The US Supreme Court has agreed to hear Halliburton v. Erica John Fund. In it, the Texas-based multinational corporation is appealing a class action securities lawsuit that tests the fraud-on-the market theory. That doctrine became part of securities law in 1988 after the highest court’s ruling in Basic v. Levinson.
The fraud-on-the-market theory is premised upon the efficient markets hypothesis, which is that the price of a stock is a reflection of all public data. This makes it possible for plaintiff attorneys to set up a class action for all the buyers of a stock without having to first prove in court that these purchasers depended upon untrue information from the company and that this caused their losses.
Instead, the doctrine assumes that a company’s stock price can reflect corporate assertions even if they are misleading. As a result lawyers are able to submit securities fraud classes while blaming corporate executives for certain changes in the market value of a company’s stock.
In the Erica John case, the plaintiffs, who purchased Halliburton stock between 1999 and 2001, claim that the company issued false statements to inflate the price of its stock. Meantime, Halliburton is challenging their class certification and it wants the fraud-on-the-market doctrine overturned. The company contends that class actions allow investors that purchased high and sold low to get reimbursement. It says that many investors buy stock because they believed the market price was wrong.
This is not the first time Halliburton brought this securities case to the US Supreme Court to challenge the investors’ class certification. Even then the company claimed that the plaintiffs failed to prove that it was a specific announcement made by Halliburton that caused their losses. The court, however, turned down that argument and sent the class action securities case back for more proceedings.
The Fifth Circuit Court of Appeals then reaffirmed the class certification and Halliburton once more appealed. This time, however, the Texas-based company posed the argument that it should be allowed to challenge the rebuttal presumption of reliance established in Basic. The Supreme Court granted cert.
Could the Supreme Court justices overturn the fraud-on-the-market theory? It is possible. Earlier this year in Amgen v. Connecticut Retirement Plans and Trust Funds, Justice Samuel A. Alito Jr. wrote in a concurrence that there is recent evidence to show that the theory may “rest on a faulty economic premise” and it might be “appropriate” to reconsider the presumption made in Basic.
As Shepherd Smith Edwards and Kantas, LTD LLP, our Texas securities fraud lawyers represent individual investors and institutional investors. We believe that investors stand a bigger chance of recovering more if not all of their investment losses when they decide to pursue their own securities case rather than being part of a class action lawsuit. Contact our securities law firm today.
A Supreme Reckoning for Securities Class Actions, Bloomberg/Businessweek, November 18, 2013
Justices to hear case on shareholder lawsuits, USA Today, November 15, 2013
Halliburton v. Erica John Fund
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