Supreme Court to hear securities class action case

Earlier this year, the U.S. Supreme Court agreed to hear a case that could seriously hinder plaintiffs' ability to bring securities fraud class action cases. The case, Halliburton Co. v. Erica P. John Fund, Inc., arose out of allegations that Halliburton had intentionally provided investors with misleading information to increase its stock price. The Court's decision to grant certiorari in the case has led many experts to believe that it is likely to revisit its 25 year old Basic Inc. v. Levinson decision.

In Basic, the Court established the fraud-on-the-market presumption, under which investors who bring securities fraud claims are not required to show that they actually relied on misleading information from a company in order to make a successful claim. In other words, in cases where plaintiffs claim that a company has violated certain sections of the Securities Exchange Act of 1934, a court will presume that they relied on a corporation's misleading statements.

The fraud-on-the-market presumption is based on the idea that stock prices depend on every bit of information available about a company and its industry. This theory assumes that all of this information is available to potential investors. When an investor purchases stock, he does so in reliance on the integrity of the market.

If a company releases misleading information about itself, this information will affect its stock price and constitutes a fraud on the entire market. Because it is rare for individual investors to meet face-to-face with corporate officers and because they rely on the integrity of the price set by the market, the Basic Court adopted a rebuttable presumption that individual investors relied on whatever misleading information was supplied by the company.

The Basic decision ushered in a new era of securities fraud class actions because it was not necessary for each member of a putative class to prove that he had actually relied on a company's misleading statement. Instead, it was up to the company to prove that its misleading statements did not affect its stock price.

In recent years, federal courts have seemed to show a willingness to reconsider the fraud-on-the-market theory articulated in Basic. Indeed, in the case set to be argued before the Supreme Court, Halliburton argues that the rule no longer reflects the reality of the market.

It is too soon to tell what the Court's decision in Halliburton is likely to be. A decision is expected by the end of the summer.

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