By Dan Bushell
The U.S. Supreme Court may not be willing to go as far some had hoped in overruling its precedents. That is the message from the Supreme Court’s June 23, 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc. Adherence to precedent won the day in Halliburton, as the Court upheld the so-called “fraud on the market” presumption that enables securities fraud suits to be brought as class actions.
The specific issue of the case was of significance to Wall Street, investors, class action lawyers, and publicly traded corporations. But the larger question was how willing the current Supreme Court is to overturn its own precedents.
At stake in Halliburton was whether the Supreme Court would reconsider the fraud on the market presumption, first embraced by the Court in Basic, Inc. v. Levinson, 485 U. S. 224 (1988). It is no exaggeration to say that overruling Basic would have put an end to securities fraud class actions. Many on Wall Street and in corporate boardrooms have long sought that result, to eliminate what they see as a nuissance that has become ubiquitous. Many investors (and their lawyers), on the other hand, would have mourned the death of what they consider to be an importance source of deterrence against fraud and a means (albeit limited) of obtaining compensation for fraud when it occurs.
What is the the fraud on the market presumption and why is it so important? The presumption solves a basic problem in securities class actions. For a case to proceed as a class action, the plaintiffs must show, among other things, that the claims can be tried on behalf of a class of persons who are similarly situated to the plaintiffs (without the class members individually trying their claims) because most of the issues to be tried are common to all members of the class, i.e., if each class member were to bring suit individually, each would need to prove the same thing that the plaintiffs will prove in the class action trial. This factor is known as predominance — common questions must predominate over individual questions.
As is true of fraud claims generally, to prove securities fraud under the federal securities laws, the plaintiff must prove not only that the defendant made a fraudulent statement, but that the plaintiff relied on the fraudulent statement to his/her/its detriment. Whether any individual relied on a statement is generally