In a highly publicized case against Halliburton Co., U.S. Supreme Court justices are considering overturning an old law that allows plaintiffs to file a collective suit for securities fraud against corporations, according to this Associated Press article online. Since 1997, class action lawsuits have generated an estimated $73 billion in settlements, and according to investor groups, such suits cut down on corporate abuse and market fraud. But for Utah securities attorneys representing both investor plaintiff groups or defending the corporations, this could all change in the near future.
Opponents of class action suits by investors claim that they extort money from corporations and create “a windfall” for plaintiff’s lawyers. The 25-year-old ruling that has helped investors launch such class action cases, based on the effect misleading statements have on a company’s stock price, is under scrutiny in the Halliburton case, and justices may be close to overturning it. Utah securities attorneys watching the decision know that it could have dramatic effects on the industry.
Halliburton’s attempts to block the class action suit include assertions that the investors who lost money after their stock prices dropped (not long after the discovery that the company misrepresented aspects around the sale of the shares) are out of luck. Because the shareholders hadn’t relied on that information when investing, they shouldn’t be compensated, since they remained relatively undamaged. But the plaintiffs aren’t having to prove anything—in most lawsuits, the injured party is responsible for providing the burden of proof that they were hurt as a result of the company’s actions. In securities fraud class action suits? Not so. And companies like Halliburton don’t think that’s fair.
The old ruling that set this precedent was solidified in 1988, during the Basic v. Levinson case which ignited a flurry of securities-related class action lawsuits against publicly traded settlements in the last 25 years. The Basic case states that shareholders claiming they’ve been defrauded by false statements in securities filings don’t have to prove they actually relied on the statements. Instead, investors are presumed to be aware of misrepresentations because of their effects on stock prices, creating the “fraud-on-the-market theory” that has become a driving force for so many class action cases, as Utah securities attorneys would be familiar with.
Halliburton might have a chance here; the U.S. Supreme Court has been hostile to class action lawsuits over the past few years. The employment discrimination lawsuit against Wal-Mart was tossed out, and a big consumer class action suit against Comcast Corp was voided. But overturning Basic isn’t just a matter of one-and-done, as Utah securities attorneys would know. Justices are being asked to adjudicate a highly technical case in the matter of textbook and market economics, and Chief Justice Roberts has asked, “How am I supposed to review the economic literature and decide?”
The task is indeed monumental. Whether a middle road can be determined, or whether this will be one for the big corporations, should be decided by summer of this year.