Supreme Court Rules on Securities Fraud Class Actions

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 settlements.

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.

Ohio Supreme Court Limits Class Action Suits

The Ohio Supreme Court in Stammco, L.L.C., v. United Tel. Co. of Ohio has rejected a proposed class action lawsuit against a telephone company and in doing so, tightened restrictions on class action lawsuits.  The Ohio Employer Law Blog has a good summary of the decision and its implications for Ohio employers:

“Stamcco is a huge victory for Ohio businesses. It is now that much harder to establish a class action, confirming that Ohio’s class-action rules fall in line with their federal counterparts.”