The U.S. Supreme Court, which has in recent years issued many rulings favorable to businesses, on Friday agreed to revisit a 1988 decision that made it much easier for shareholders to sue companies for alleged securities fraud.
Shareholders led by the Erica P. Johns Fund Inc claimed Halliburton Co understated its asbestos liabilities while overstating revenues in its engineering and construction business and the benefits of its merger with Dresser Industries.
The case gives the justices an opportunity to revisit a 25-year-old precedent, Basic v. Levinson, that made it easier for securities class action cases to go beyond the preliminary certification stage.
In that 1988 case, the court ruled that investors did not have to prove that their loss could be directly traced to the alleged fraud. Instead, the court held that any misrepresentation about a security would be incorporated into the market price. Any investor who purchased the security at that price could be presumed to have been directly affected by the misrepresentation.
Four of the nine justices have been openly critical of that "fraud-on-the-market" theory. Justice Samuel Alito said the court should consider overruling the 1988 case in a separate opinion he wrote after concurring with the majority in a securities class action case decided in February in favor of plaintiffs, Amgen v. Connecticut Retirement Plans. Three other justices dissented in that case.
The U.S. Chamber of Commerce and the National Association of Manufacturers both asked the court to hear the Halliburton case, which has already been before the Supreme Court on a different question. In January 2011, the court unanimously ruled that a U.S. appeals court erred in rejecting class certification.
The lawsuit was filed in 2002 on behalf of all buyers of Halliburton stock between June 1999 and December 2001.
The alleged misstatements artificially pumped up Halliburton's stock price, the lawsuit said, adding that the Houston-based company eventually made corrective disclosures that caused its stock price to fall.
After the first Supreme Court ruling, Halliburton argued that the class could still not be certified because the alleged fraud did not affect the stock price. The appeals court rejected that argument in an April 2013 ruling.
Oral arguments and a ruling are expected by the end of June. The case is Halliburton Co. v. Erica P. Johns Fund, U.S. Supreme Court, No. 13-317.