WASHINGTON - (Legal Newsline) - The Committee on Capital Markets Regulation and the Washington Legal Foundation submitted amicus briefs to the U.S. Supreme Court last week on securities class actions suits and the "fraud-on-the-market" presumption in the case of Halliburton v. Erica P. John Fund, which is scheduled to be heard on March 5.
The case raises the issue of whether the court should revise its "fraud-on-the-market" rule that it adopted in 1988 in Basic v. Levinson.
WLF believes the 1988 precedent Basic v. Levinson established should be overruled because research demonstrates that even short-term stock prices fluctuate widely and many investors buy stock precisely because they believe a stock is not accurately priced, according to a WLF press release.
In a stock fraud lawsuit, a plaintiff must establish that he purchased a corporation's stock in reliance on the defendant company's misrepresentation. This rule presumes that investors rely on the market price when buying stock, which the court assumed would incorporate any false information issued by a company.
As a result, investors do not have to prove that they knew of the false information and actually relied on it.
This is important because if investors had to prove such actual reliance, securities class actions would not be possible because individual members of the class would differ as to their reliance, and thus the common question requirement for class actions could not be satisfied, the CCMR says.
"From the very inception of the committee, in its 2006 Report on Competitiveness, we have been highly critical of the adverse impact securities class actions by shareholders against their companies have had on our capital markets," said Prof. Hal S. Scott, director of the committee in a press release. "The brief details those effects and shows that securities class actions fail to achieve the twin objectives of compensation and deterrence."
The Washington Legal Foundation also urged the Supreme Court to overturn or substantially modify its 25-year-old "fraud-on-the-market" presumption.
The practical effect of that presumption has been to ease securities class action certifications and force defendants to settle such cases without regard to merit, WLF says.
WLF's brief supported overturning class certification in a long-running securities lawsuit against Halliburton. It also argued alternatively that at the very least, the court should permit defendants to introduce evidence at the class certification stage of the litigation that any alleged misrepresentations did not inflate the market price.
"The Supreme Court opened the floodgates to securities class action lawsuits 25 years ago when it created a presumption that every shareholder relies on every statement made by a publicly traded company," said WLF Chief Counsel Richard Samp in a press release.
"But experience has shown that markets simply do not work that way. Fairness requires permitting defendants to rebut the presumption-and thereby defeat class certification-by introducing evidence that any alleged misrepresentation had no impact on stock price."