The Supreme Court May Limit Securities Fraud Suits

The Supreme Court on Wednesday, MArch 5, 2014, seemed poised to impose new limits on securities fraud suits – making it harder for investors to group together to bring claims that they were misled when they bought or sold securities.

Organizations facing fraud class actions prefer to have the case certified as late in the litigation as possible because once a class is certified, the damages can be so enormous that most companies settle. “Once you get the class certified, the case is over,” Justice Antonin Scalia said on Wednesday.

Several justices, including Justice Anthony Kennedy, suggested that this phenomenon could be partly addressed through a proposal  by two law professors that argued  plaintiffs should be required to show at an early stage “whether the alleged fraud affected market price.”

David Boise, attorney for the plaintiffs resisted the change. According to the New York Times, “The plaintiffs contend that Halliburton made false statements on three topics that were intended to inflate its stock price: its financial exposure to asbestos claims, prospective earnings from its engineering and construction business and expected benefits of a merger.”

Mr. Boies said the real problem in making the showing proposed by the law professors was that it can be difficult to untangle the impact of a misstatement from other factors that affect stock prices. The Department of Justice seemed to support the measure.

Business groups had hoped for a complete victory. The defendant in the case, Haliburton, requested that the court overrule a 1988 decision, Basic v. Levinson that said that investors in class actions do not need to show reliance.

The position the court seemed likely to embrace would fall well short of overruling the Basic decision.

By the end of Wednesday’s argument, the Basic decision seemed likely to stand. In the case argued Wednesday, Halliburton v. Erica P. John Fund, No. 13-317, the court seemed poised to follow the general approach outlined by the law professors. A decision is expected to be rendered in June of 2014.