High Court Gives Companies More Room to Challenge Class Actions; Supreme Court Strikes Middle Ground on Securities Fraud Lawsuits in Case Involving Halliburton

High Court Gives Companies More Room to Challenge Class Actions

Supreme Court Strikes Middle Ground on Securities Fraud Lawsuits in Case Involving Halliburton


Updated June 23, 2014 5:46 p.m. ET

WASHINGTON—The Supreme Court on Monday gave companies more leeway to fend off securities-fraud lawsuits before trial, but it declined to overrule legal precedent that has undergirded investor class actions for more than two decades.

The decision, which came in long-running litigation involving Halliburton Co.HAL +0.19% ‘s asbestos liabilities, is a middle-of-the road outcome in a case that could have reset the board to better favor corporate defendants facing class-action lawsuits brought by investors. As a result of Monday’s ruling, companies can present evidence at an early stage in litigation to try to demonstrate that misleading public statements didn’t affect stock prices. The ruling means Halliburton will have an opportunity to present such evidence in a further effort to get the case thrown out in the lower courts.

“The court today took a small first step in a long journey toward reducing the costs of securities class actions for investors,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said.

But Chief Justice John Roberts, writing for the court, disappointed business interests by embracing the fundamental principle of a 1988 decision laying out what plaintiffs must allege to proceed in an investor class action. That precedent “is indispensable to institutional investors and their ability to recover some portion of their beneficiaries’ losses resulting from securities fraud,” the Council of Institutional Investors, a group representing pension and employee-benefit funds, endowments and foundations, said.

The landmark case of Basic Inc. v. Levinson—decided five months after Black Monday, the 1987 stock-market crash—found it unrealistic to require investors to prove they had relied on any specific misleading statement by a company before getting a class action into court. Instead, investors could rely on the integrity of share prices, which efficient markets were presumed to set in light of company statements.

That legal doctrine, known as “fraud on the market,” provided a basis for investors to pool their claims into one large class-action lawsuit, creating a legal dynamic that corporations have been battling for decades. Critics say the Basic ruling is faulty, in part because some investors buy or sell on the speculation the market has mispriced a particular security.

“Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent,” Chief Justice Roberts wrote, rejecting that argument.

He added that corporate defendants are entitled to rebut the presumption investors relied on company statements before a plaintiff class action is certified by a trial court—a step companies say puts pressure on them to settle even questionable claims rather than risk a jury verdict. The court was unanimous on that point. But three justices— Clarence ThomasAntonin Scalia and Samuel Alito —said they would have overruled the Basic decision.

The ruling in Halliburton v. Erica P. John Fund addressed a decade-old lawsuit where plaintiffs allege the company misled the public about its asbestos liabilities, revenue on construction contracts and the benefits of its 1998 merger with Dresser Industries.

Both the plaintiffs and Halliburton said they were pleased with the outcome, but Halliburton declined further comment. “Defendants have always been permitted to try to prove the absence of price impact, and permitting them to do so at the class-certification stage will not significantly limit securities lawsuits,” said David Boies of Boies, Schiller & Flexner, representing plaintiffs in the case.

Separately, the court gave a broad reading to a federal bank-fraud law, ruling it can be used to prosecute a scam artist who used altered checks to deceive cashiers at Target Corp. stores.

With the aid of his girlfriend, Kevin Loughlin posed as a Mormon missionary to approach Salt Lake City households, where he rifled through mailboxes to steal checks, court documents said. He forged or altered the checks, used them to buy merchandise and then would return purchases for a cash refund.

Federal prosecutors charged Mr. Loughlin with obtaining property from a bank “by means of false or fraudulent pretenses, representations or promises.” The case involved six checks, totaling about $1,200, and he was sentenced to three years in prison. The Supreme Court ruled squarely for prosecutors. “After all, a merchant accepts a check only to pass it along to a bank for payment; and upon receipt from the merchant, that check triggers disbursement of bank funds just as if presented by the fraudster himself,” Justice Elena Kagan wrote in the court’s unanimous decision.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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