U.S. Supreme Court Issues Ruling in Halliburton Case Involving Fraud-On-The-Market Theory, Class Action Securities Cases

Ruling in Halliburton v. Erica P. John Fund, the U.S. Supreme Court has left the fraud-on-the-market theory intact. However, they may have made it easier for large companies to get the courts to throw out class action securities cases sooner.

Halliburton Co. wanted to block a class action lawsuit accusing the company of inflating its stock price. A number of investors are claiming that they lost money after the stock price fell following news that it misrepresented revenues, overstated a merger’s benefits, and understated its liability in asbestos litigation.

Under the theory, securities fraud lawyers can use stock prices as proof that a company took part in fraud without having to prove that investors depended on company statements (or omissions of statements) when making decisions. Many corporate lawyers had hoped that the court would get rid of the 1988 precedent it made when it ruled in Basic V. Levinson more than 25 years ago. However, Chief Justice John Roberts wrote in the opinion for the justices that Halliburton didn’t offer any “special justification” for overruling the fraud-on-the-market presumption. (Justice Clarence Thomas, who ruled unanimously with the court, issued a separate opinion and was joined by Justices Samuel Alito and Antonin Scala. He said that Basic should have been overruled.)

However, the court’s ruling did give a minor victory to defendants. The justices modified a rule just enough so that before a class gets certified defendants can give evidence to show that the alleged fraud did not impact its stock price. This is important seeing as most securities class actions are typically settled after a judge certifies a class. That’s because corporations want to avoid having to pay a jury verdict, which can be substantially higher than a settled amount.

This latest ruling will primarily benefit large-cap companies with stocks that can be impacted by so many factors that it would be hard for plaintiffs to prove that a false statement or fraud inflated a stock price enough that a loss was incurred when the real facts emerged. Corporate defendants will likely work harder to get a case thrown out sooner by trying to prove that the stock price wasn’t inflated. All of this could make it more costly and time consuming for plaintiffs during the early stages of their class litigation.

Halliburton now goes back to the lower courts. There, the company will get another opportunity to deter investors from becoming a class.

Our securities fraud lawyers handle individual claims for investors and institutional investors. It is our belief that filing your own securities claim or fraud lawsuit increases your chances of getting back all (or most) of your lost investment.

Supreme Court toughens standards for class-action securities fraud cases, AP/US News, June 23, 2014

Supreme Court Tinkering With Securities Class Act, NY Times, June 23, 2014

Halliburton V. Erica P. John Fund (PDF)

Basic V. Levinson (PDF)

More Blog Posts:
Supreme Court to Hear Texas-Based Halliburton’s Class Action Securities Fraud Case Again, Stockbroker Fraud Blog, November 18, 2013

Just Because Supreme Court’s Rulings in Amgen and Halliburton Give Defendants Less Tools to Beat Weak Class Certifications But Doesn’t Mean Plaintiffs Can Rest Easy, Institutional Investor Securities Blog, April 27, 2013

Texas Judge Throws Out Verizon Retirees’ Class Action Lawsuit Over $8.4B Pension Sales to Prudential, Stockbroker Fraud Blog, July 9, 2013