securities fraud

Supreme Court Chief Justice John Roberts joined with "unexpected allies--his liberal colleagues--in an alliance that drew some of the Supreme Court's major decisions closer toward the ideological middle in the term just concluded," the Wall Street Journal reports. For example, Roberts aligned with the liberal justices and conservative Justice Anthony Kennedy to uphold a precedent allowing securities fraud class-action plaintiffs to rely on the theory that market prices reflect all publicly available information and that keeping information from investors can constitute fraud on the market. But the test was refined so that corporations can more easily get class actions thrown out, WSJ reports.

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.

The U.S. Supreme Court will wrap up its term a week from today, and there are several major cases left to be decided, USA Today reports. A couple highlights of issues to be decided: 

One, what is the scope of the presidential power to make appointments when the Senate is in recess?

Two, can the Environmental Protection Agency change the threshold for greenhouse gas emissions?

Three, can shareholders alleging securities fraud rely on the assumption that stock price reflects all available information instead of having to prove specifically that fraud affected stock prices? 

If the U.S. Supreme Court rules against the theory that share prices reflect all publicly available information and that there is a fraud on the market when corporations misrepresent the truth publicly, major companies in the banking, pharmaceutical and casino industries would benefit, Reuters reports.

At least during oral argument, it seemed that the justices weren't in favor of completely overthrowing the fraud on the market theory: and were seeking "to find a middle ground that would require plaintiffs to show that the misrepresentation had a significant effect on the stock price but that would not overturn [the court's prior precedent] Basic [v. Levinson]. During oral arguments, some of the justices appeared to signal that the middle option would be their preference," Reuters further reports.

If the U.S. Supreme Court decides to curb securities fraud litigation, it's widely expected that they'll use the arguments advanced by law school professors Joseph Grundfest or Adam Pritchard, Reuters' Alison Frankel reports. Both filed competing amicus briefs in Halliburton Co. v. Erica P. John Fund. 

The case is challenging the theory that share prices reflect all publicly available information and that there is a fraud on the market when corporations misrepresent the truth publicly, Frankel writes. Grundfest argued that investors can't recover money damages at all without showing they relied on misstatements, while Pritchard suggests that investors "should be required to show that corporate misrepresentations distorted share prices by offering evidence of a market correction when the truth was revealed," Frankel reports.

During oral argument, Justice Anthony Kennedy cited Pritchard's position, Frankel said.