fraud on the market

The U.S. Supreme Court has kept alive the main legal theory behind securities fraud class actions: that plaintiffs can rely upon the assumption that stock prices in efficient markets reflect all publicly available information and misstatements about a company's financial situation is a fraud on the market.

But the Supreme Court has increased the ability of defendants to rebut the presumptions that plaintiffs rely upon to allege that they were defrauded by company misstatements, the Legal Times' Tony Mauro reports. Now defendants will be able to rebut, before class certifications, that misstatements impacted stock prices.

USA Today reports on the U.S. Supreme Court oral arguments this week in a case that will shape the future of securities class actions in America: "The Supreme Court searched for a compromise Wednesday that would help businesses avoid some class-action lawsuits charging securities fraud without making them virtually extinct. Faced with the real prospect of overturning a 26-year-old precedent permitting class-action cases based on investors' trust in market prices, several justices asked whether it might be better to require that investors prove that the fraud affected the price. Four conservative justices previously had made clear their desire to modify or overturn the 1988 decision. That would take a huge burden off U.S. corporations but make class-action challenges more difficult to bring. During oral arguments in the case of Halliburton v. Erica P. John Fund, however, both Justices Anthony Kennedy and John Roberts appeared to be searching for a middle ground. Even Justice Antonin Scalia, an opponent of the court's earlier decision in Basic v. Levinson, mused about the court adopting 'Basic writ small.'"

As the U.S. Supreme Court takes up the fraud-on-the-market theory underpinning most securities fraud class actions, the Wall Street Journal asks if this sort of class action will become an endangered species and if the "balance of power between companies and the lawyers who sue them" will be rebalanced.

Under the fraud-on-the-market theory, shareholders don't have to show a direct connection between the alleged fraud and their losses, WSJ reports. Instead, the theory is that stock proices reflect all relevant information, including fraudulent information.

Analysts predict that there may very well be five votes on the court to overturn 1988 precedent that approved the theory, WSJ also reports.

Two Supreme Court watchers got into a bit of a tit-for-tat this week on the eighth anniversary since Justice Clarence Thomas last asked a question from the bench.

Jeffrey Toobin opined that Thomas' famous habit of not asking questions during oral arguments is "disgraceful" because "they are, in fact, the public's only windows onto the Justices' thought processes, and they offer the litigants and their lawyers their only chance to look thse arbiters in the eye and make their case."

Then Adam Liptak wrote that "the real work of the Supreme Court is done in written opinions, and there Justice Thomas has laid out a consistent and closely argued vision."

Most interesting to me in all of this is Liptak's analysis of how Thomas might treat stare decisis in a case that could shape the future of securities class actions. At issue is the viability of the "fraud on the market" theory and the presumption that a company's stock price reflects all important publicly available information. If the case gets overturned, then securities class actions will likely be extinct.

The defendants argue the precedent in the case deserves less adherence because it involves "'largely a procedural and evidentiary construct.'" Liptak closes his piece with the comment that "we will have to wait until the court decides the case, probably in June, to see how just how weak [Thomas'] 'affinity for stare decisis' is."

Next week, the U.S. Supreme Court will hear arguments in a securities fraud class action and weigh the fraud-on-the market theory, The Southeast Texas Record reports. The case could affect the future of class actions, including whether the fraud-on-the-market theory can be used in class actions, the paper also notes.

"The theory assumes that all public information provided by a company is incorporated into its stock price," The Record reports. Halliburton was accused of inflating its stock price by misrepresenting "its asbestos liabilities, overstating its revenues and building up hype about the company’s merger with Dresser Industries," The Record further reports.