Supreme Court Should Tread Lightly in Halliburton Case
Summary Judgment is American Lawyer senior writer Susan Beck's regular opinion column for the Litigation Daily.
Is there a compelling reason to eliminate a big chunk of securities class actions?
Sure, if you're the U.S. Chamber of Commerce, and you believe every securities class action is an assault on free enterprise and the integrity of our judicial system. Sure, if you take a hypertechnical approach to interpreting securities laws and are willing to jettison 25-plus years of jurisprudence. And sure, if you think the business community is a helpless victim of the plaintiffs bar.
But if you care about investors—especially small investors—having confidence in the market, then you should be concerned about the U.S. Supreme Court's decision last Friday to grant certiorari in Halliburton v. Erica P. John Fund. Halliburton Company, backed by some influential amici, asked the court in its cert petition to invalidate the fraud-on-the-market presumption that underpins many securities fraud class actions.
Established in the 1988 Supreme Court case Basic v. Levinson, the fraud-on-the-market doctrine provides a shortcut for plaintiffs to establish the necessary element of reliance at the class certification stage. It allows courts to presume that all class plaintiffs relied on an alleged misrepresentation in their investment decisions because, in an efficient market, the price of a security reflects all available information.
If the court sweeps away that presumption, it would create a two-tier system of justice. Small investors wouldn't be able to bring Section 10(b) securities fraud class actions because there would be too many individual questions about whether each investor relied on an alleged misrepresentation in deciding to buy or sell a company's security. Larger institutional investors, which can forgo class actions and sue on their own, wouldn't have such a problem. They have professionals on staff who pore over financial information, and who could attest that they did indeed rely on a supposed falsehood in making their investing decisions.
A new rule that protects the biggest investors while rejecting the claims of small investors would be nonsensical and unfair. Fortunately, Halliburton and its allies are up against a formidable competitor: David Boies of Boies, Schiller & Flexner is representing the plaintiffs.
There's another question I keep coming back to: What is the real-world problem that the court is being asked to fix? The only problem I see is that the business community wants to stamp out securities class actions, and it hasn't been able to do so through other means.
According to an amicus brief by the Chamber of Commerce and the National Association of Manufacturers, the fraud-on-the-market presumption has allowed plaintiffs to coerce companies into "in terrorem" settlements. (I had to look up the Latin phrase: It means by way of threat or intimidation.) In 2012 alone, they point out, defendants paid $2.9 billion in securities class action settlements. But does this figure really reflect a problem with securities litigation? How about the possibility that we've got a crisis in business ethics?
I talked to Stanford Law School professor Joseph Grundfest, who is one of the law professors who submitted an amicus brief urging the court to grant cert. (The brief was authored by Wachtell, Lipton, Rosen & Katz.) Grundfest published a paper this August arguing that under a "textualist interpretation" of Section 10(b), the right of an investor to recover money damages requires actual "eyeball" reliance. (Grundfest also discussed the Halliburton case with The National Law Journal's Tony Mauro.)
Grundfest stressed in our conversation that his paper focused on how the current Supreme Court is likely to resolve this issue, and not whether scrapping Basic would be the best policy. Grundfest declined to identify a specific settlement that illustrates the problem raised by Halliburton. But he stressed that most 10(b) class actions are based on a shaky premise. Congress never did create a private right of action for Section 10(b) claims; instead that right has been implied by the courts over the years. And the fraud-on-the-market presumption is also a judge-made rule.
Grundfest believes a majority of the justices are likely to want Congress, not the courts, to set these rules. He concedes, though, that there are valid concerns about eliminating the ability of small investors to bring 10(b) claims as a class. "We have no perfect choice here," he said. "Which branch of the government do you want to make the decision?"
Well, with Congress in its current state of dysfunction, I wouldn't count on that body to do anything productive. And most judges have done a good job of policing securities litigation and tossing frivolous claims. In the absence of a glaring problem, I don't see the need to jettison a quarter century of jurisprudence. That would be the sort of judicial activism we don't need.