The U.S. Supreme Court is getting ready to hear arguments from Halliburton in a case that could affect the future of class actions.
On March 5, the court will listen to parties in Halliburton Co. v. Erica P. John Fund Inc. The case involves the “fraud-on-the-market” theory of liability in securities class actions.
As the Record previously reported, in 2002, the Erica P. John Fund, which supports the Archdiocese of Milwaukee, sued Houston-based Halliburton, an oil-services company, for securities fraud.
The suit accused Halliburton of lying about its asbestos liabilities, overstating its revenues and building up hype about the company’s merger with Dresser Industries.
Those misrepresentations artificially inflated Halliburton’s stock price and, when the misrepresentations were revealed, the stock plummeted, damaging purchasers of stock during the period in question, the company claims.
In 2007, the John Fund moved to certify as a class all those who purchased Halliburton stock between June 1999 and December 2001. The district court denied class certification. The Fund appealed, and the 5th Circuit affirmed the lower court.
The lawsuit was brought on behalf of a class consisting of all shareholders of Halliburton. Contesting the class action, Halliburton argues that the lawsuit could not be brought by all shareholders unless individual shareholders actually relied on Halliburton’s alleged fraudulent acts to make their investment decisions, court papers state.
However, the Fund contends that reliance by the individual shareholders is presumed due to the fraud-on-the market theory established by Basic v. Levinson. The theory assumes that all public information provided by a company is incorporated into its stock price.
Thus, Halliburton’s fraudulent information harmed all of its shareholders even if not every one of them personally read and relied on the information.
The Supreme Court’s decision will determine whether the fraud-on-the-market theory remains valid. If the Court rejects the theory, then plaintiffs would have a harder time initiating lawsuits for securities fraud, and companies that allegedly commit the fraud would likely pay less in damages.
Halliburton and its supporters believe that the theory is invalid and should be overruled because it leads to "high volumes of securities fraud litigation," which deters companies from doing business or accessing capital markets in the United States.
The Erica P. John Fund and its supporters claim the theory preserves shareholders’ ability to bring lawsuits against companies, to hold them accountable for their fraudulent actions and to deter future bad behavior, court papers state.
The Committee on Capital Markets Regulation reported that in 2012, almost 150 securities class action suits were filed in the U.S., and the aggregate cost of settlements added up to $3.3 billion. The CCMR argues that securities class actions impose significant costs to the United States economy and its capital markets, as more than 40 percent of the corporations that are traded on major U.S. stock exchanges are targets of securities class action suits, according to the brief.
On the other hand, the John Fund argues that the litigation and settlement costs spent by companies are exaggerated. They claim that more cases have been dismissed than settled or continued beyond the pleading stage.
The Fund reports that a total of 73 percent of cases were resolved through dismissal or settlement even before a motion for class certification was filed, and that 12 percent were resolved before any ruling on the class certification motion. Therefore, according to the Respondent, 85 percent of the cases were resolved even before the court granted a class certification.