Investor Suits Challenged as Court Takes Halliburton CaseGreg Stohr
The U.S. Supreme Court accepted a case with the potential to transform securities litigation, agreeing to reconsider a precedent that has served as the foundation for shareholder suits for the past 25 years.
The Halliburton Co. appeal asks the court to overturn a 1988 ruling that created what four former Securities and Exchange Commission members called “the most powerful engine of civil liability ever established in American law.” The 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.
“Real-world experience has crippled the theoretical underpinnings of Basic,” argued Halliburton, which is battling a suit accusing the company of distorting its financial condition.
Four justices -- Antonin Scalia, Clarence Thomas, Anthony Kennedy and Samuel Alito -- suggested in a ruling in February that they might jettison the “Basic presumption,” as it has become known. The outcome of the case may be in the hands of Chief Justice John Roberts, who usually joins that group in ideologically divisive cases.
The shareholders suing Halliburton urged the court not to hear the case, arguing that the presumption “is crucial to private securities actions” and has been repeatedly endorsed by Congress, the SEC and the Justice Department.
“A reversal of Basic v. Levinson would represent the most radical change in the private enforcement of the federal securities law in a generation and would be a severe blow to investors’ rights,” said Daniel Sommers, a Washington securities lawyer at Cohen Milstein Sellers & Toll, which focuses on pressing class action litigation.
The importance of the issue stems from two separate requirements for such claims: that shareholders show they made investment decisions in reliance on a company misstatement and that class action litigants show their claims have enough similarities to warrant a group lawsuit.
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. Dick Cheney, later the U.S. vice president, served as chairman and chief executive officer of the oilfield-services provider during part of the disputed period.
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.”
The court will hear arguments early next year and rule by July.
The case is Halliburton v. Erica P. John Fund, 13-317.