Class Actions -- 2014



Halliburton Co. v. Erica P. John Fund, Inc.   (U.S. Supreme Court)

Whether to reconsider the presumption of reliance in the fraud-on-the-market theory for class action securities litigation

Although this suit involves investor claims against a company for losses allegedly suffered from company statements about asbestos litigation, this kind of suit arises in a variety of contexts where investors feel a stock price may have been affected by statements from company management. The issue on appeal is whether the Supreme Court's 1988 holding in Basic Inv. v. Levinson should be revisited (and reversed). The decision in that case established the fraud-on-the-market theory of reliance, whereby plaintiffs such as the investors in this case need not show that they individually relied on alleged misrepresentations by the company, but that the entire investor community relied on the misstatements, even if no one plaintiff in this case actually did. It's an easy way for plaintiffs to avoid having to show they were misled in any way.

The NAM filed an amicus brief supporting Supreme Court review of a 5th Circuit decision that applied the fraud-on-the-market presumption of reliance. We asked the Court to reconsider the theory, and also to prevent a case from being prosecuted as a class action when the alleged misrepresentation did not impact the market price of the stock at issue. The presumption in the Basic case has generated confusion in the courts, led to easy class certification, excessive litigation, and unfair settlement pressures. As a result, U.S. public companies and their investors have paid high litigation and settlement costs, resulting in merely a shifting of money from one set of investors to another, and their lawyers.

On Nov. 15, 2013, the Court agreed to hear this appeal.

On January 6, 2014, the NAM and other groups filed an amicus brief on the merits of the issue, arguing that the Court should overrule or modify the presumption of reliance, since the presumption undermines the requirement that plaintiffs prove actual reliance. It is based on an erroneous premise that investors rely on the integrity of market prices, while "many (if not most) investors buy or sell a security precisely because they believe the market price is wrong -- buying when they assess the market has undervalued the stock and selling when the stock is overvalued in their estimation." Such value investing is a recognized strategy. In addition, we argued that eliminating the presumption of reliance will not undermine fraud deterrence or investor compensation in cases of actual fraud.

On June 23, 2014, the Court rejected NAM’s argument and decided to uphold the Basic presumption of reliance, stating that requiring each plaintiff to prove direct reliance “would place an unnecessarily unrealistic evidentiary burden on the . . . Plaintiff who has traded on an impersonal market.” The Court reiterated that the plaintiff need only prove that the misrepresentation applied to “stock traded in a generally efficient market” and that the plaintiff purchased the stock at market price during the relevant period. Satisfying these two elements also enables the plaintiffs to proceed in a class action suit, instead of demonstrating individual reliance. The Court did reverse the circuit court’s ruling that prevented the company from raising a defense during the class certification stage. The company may defend against the presumption of reliance by demonstrating that the misrepresentation did not impact the stock price. This decision gives a company another way to prevent the certification of class action shareholder litigation.


Related Documents:
NAM amicus brief on the merits  (January 6, 2014)
NAM amicus brief  (October 11, 2013)

 


Class Actions -- 2011



Erica P. John Fund v. Halliburton Co.   (U.S. Supreme Court)

Evidence of fraud required to certify class in securities litigation

Suits against companies for misleading or fraudulent statements (or withholding signification information) that affect the price of the company's stock require proof of causation, that is, that the statements actually had an effect on the market. This case involves whether such proof must be provided at the stage of the case when the judge is deciding whether to certify the case as a class action, or whether that proof can wait until the trial phase. Whether to certify a lawsuit as a class action is often case-dispositive, since certification puts tremendous pressure on companies to settle questionable suits to avoid potentially excessive liability.

The Fifth Circuit ruled that plaintiffs must show evidence of causation prior to certification of the class. Unless the alleged fraud actually caused the loss, a court cannot assume that all the proposed members of the class relied on the fraud when buying their stock. The Supreme Court's reversed on June 6, 2011, holding that plaintiffs need not prove loss causation in order to obtain class certification. It found that loss causation is different from reliance on a misrepresentation or omission, and requires a plaintiff to show that the misrepresentation caused a subsequent economic loss.

As a result, it will be easier for shareholders to file class action lawsuits alleging misrepresentations or omissions by company management.