A United States Supreme Court decision near the end of its last term makes it more difficult for investors to pursue class action suits alleging securities fraud, but it does not effectively prevent such actions altogether.
The case involved a challenge to Basic Inc. v. Levinson,
a 1988 decision in which the Court adopted a “fraud on the market”
theory in securities fraud class action suits. In these securities fraud
cases, a presumption arises that a company’s false statements
improperly inflated the share prices and that investors relied on that
inflated price when they bought. This presumption helps plaintiffs
fulfill the requirements for a class action suit of Rule 23 of the Federal Rules of Civil Procedure, particularly the need for “questions of law or fact common to the class.”
In the June decision in Halliburton Co. v. Erica P. John Fund,
the Court held that companies can rebut this presumption during the
class certification stage of litigation with evidence showing that the
stock price was not inflated. Prior law prevented this evidence until
the merits of the case were at issue, thus encouraging earlier
The impact of the ruling is unclear.
Although the court did not abolish the “fraud on the market” presumption
altogether, it did allow corporate defendants to offer contrary
evidence earlier in the litigation process.
The New York Times has a summary of the decision, and Forbes and the Wall Street Journal have full discussions of the potential impact of the ruling.