The U.S. Supreme Court has accepted a case which has the potential to have a profound effect on securities litigation. The justices agreed to reconsider a precedent that has served as the foundation for shareholder suits for the past 25 years. An appeal by the Halliburton Co. seeks to have the court overturn a 1988 ruling that created what four former Securities and Exchange Commission (SEC) members called “the most powerful engine of civil liability ever established in American law.”
The 1988 ruling, Basic v. Levinson, made it easier for shareholders to band together in class actions. Halliburton contends the decision’s premise — that corporate misrepresentations are reflected in a company’s stock price — has proven to be flawed. Halliburton, which is battling a suit accusing the company of distorting its financial condition, contends: “Real-world experience has crippled the theoretical underpinnings of Basic.”
Four justices — Antonin Scalia, Clarence Thomas, Anthony Kennedy and Samuel Alito — suggested in a ruling in February that they might undo the “Basic presumption,” as it has become known. Court-observers say the outcome of the Halliburton case may be in the hands of Chief Justice John Roberts, who usually joins the four justice mentioned above in ideologically divisive cases. The shareholders suing Halliburton urged the Supreme Court not to hear the case, arguing that the presumption “is crucial to private securities actions” and one that has been repeatedly endorsed by Congress, the SEC and the Justice Department.
Many believe that a reversal of Basic v. Levinson would represent a most radical change in the private enforcement of the federal securities law. If that happens, it will be a severe blow to investors’ rights and restrict their access to justice. The importance of the issue stems from two separate requirements for such claims:
Under the Basic decision, judges now presume that investors will take any publicized, significant misstatements into account before buying shares. That approach, also known as the fraud-on-the-market presumption, “springs from the very concept of market efficiency,” Justice Ruth Bader Ginsburg said for the majority in the February ruling.
Halliburton’s appeal contends that research in recent years has shown the market to be much less efficient than the court thought in the Basic case. The company points to the 2008 economic crisis and the technology bubble a decade earlier as examples. Houston-based Halliburton, the world’s largest provider of hydraulic-fracturing services, is also making a narrower argument. The company says it at least should have a chance to rebut the presumption by proving that the alleged misrepresentations didn’t distort the market price of the stock. The case marks the second time the Supreme Court has intervened in the Halliburton litigation. The court ruled in favor of the shareholders on a separate issue in 2011. The shareholders, led by the Erica P. John Fund, contend that Halliburton from 1999 to 2001 falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger.
The former SEC commissioners backing Halliburton are Paul Atkins, Edward Fleischman, Joseph Grundfest and Laura Unger. In a brief filed along with scholars and other former SEC officials, they said the Basic presumption “revolutionized private securities litigation and made it the massive multibillion-dollar industry that it is today.” It appears that the court will hear arguments in the Halliburton case early next year and rule by July.
Sources: Greg Stohr and Bloomberg News
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