The Supreme Court took a modest step Monday toward making it harder for individuals to band together in class-action suits alleging securities fraud.
Chief Justice John G. Roberts Jr. said that companies should be able to present evidence earlier in proposed class-action suits that fraud was not responsible for a drop in stock prices. Currently, corporations can present such evidence only at the merits stage of the litigation — but business groups say most litigation never reaches that stage, because it is cheaper for companies to settle the claims.
Business groups had wanted much more from the court. They had asked it to overturn a 1988 precedent that has been a crucial factor in allowing investors to jointly sue over corporate statements they say misstate the health of companies and inflate their stock prices. Settlements in such cases have reached upward of $70 billion.
The “fraud on the market” theory that the court adopted in Basic Inc. v. Levinson established that in an efficient market, it can be presumed that false statements by a company can improperly inflate the market price for its shares. Investors who buy stock at that price are thus overpaying and can later claim they were defrauded.
According to the presumption, investors who say they were defrauded do not have to show that they personally relied on the misstatements — or were even aware of them — in buying the stock.
In deciding a case brought by the energy company Halliburton, Roberts and five other members of the court said the company had not made a convincing case that that theory should be junked.
“The academic debates discussed by Halliburton have not refuted the modest premise underlying the presumption of reliance,” Roberts wrote.
“Even the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices.”
Instead, Roberts said, it is better to allow a company to dispute the specifics of its case earlier in the process, while a judge is deciding whether to let a class-action suit go forward. If the company can present evidence that a misstatement did not affect stock prices, it would weed out unworthy cases.
The specific case before the justices is a long-running dispute involving a group of shareholders, called the Erica P. John Fund, that is suing Halliburton. The fund seeks to represent all purchasers of the company’s stock between 1999 and 2001.
It contends that the company lowballed its potential liabilities involving asbestos, inflated the potential benefits of a merger and misstated earnings reports.
The Supreme Court rejected Halliburton’s attempt to have the suit thrown out on other grounds in 2011, and lower courts certified the class and allowed the case to go forward.
The “fraud on the market” presumption is essential to such suits because it helps investors meet two class-action requirements: that they show they relied on a company’s false statements and that they share a common harm.
The court’s ruling Monday may be viewed as either a compromise or a first step in further limiting class-action suits.
Three of the court’s liberal justices who signed on to Roberts’s opinion issued a concurring opinion setting out their understanding.
“The court recognizes that it is incumbent upon the defendant to show the absence of price impact,” Justice Ruth Bader Ginsburg wrote in an opinion joined by Justices Stephen G. Breyer and Sonia Sotomayor.
“The court’s judgment, therefore, should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”
Three justices said they would have gotten rid of the basic presumption.
“Logic, economic realities and our subsequent jurisprudence have undermined the foundations” of the decision, Justice Clarence Thomas wrote, and it should be overruled. He was joined by Justices Antonin Scalia and Samuel A. Alito Jr.
Jonathan Richman, a securities lawyer in New York, said there was some good news for both sides in the decision.
“The plaintiffs’ securities bar can relax a bit: the sky hasn’t fallen after all,” he said in a statement.
But he said it also gives corporations a new weapon to stop the suits and could “turn class certification into an epic battle, rather than a more subdued skirmish.”
The case is Halliburton Co. v. Erica P. John Fund.