Supreme Court to review fraud-on-the-market doctrine

Posted on: November 21st, 2013 by Steve Larson

Stocks and sharesThe U.S. Supreme Court may reconsider a 25-year-old legal theory underpinning securities class actions; the fraud-on-the-market doctrine.  The high court granted a petition for certiorari in Halliburton Co. et al. v. Erica P. John Fund, a class action alleging the energy giant misled investors about key information like its liability in asbestos litigation. Halliburton has asked the court to overturn its 1988 decision in Basic Inc. v. Levinson, which established the fraud on the market doctrine. The doctrine assumes that investors who buy stock in an efficient market rely on a defendant’s alleged misstatements because they are accurately reflected in the company’s stock price.

If the court were to reverse the doctrine, investors may be forced to demonstrate reliance on an individual basis, rather than as a single bloc. Plaintiffs — even large, institutional investors — may not have the funds necessary to pursue cases on their own.

Defense attorney Paul R. Bessette, stated that “If the Supreme Court rejects the ‘fraud-on-the-market’ presumption of reliance altogether, then it would effectively end securities class action litigation in the United States.”

In a February decision in Amgen v. Connecticut Retirement Plans and Trust Funds, four of the nine justices said the fraud-on-the-market theory may have outlived its usefulness.

Justice Samuel Alito warned that the theory “may rest on a faulty economic premise.” Justices Clarence Thomas and Anthony Kennedy called it “questionable.” And Justice Antonin Scalia, never one to mince words, said it was “invented by the court” in Basic.