Tomorrow the US Supreme Court will hear oral arguments in the most recent class action fight to find its way to 1 First St. NE, Halliburton Co. v. Erica P. John Fund, Inc. (http://www.scotusblog.com/case-files/cases/halliburton-co-v-erica-p-john-fund-inc/). What is at stake, potentially, is the very existence of class-action securities litigation.
Halliburton is arguing for the out-and-out reversal of Basic Inc. v. Levinson and the “fraud on the market theory” articulated therein. To oversimplify, the theory is that, because the market for liquid securities is efficient, anyone who buys stock during the period after a material misstatement has been publically disseminated but prior to it being determined to be misstatement is necessarily injured. That is, because the fraudulent statement is artificially inflating the value of the security in a manner that harms all purchasers, all those purchasers implicitly rely on that statement whether they are aware of it or not. Because proving actual reliance in a securities class–action is generally impossible without a presumption, the fraud on the market theory is a necessary underpinning to most every fraud related securities class-action filed in the US.
If you find the legal rationale and economic analysis of why the fraud on the market theory does or does not accurately describe the effect of misstatements by corporations on the market for their securities, the briefs not just of the parties but of the various amici are pretty interesting stuff. Something else interesting about this decision is that it should give further insight into whether the Robert’s Court finds the class-action device fundamentally noxious or whether it only runs afoul of their sensibilities when it would stand to benefits classes of consumers or employees– as opposed to a class of shareholders. The Court has recently narrowed the ability of Plaintiffs in the former two classes to achieve certification in class actions, in both cases through 5-4 decisions with the four “liberal” votes in the minority (in Comcast & Dukes). However, given the chance to narrow the ability of securities class action plaintiffs to achieve class-certification in Amgen, the Court refrained, with Roberts and Alito joining the liberals in a 6-3 majority.
Now, of course, each of these cases involved distinct legal questions – they are notper se referendums on class action litigation, although certain Court watchers (perhaps correctly, perhaps not) view them that way. So, if the Court decidesHalliburton as it should – upholding Basic and the fraud on the market theory – what exactly are Roberts and Alito telling us? That the class action is an important vehicle to assert collective economic rights unless the constituency trying to do so is at direct odds with the investor class, rather than a part of it?