Institutional investors are holding their collective breath as the Supreme Court considers making it harder to bring class-action securities lawsuits.
On March 5, the justices will hear arguments in Halliburton Co. vs. Erica P. John Fund Inc., a case challenging a 25-year-old legal precedent that allows class actions to go forward on the presumption that stock prices can be negatively affected by corporate actions or misrepresentations.
“This is a fundamental right that investors can pursue, and most public pension systems have been very active (in class-action suits),” said Michael McCauley, senior officer for investment programs and governance with the Florida State Board of Administration, Tallahassee. “I think it will be a very significant ruling.”
The Supreme Court's decision is expected in June. Its ramifications will go far beyond the parties themselves, as numerous groups have taken sides in the case.
On one side are institutional investors from groups like AARP and the Council of Institutional Investors in Washington. The council's friend-of-the-court brief argues to preserve the status quo. That amicus brief was signed by 20 pension fund members, including the $282.5 billion California Public Employees' Retirement System, Sacramento; the $176.2 billion California State Teachers' Retirement System, West Sacramento; the $173.2 billion New York State Common Retirement Fund, Albany; the $42.3 billion Colorado Public Employees' Retirement Association, Denver; and the Florida SBA, which oversees $171.7 billion in assets.
The Department of Justice and the Securities and Exchange Commission also are supporting that side of the case, which has attracted a total of 23 friend-of-the-court briefs altogether.
Arguing the opposite are business groups like the U.S. Chamber of Commerce and some legal scholars, who complain the underlying legal premise Halliburton is challenging makes securities class-action lawsuits too easy to start, while the cost of litigating often leads to settlements regardless of a case's merits. An analysis by economic and financial consulting firm Cornerstone Research found that of securities fraud cases filed between 1996 and 2011, 67% were dismissed or settled before the merits of the case were argued.