WASHINGTON — The Supreme Court refused Monday to throw out a quarter century-old precedent that allows investors to file class-action lawsuits for securities fraud based on their reliance on market prices.
But the court, in a classic compromise written by Chief Justice John Roberts that attracted a unanimous verdict, said companies must be given a new opportunity to rebut investors' argument that a stock's price hid evidence of securities fraud. A successful rebuttal would stymie the lawsuit in its infancy.
The business community, led by the plaintiff in the case, Houston-based energy giant Halliburton, wanted to go further and reverse a landmark 1988 decision that created the "fraud on the market" standard for securities fraud claims. Under that standard, investors only have to show that the market price was misleading, rather than a direct link to any corporate omissions or misrepresentations.
Overturning the quarter century-old Basic v. Levinson decision would have been a major victory for corporations and a devastating blow to investors. Three justices — Clarence Thomas, Antonin Scalia and Samuel Alito — wanted to do that but settled for what they could get.
"Defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock," Roberts said.
Halliburton had lost two lower court rulings to a group of investors known as the Erica P. John Fund. The company and its business community allies argued that market prices vary for many reasons and are not always accurate indicators of a stock's value.
"The court today took a small first step in a long journey toward reducing the costs of securities class actions for investors," said Lisa Rickard of the U.S. Chamber of Commerce. "We are disappointed, however, that the court missed an important opportunity to correct the mistake that Basic has turned out to be for investors. Meritless securities class actions benefit only a few plaintiffs' lawyers and ultimately cost investors billions."
Despite Congress' enactment of legislation in 1995 designed to limit frivolous lawsuits, about 200 securities class-action claims are filed each year, which have led to $73 billion in settlements. More than 40% of corporations on major stock exchanges have been targeted, forcing them to spend large sums for insurance and payouts.
Trade groups representing institutional investors say reliance on market prices is essential, because most of them use market indexes and lack the time and expertise to parse corporate financial statements.
The investors' fund contends that Halliburton misrepresented the firm's asbestos litigation liability, construction contract revenue and benefits from a merger between 1999 and 2001, a period that included part of former vice president Dick Cheney's chairmanship of the company.
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