Securities Fraud Class Action Lawsuits Standards Weighed By Supreme Ct.

The Supreme Court is weighing whether to impose limitations or even outright ban investors from pursuing class action lawsuits against companies over securities fraud.  

Oral arguments were held earlier this month in Halliburton v. Erica P. John Fund, which may result in the U.S. Supreme Court overturning a 1988 decision that allowed securities fraud class action lawsuits against companies based on investors’ trust in market prices. However, the Justices appear to be leaning toward a compromise that would add restrictions to such lawsuits.

At issue is whether investors can trust the market to be an efficient indicator of a stock’s value, meaning they can sue a company for misrepresenting the value of its stock. This often occurs when investors accuse the company of fraud that, when revealed to the public, negatively affects the stock value.

Attorneys for Halliburton are urging the U.S. Supreme Court to overturn it’s prior decision in Basic V. Levinson, arguing that allowing such lawsuits is too burdensome and unfair for businesses. During oral arguments, the company argued that market price is not meant to be an efficient indicator of the value of a stock, maintaining that holding companies accountable as if it were is unfair.

Businesses and the U.S. Chamber of Commerce have also joined Halliburton in arguing that investors know stock values are not accurate, and that is why a number of them invest, basing their actions on whether they believe the true value of the stock is lower or higher than the current price.

However, the Obama administration has asked the court not to overturn the ruling, countering that even if investors do not think the prices are accurate, they are not basing their decisions with the expectation that companies are committing fraud.

The conservative Justices on the Supreme Court are expected to push for the ruling to be overturned in favor of business interests. However, some of the Justices openly considered a compromise ruling during the oral arguments, which would require investors to prove that fraud took place.

A decision in the case is expected by June of this year.