The U.S. Supreme Court imposed new requirements on shareholders seeking to press class-action fraud lawsuits, giving a partial victory to Halliburton Co.
The justices on Monday gave Halliburton a new chance to argue that the case shouldn't be allowed to proceed as a class action. Halliburton and business groups had sought a sweeping decision, aiming to effectively abolish class-action suits over securities bought on public exchanges. The court stopped short of taking that step, instead giving defendants a new tool to stop shareholder lawsuits at an early stage.
The case, Halliburton Co. vs. Erica P. John Fund Inc., tested the legal rules underlying the vast majority of those suits by calling into question a landmark 1988 Supreme Court ruling. The 1988 ruling, Basic vs. Levinson, said judges considering misrepresentation claims should presume that investors will take any public misstatement into account before buying shares.
Writing for the court, Chief Justice John Roberts refused to overturn the 1988 ruling, as business advocates had sought, instead giving Halliburton a narrower victory. Mr. Roberts said the company should have a chance, before the class action is approved, to argue that the alleged misrepresentation didn't affect the stock price.
Justices Clarence Thomas, Samuel Alito and Antonin Scalia said they would have gone further and overturned the 1988 decision.
The shareholders, led by the Erica P. John Fund and represented by David Boies, contend that from 1999 to 2001 Halliburton falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger. Mr. Boies told the justices that Halliburton stock dropped 42% on the day those statements were shown to be false.
That “fraud on the market presumption” helps shareholders overcome two separate legal hurdles: the securities-law requirement that they show they relied on a company misstatement, and the class-action requirement that the plaintiffs' claims have enough similarities to warrant a group lawsuit.
Without the presumption, each shareholder would have to show individual reliance on an alleged misstatement. That requirement, in turn, would preclude class actions because it would force judges to conduct a case-by-case inquiry into the circumstances of each shareholder.
Securities-fraud litigation has thrived in recent years even as Congress has tried to rein it in. More than 4,000 class-action suits have been filed since 1996, producing almost $80 billion in settlements, according to Nera Economic Consulting, a unit of insurance broker Marsh & McClennan Cos.