934 to overturn Basic v. Levinson altogether, while Grundfest proposed that “investors can’t sue to recover money damages at all without showing they relied on corporate misstatements,” something that wouldn’t require traditionalists like Chief Justice John Roberts to overturn Basic. The Supreme Court is expected to rule any day now in the cases of Haliburton Co. v. Erica P John Fund, thereby deciding the future of securities fraud class action suits.