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The Supreme Court And Securities Class Actions

Publication Date: 
November 18, 2013
Alison Frankel and Eddie Evans

Professor Joseph Grundfest is quoted in Reuters on an upcoming Supreme Court case regarding securities fraud. 

On Friday, the U.S. Supreme Court agreed to hear Halliburton v. Erica P. John Fund, which challenges an essential building block of securities fraud class actions. [ID:nL2N0J01A7]

Halliburton's cert petition presented the question of whether the Supreme Court should overrule its own 1988 decision in Basic v. Levinson, which held that investors in broadly traded stock presumptively relied on public misstatements. Basic's fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic's presumption of reliance, it's hard to imagine how plaintiffs' lawyers will be able to win certification of securities fraud class actions. As Max Berger of Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, "I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It's a game changer."


But undoing Basic won't end shareholder litigation, or even shareholder class litigation. In fact, defendants who have hoped fervently for an end to fraud class actions that generated more than $73 billion in settlements between 1997 and 2012, including six of the 10 biggest settlements in class action history, may end up ruing that they got what they wished for, according to Stanford Law School professor Joseph Grundfest, the securities litigation guru whose working paper, Damages and Reliance Under Section 10(b) of the Exchange Act, supplied me with the statistics I just quoted.

Grundfest is no fan of Basic's fraud-on-the-market theory. His paper, which documents the de facto impossibility of rebutting Basic's presumption of reliance, was the foundation of an amicus brief by a group of law professors and former SEC officials who urged the Supreme Court to use the Halliburton appeal as a vehicle to wipe out its 1988 precedent. In a phone interview Friday, after the justices granted cert, Grundfest pointed out that even if the court eliminates the presumption of classwide reliance, investors in some cases will still be able to bring class actions under Section 11 of the Securities Act of 1933, which does not require a showing of reliance but holds defendants strictly liable for material misstatements in offering materials. Individual investors with sizeable losses may also still sue for fraud under both state and federal law, as long as they can show that they relied on alleged misrepresentations, Grundfest said.